As filed
with the Securities and Exchange Commission on
March 16,
2009
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
|
x
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2008.
or
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from _____ to _____.
Commission
File Number 001-14951
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FEDERAL
AGRICULTURAL MORTGAGE CORPORATION
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(Exact
name of registrant as specified in its charter)
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Federally
chartered instrumentality
of
the United States
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52-1578738
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(State
or other jurisdiction of incorporation
or organization)
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(I.R.S.
employer identification number)
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1133
Twenty-First Street, N.W., Suite 600,
Washington,
D.C.
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20036
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(Address
of principal executive offices)
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(Zip
code)
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(202)
872-7700
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(Registrant’s
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Exchange on which
registered
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Class
A voting common stock
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New
York Stock Exchange
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Class
C non-voting common stock
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: Class B voting
common stock
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o
No x
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes x
No o
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. §229.405) is
not contained herein, and will not be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
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Large
accelerated filer o
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Accelerated
filer x
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Non-accelerated
filer o
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Smaller
reporting company o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o
No x
The aggregate market values of the
Class A voting common stock and Class C non-voting common stock held by
non-affiliates of the registrant were $15,204,005 and $210,185,818,
respectively, as of June 30, 2008, based upon the closing prices for the
respective classes on June 30, 2008 reported by the New York Stock
Exchange. For purposes of this information, the outstanding shares of
Class C non-voting common stock owned by directors and executive officers of the
registrant were deemed to be held by affiliates. The aggregate market
value of the Class B voting common stock is not ascertainable due to the absence
of publicly available quotations or prices for the Class B voting common stock
as a result of the limited market for, and infrequency of trades in, Class B
voting common stock and the fact that any such trades are privately negotiated
transactions.
As of March 2, 2009, the registrant had
outstanding 1,030,780 shares of Class A voting
common stock, 500,301 shares of Class B voting common stock and 8,603,708
shares of Class C non-voting common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
The definitive proxy statement relating
to the registrant’s 2009 Annual Meeting of Stockholders (portions of which are
incorporated by reference into Part II and Part III of this Annual Report on
Form 10-K as described herein).
- 2
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Table of Contents
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PART
I
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5
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Item
1.
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5
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31
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31
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32
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32
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32
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Item
1A.
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34
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Item
1B.
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40
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Item
2.
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40
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Item
3.
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40
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Item
4.
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41
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PART
II
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42
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Item
5.
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42
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Item
6.
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45
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Item
7.
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46
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46
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47
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53
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66
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69
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82
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88
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Item
7A.
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88
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Item
8.
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89
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89
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90
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93
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94
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97
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Item
9.
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159
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Item
9A.
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159
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Item
9B.
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159
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PART
III
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160
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Item
10.
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160
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Item
11.
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160
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Item
12.
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160
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Item
13.
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160
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Item
14.
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160
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PART
IV
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161
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Item
15.
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161
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PART I
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Item
1.
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Business
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General
The
Federal Agricultural Mortgage Corporation (“Farmer Mac” or the “Corporation”) is
a stockholder-owned, federally chartered instrumentality of the United States
organized and existing under Title VIII of the Farm Credit Act of 1971, as
amended (12 U.S.C. §§ 2279aa et seq.) (the “Act”). Farmer Mac was
originally created by the United States Congress to establish a secondary market
for agricultural real estate and rural housing mortgage loans. This
secondary market was designed to increase the availability of long-term credit
at stable interest rates to America’s rural communities, including farmers,
ranchers and rural homeowners, and to provide those borrowers with the benefits
of capital markets pricing and product innovation. In May 2008,
Congress expanded Farmer Mac’s charter to authorize the Corporation to purchase,
and to guarantee securities backed by, loans made by cooperative lenders to
cooperative borrowers to finance electrification and telecommunications systems
in rural areas.
Farmer
Mac accomplishes its congressional mission of providing liquidity and lending
capacity to agricultural and rural utilities lenders by:
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·
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purchasing
eligible loans directly from
lenders;
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·
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guaranteeing
securities representing interests in, or obligations secured by, pools of
eligible loans; and
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·
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issuing
long-term standby purchase commitments (“LTSPCs”) for eligible
loans.
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Farmer
Mac conducts these activities through three programs—Farmer Mac I,
Farmer Mac II and Rural Utilities. As of December 31, 2008,
the total volume in all of Farmer Mac’s programs was
$10.1 billion.
Under the
Farmer Mac I program, Farmer Mac purchases or commits to purchase mortgage loans
secured by first liens on agricultural real estate. Farmer Mac also
guarantees securities representing interests in, or obligations secured by,
pools of eligible mortgage loans. The securities guaranteed by Farmer
Mac under the Farmer Mac I program are referred to as “Farmer Mac I Guaranteed
Securities.” To be eligible for the Farmer Mac I program, loans must
meet Farmer Mac’s credit underwriting, collateral valuation, documentation and
other specified standards that are discussed in “Business—Farmer Mac
Programs—Farmer Mac I.” As of December 31, 2008, outstanding
Farmer Mac I loans held by Farmer Mac and loans that either back Farmer Mac I
Guaranteed Securities or are subject to LTSPCs in the Farmer Mac I program
totaled $8.0 billion.
Under the Farmer Mac II program, Farmer
Mac purchases the portions of loans guaranteed by the United States Department
of Agriculture (“USDA-guaranteed portions”) pursuant to the Consolidated Farm
and Rural Development Act (7 U.S.C. §§ 1921 et seq.) and guarantees securities
backed by those USDA-guaranteed portions (“Farmer Mac II Guaranteed
Securities”). As of December 31, 2008, outstanding Farmer Mac II
Guaranteed Securities totaled $1.0 billion.
Farmer Mac’s Rural Utilities program,
which is separate from the Farmer Mac I and Farmer Mac II programs, was
initiated during second quarter 2008 after Congress expanded Farmer Mac’s
authorized secondary market activities to include rural utilities
loans. Farmer Mac’s authorized activities under this program are
similar to those conducted under the Farmer Mac I program—loan purchases,
guarantees of securities (“Farmer Mac Guaranteed Securities – Rural Utilities”)
and issuance of LTSPCs—with respect to eligible rural utilities
loans. To be eligible for the Rural Utilities program, loans must
meet Farmer Mac’s credit underwriting and other specified standards that are
discussed in “Business—Farmer Mac Programs—Rural Utilities.” To date,
Farmer Mac has retained in its portfolio all of the Farmer Mac Guaranteed
Securities – Rural Utilities under this program and has not issued any LTSPCs
with respect to rural utilities loans. As of December 31, 2008,
outstanding Farmer Mac Guaranteed Securities – Rural Utilities totaled $1.1
billion.
Farmer
Mac I Guaranteed Securities, Farmer Mac II Guaranteed Securities and
Farmer Mac Guaranteed Securities – Rural Utilities are sometimes collectively
referred to as “Farmer Mac Guaranteed Securities.” Farmer Mac
securitizes both (1) loans eligible under its three programs and (2) general
obligations of lenders secured by pools of eligible loans. The
Corporation then guarantees the timely payment of principal and interest on the
resulting Farmer Mac Guaranteed Securities. AgVantage® is a
registered trademark of Farmer Mac used to designate Farmer Mac’s guarantees of
securities related to general obligations of issuers that are secured by pools
of eligible loans. Farmer Mac may retain Farmer Mac Guaranteed
Securities in its portfolio or sell them to third parties.
Farmer
Mac’s two principal sources of revenue are:
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·
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guarantee
and commitment fees received in connection with outstanding Farmer Mac
Guaranteed Securities and LTSPCs;
and
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·
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interest
income earned on its portfolio of Farmer Mac Guaranteed Securities, loans
and investments, net of interest expense incurred on related debt
instruments issued by Farmer Mac.
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Farmer
Mac funds its “program” purchases of Farmer Mac Guaranteed Securities and
eligible loans primarily by issuing debt obligations of various maturities in
the public capital markets. As of December 31, 2008, Farmer Mac had
$2.1 billion of discount notes and $2.5 billion of medium-term notes
outstanding. To the extent the proceeds of debt issuance exceed
Farmer Mac’s need to fund program assets, those proceeds are invested in
“non-program” investments that must comply with regulations promulgated by the
Farm Credit Administration (“FCA”), including dollar amount, issuer
concentration, and credit quality limitations. Those regulations can
be found at 12 C.F.R. §§652.1-652.45 (the “Investment
Regulations”). Farmer Mac’s regular debt issuance and non-program
investment assets support its access to the capital markets and provide an
alternative source of funds should market conditions be
unfavorable.
FCA, acting through its Office of
Secondary Market Oversight (“OSMO”), has general regulatory and enforcement
authority over Farmer Mac, including the authority to promulgate rules and
regulations governing the activities of Farmer Mac and to apply FCA’s general
enforcement powers to Farmer Mac and its activities. For a discussion
of Farmer Mac’s statutory and regulatory capital requirements and its actual
capital levels, and particularly FCA’s role in the establishment and maintenance
of those requirements and levels, see “Business—Government Regulation of Farmer
Mac—Regulation—Capital Standards,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Balance Sheet Review—Capital” and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources—Capital Requirements.”
Farmer
Mac is an institution of the Farm Credit System (the “FCS”), but is not liable
for any debt or obligation of any other institution of the
FCS. Likewise, neither the FCS nor any other individual institution
of the FCS is liable for any debt or obligation of Farmer Mac.
For more
information about Farmer Mac’s program assets and non-program investment assets,
as well as its financial performance and sources of capital and liquidity, see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Farmer
Mac has three classes of common stock outstanding—Class A voting,
Class B voting and Class C non-voting. See “Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities” for information regarding Farmer Mac’s common
stock. Farmer Mac also has multiple series of preferred stock
outstanding. See “Business—Farmer Mac Programs—Financing—Equity
Issuance” for information regarding Farmer Mac’s preferred stock.
As of December 31, 2008, Farmer Mac
employed 43 people, located primarily at its principal executive offices at 1133
Twenty-First Street, N.W., Washington, D.C. 20036. Farmer Mac’s main
telephone number is (202) 872-7700.
Farmer Mac makes available free of
charge, through the “Investors” section of its internet website at
www.farmermac.com, copies of materials it files with, or furnishes to, the U.S.
Securities and Exchange Commission (the “SEC”), including Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports, as soon as reasonably practicable after
electronically filing such materials with, or furnishing such materials to, the
SEC. Please note that all references to www.farmermac.com in this
Annual Report on Form 10-K are inactive textual references only and that the
information contained on Farmer Mac’s website is not incorporated by reference
into this Annual Report on Form 10-K.
FARMER MAC PROGRAMS
The following tables present the
outstanding balances and annual activity under Farmer Mac’s three
programs—Farmer Mac I, Farmer Mac II, and Rural Utilities.
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Outstanding
Balance of Farmer Mac Loans and Loans Underlying
|
||||||||
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Farmer
Mac Guaranteed Securities and LTSPCs
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||||||||
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As
of December 31,
|
||||||||
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2008
|
2007
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|||||||
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(in
thousands)
|
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On-balance
sheet assets:
|
||||||||
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Farmer
Mac I:
|
||||||||
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Loans
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$ | 781,305 | $ | 762,319 | ||||
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Guaranteed
Securities
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282,185 | 336,778 | ||||||
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AgVantage
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53,300 | 30,800 | ||||||
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Farmer
Mac II:
|
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Guaranteed
Securities
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1,013,330 | 921,802 | ||||||
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Farmer
Mac Guaranteed
|
||||||||
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Securities
- Rural Utilities
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1,054,941 | - | ||||||
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Total
on-balance sheet
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$ | 3,185,061 | $ | 2,051,699 | ||||
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Off-balance
sheet assets:
|
||||||||
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Farmer
Mac I:
|
||||||||
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Guaranteed
Securities
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$ | 1,697,983 | $ | 2,018,300 | ||||
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AgVantage
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2,945,000 | 2,500,000 | ||||||
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LTSPCs
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2,224,181 | 1,948,941 | ||||||
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Farmer
Mac II:
|
||||||||
|
Guaranteed
Securities
|
30,095 | 24,815 | ||||||
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Total
off-balance sheet
|
$ | 6,897,259 | $ | 6,492,056 | ||||
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Total
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$ | 10,082,320 | $ | 8,543,755 | ||||
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Farmer Mac Loan Purchases, Guarantees and
LTSPCs
|
||||||||||||
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For
the Year Ended December 31,
|
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2008
|
2007
|
2006
|
||||||||||
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(in
thousands)
|
||||||||||||
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Farmer
Mac I:
|
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Loans
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$ | 196,622 | $ | 127,709 | $ | 98,673 | ||||||
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AgVantage
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475,000 | 1,000,000 | 1,500,000 | |||||||||
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LTSPCs
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530,363 | 970,789 | 1,139,699 | |||||||||
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Farmer
Mac II Guaranteed Securities
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303,941 | 210,040 | 234,684 | |||||||||
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Farmer
Mac Guaranteed Securities -
|
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Rural
Utilities
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1,560,676 | - | - | |||||||||
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Total
purchases, guarantees and commitments
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$ | 3,066,602 | $ | 2,308,538 | $ | 2,973,056 | ||||||
The
following sections describe Farmer Mac’s activities under each
program.
Farmer Mac I
Under the Farmer Mac I program, Farmer
Mac assumes, for a fee, the credit risk on agricultural real estate mortgage
loans by (1) guaranteeing the timely payment of principal and interest on
securities representing interests in, or obligations secured by, pools of
eligible mortgage loans, or (2) issuing LTSPCs to acquire designated
eligible mortgage loans. Farmer Mac also may assume the credit risk
on eligible mortgage loans by purchasing and retaining them.
Loan
Eligibility
To be
eligible for the Farmer Mac I program, a loan is required to:
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|
·
|
be
secured by a fee simple mortgage or a long-term leasehold mortgage, with
status as a first lien on agricultural real estate or rural housing (as
defined below) located within the United
States;
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|
·
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be
an obligation of a citizen or national of the United States, an alien
lawfully admitted for permanent residence in the United States or a
private corporation or partnership that is majority-owned by U.S.
citizens, nationals or legal resident
aliens;
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·
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be
an obligation of a person, corporation or partnership having training or
farming experience that is sufficient to ensure a reasonable likelihood
that the loan will be repaid according to its terms;
and
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·
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meet the
Farmer Mac I credit underwriting, collateral valuation,
documentation and other specified standards. See
“—Underwriting and Collateral Valuation (Appraisal) Standards” and
“—Sellers” for a description of these
standards.
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For
purposes of the Farmer Mac I program, agricultural real estate is one or more
parcels of land, which may be improved by permanently affixed buildings or other
structures, that:
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·
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is
used for the production of one or more agricultural commodities or
products; and
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·
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either
consists of a minimum of five acres or generates minimum annual receipts
of $5,000.
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Although
the Act does not prescribe a maximum loan size for a Farmer Mac I eligible
agricultural mortgage loan secured by 1,000 acres or less of agricultural real
estate, Farmer Mac currently limits the size of these loans to
$15.0 million, except that the maximum loan size of loans securing
AgVantage securities is $35.0 million. Those maximum loan sizes
were reduced from $22.5 million and $50.0 million, respectively, in
October 2008. For a Farmer Mac I eligible agricultural mortgage loan
secured by more than 1,000 acres of agricultural real estate, the Act authorizes
a maximum loan size of $9.8 million (adjusted annually for inflation), which
Farmer Mac currently further limits to $9.0 million for loan products as to
which Farmer Mac offers daily rates to purchase.
For
purposes of the Farmer Mac I program, rural housing is a one- to four-family,
owner-occupied, moderately priced principal residence located in a community
with a population of 2,500 or less. The current maximum purchase
price or current appraised value for a dwelling, excluding the land to which the
dwelling is affixed, that secures a rural housing loan is
$269,807. That limit is adjusted annually based on changes in home
values during the previous year. In addition to the dwelling itself,
an eligible rural housing loan can be secured by land associated with the
dwelling having an appraised value of no more than 50 percent of the total
appraised value of the combined property. As of December 31,
2008, rural housing loans did not represent a significant part of Farmer Mac’s
business.
Summary of Farmer Mac I
Transactions
During the year ended December 31,
2008, Farmer Mac purchased or placed under guarantee or LTSPC $1.2 billion
of loans under the Farmer Mac I program. As of December 31,
2008, loans held and loans underlying Farmer Mac I Guaranteed Securities and
LTSPCs totaled $8.0 billion.
The
following table summarizes loans purchased or newly placed under guarantees
(including in AgVantage transactions) or LTSPCs under the Farmer Mac I program
for each of the years ended December 31, 2008, 2007 and 2006.
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For
the Year Ended December 31,
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||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
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(in
thousands)
|
||||||||||||
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Loans
and Guaranteed Securities
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$ | 196,622 | $ | 127,709 | $ | 98,673 | ||||||
|
AgVantage
|
475,000 | 1,000,000 | 1,500,000 | |||||||||
|
LTSPCs
|
530,363 | 970,789 | 1,139,699 | |||||||||
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Total
|
$ | 1,201,985 | $ | 2,098,498 | $ | 2,738,372 | ||||||
The
following table presents the outstanding balances of Farmer Mac I loans held and
loans underlying Farmer Mac I Guaranteed Securities (including AgVantage
securities) and LTSPCs as of the dates indicated:
|
As
of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
On-balance
sheet assets:
|
||||||||
|
Loans
|
$ | 781,305 | $ | 762,319 | ||||
|
Guaranteed
Securities
|
282,185 | 336,778 | ||||||
|
AgVantage
|
53,300 | 30,800 | ||||||
|
Total
on-balance sheet
|
$ | 1,116,790 | $ | 1,129,897 | ||||
|
Off-balance
sheet assets:
|
||||||||
|
Guaranteed
Securities
|
$ | 1,697,983 | $ | 2,018,300 | ||||
|
AgVantage
|
2,945,000 | 2,500,000 | ||||||
|
LTSPCs
|
2,224,181 | 1,948,941 | ||||||
|
Total
off-balance sheet
|
$ | 6,867,164 | $ | 6,467,241 | ||||
|
Total
|
$ | 7,983,954 | $ | 7,597,138 | ||||
Loan
Purchases
Farmer Mac offers loan products
designed to increase the secondary market liquidity of agricultural real estate
mortgage loans and the lending capacity of financial institutions that originate
those loans. Farmer Mac enters into mandatory and optional delivery
commitments to purchase loans and offers rates for such commitments
daily. Farmer Mac also purchases portfolios of newly originated and
seasoned loans on a negotiated basis. Farmer Mac purchases both
fixed- and adjustable rate loans that have a variety of maturities and often
include balloon payments. Loans purchased or subject to purchase
commitments may include provisions that require a yield maintenance payment or
some other form of prepayment penalty in the event a borrower prepays a loan
(depending upon the level of interest rates at the time of
prepayment). Of the $196.6 million of loans purchased in the
Farmer Mac I program during 2008, 59 percent included balloon payments and
2 percent included yield maintenance prepayment protection. By
comparison, of the $127.7 million of loans purchased in the Farmer Mac I program
during 2007, 72 percent included balloon payments and 10 percent included yield
maintenance prepayment protection.
Off-Balance Sheet Guarantees and Commitments
Farmer
Mac offers two Farmer Mac I credit enhancement alternatives that allow approved
agricultural and rural residential mortgage lenders the ability to retain the
cash flow benefits of their loans and increase their liquidity and lending
capacity: (1) LTSPCs and (2) Farmer Mac I Guaranteed
Securities. Both of these products result in the creation of
off-balance sheet obligations for Farmer Mac in the ordinary course of its
business.
Both
types of transactions permit a seller to nominate from its portfolio a
segregated pool of loans for participation in the Farmer Mac I program,
subject to review by Farmer Mac for conformance with its applicable
standards. In both types of transactions, the seller effectively
transfers the credit risk on those loans upon Farmer Mac’s approval of the
eligible loans because, through its guarantee or commitment to
purchase, Farmer Mac assumes the ultimate credit risk of borrower defaults
on the underlying loans and, in the case of AgVantage securities, issuer default
on the underlying obligations that are backed by eligible loans. That
transfer of risk reduces the seller’s credit and concentration risk exposures
and, consequently, its regulatory capital requirements and its loss reserve
requirements. The loans underlying LTSPCs and Farmer Mac I Guaranteed
Securities may include loans with payment, maturity and interest rate
characteristics that differ from the loan products that Farmer Mac offers for
purchase on a daily basis, but all the loans are subject to the applicable
underwriting standards described in “—Underwriting and Collateral Valuation
(Appraisal) Standards.” See also “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Risk Management—Credit
Risk - Loans.”
LTSPCs. An
LTSPC commits Farmer Mac to a future purchase of eligible loans from a
segregated pool of loans that met Farmer Mac’s standards at the time the loans
first became subject to the LTSPC and Farmer Mac assumed the credit risk on the
loans. The LTSPC structure, which is not a guarantee of loans or
securities, permits the seller to retain the segregated loan pool in its
portfolio until such time, if ever, as the seller delivers some or all of the
segregated loans to Farmer Mac for purchase under the LTSPC. As
consideration for its assumption of the credit risk on loans underlying an
LTSPC, Farmer Mac receives commitment fees payable monthly in arrears in an
amount approximating what would have been the guarantee fees if the transaction
were structured as Farmer Mac I Guaranteed Securities. The loans
underlying an LTSPC can be converted into Farmer Mac I Guaranteed Securities at
the option of the seller, with no conversion fee paid to Farmer
Mac.
Farmer
Mac purchases loans subject to an LTSPC at:
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par
(if the loans become delinquent for at least four months or are in
material non-monetary default), with accrued and unpaid interest on the
defaulted loans payable out of any future loan payments or liquidation
proceeds as received;
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·
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a
mark-to-market price or in exchange for Farmer Mac I Guaranteed Securities
(if the loans are not delinquent and are standard Farmer Mac I loan
products); or
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either
(1) a mark-to-market negotiated price for all (but not some) loans in the
pool, based on the sale of Farmer Mac I Guaranteed Securities in the
capital markets or the funding obtained by Farmer Mac through the issuance
of matching debt in the capital markets, or (2) in exchange for Farmer Mac
I Guaranteed Securities (if the loans are not four months
delinquent).
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In 2008,
Farmer Mac entered into $530.4 million of LTSPCs, compared to
$970.8 million in 2007. In 2008, LTSPCs remained the preferred
credit enhancement alternative for new transactions and they continue to be a
significant portion of the Farmer Mac I program. During 2008, there
were no conversions of LTSPCs into Farmer Mac I Guaranteed
Securities. As of December 31, 2008, Farmer Mac’s outstanding
LTSPCs covered 7,056 mortgage loans with an aggregate principal balance of
$2.2 billion and outstanding off-balance sheet Farmer Mac I Guaranteed
Securities were backed by 7,326 mortgage loans having an aggregate principal
balance of $1.7 billion. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Results of Operations—Business
Volume.”
Farmer Mac I Guaranteed
Securities. In Farmer Mac I Guaranteed Securities
transactions, Farmer Mac either (1) guarantees securities representing interests
in, or obligations secured by, eligible loans held by a trust or other entity
established by a seller or (2) acquires eligible loans from sellers in
exchange for Farmer Mac I Guaranteed Securities backed by those
loans. Farmer Mac guarantees the timely payment of interest and
principal on the securities, which are either retained by Farmer Mac or sold to
third parties. These securities are customarily issued through
special purpose trusts and entitle each investor in a class of securities to
receive a portion of the payments of principal and interest on the related
underlying pool of loans or obligation equal to the investor’s proportionate
interest in the pool or obligation as specified in the applicable transaction
documents. As consideration for its assumption of the credit risk on
loans underlying the Farmer Mac I Guaranteed Securities, Farmer Mac
receives guarantee fees payable in arrears out of periodic loan interest
payments and based on the outstanding balance of the related Farmer Mac I
Guaranteed Securities. The Farmer Mac I Guaranteed Securities
representing the general obligations of issuers secured by eligible loans are
referred to as AgVantage securities. See “—AgVantage
Securities.”
Farmer Mac is obligated under its
guarantee on the securities to make timely payments to investors of principal
(including balloon payments) and interest based on the scheduled payments on the
underlying loans or obligations, regardless of whether the trust has actually
received such scheduled payments. Farmer Mac's guarantee fees
typically are collected out of installment payments made on the underlying loans
or obligations until those loans or obligations have been repaid or otherwise
liquidated (generally as a result of default). The aggregate amount
of guarantee fees received on Farmer Mac I Guaranteed Securities depends upon
the amount of such securities outstanding and on the applicable guarantee fee
rate, which Farmer Mac’s statutory charter caps at 50 basis points (0.50
percent) per annum. The Farmer Mac I guarantee fee rate typically
ranges from 15 to 50 basis points (0.15 to 0.50 percent) per annum,
depending on the credit quality of and other criteria regarding the loans or
obligations. The amount of non-AgVantage Farmer Mac I Guaranteed
Securities outstanding is influenced by the repayment rates on the underlying
loans and by the rate at which Farmer Mac issues new Farmer Mac I Guaranteed
Securities. In general, when the level of interest rates declines
significantly below the interest rates on loans underlying Farmer Mac I
Guaranteed Securities, the rate of prepayments is likely to increase;
conversely, when interest rates rise above the interest rates on the loans
underlying Farmer Mac I Guaranteed Securities, the rate of prepayments is likely
to decrease. In addition to changes in interest rates, the rate of
principal payments on Farmer Mac I Guaranteed Securities also is influenced by a
variety of economic, demographic and other considerations, such as yield
maintenance provisions that may be associated with loans underlying Farmer Mac I
Guaranteed Securities. For more information regarding yield
maintenance provisions, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Risk Management—Interest Rate
Risk.”
For each
of the years ended December 31, 2008 and 2007, Farmer Mac sold
non-AgVantage Farmer Mac I Guaranteed Securities in the amounts of
$143.8 million and $1.3 million, respectively. The 2008 sales
resulted in Farmer Mac recognizing a gain of $1.5 million. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Results of Operations—Business Volume.” See “—AgVantage
Securities” for information about Farmer Mac’s AgVantage transactions, which are
a form of Farmer Mac I Guaranteed Securities.
AgVantage Securities
Each
AgVantage security is a general obligation of an institution approved by Farmer
Mac, which obligation is also secured by a pool of eligible loans under one of
Farmer Mac’s three programs. Farmer Mac guarantees those securities
as to the timely payment of principal and interest and may retain AgVantage
securities in its portfolio or sell them to third parties in the capital markets
as Farmer Mac Guaranteed Securities.
Before
approving an institution as an issuer in a Farmer Mac I AgVantage transaction,
Farmer Mac assesses the institution’s agricultural real estate mortgage loan
performance as well as its creditworthiness. Farmer Mac continues to
monitor the counterparty risk assessment on an ongoing basis after the AgVantage
security is issued.
In
addition to being a general obligation of the issuing institution, each Farmer
Mac I AgVantage security is secured by eligible agricultural real estate
mortgage loans in an amount at least equal to the outstanding principal amount
of the security. In the Farmer Mac I program, Farmer Mac also
requires the general obligation to be overcollateralized, either by more
eligible loans or any of the following types of assets:
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cash;
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securities
issued by the U.S. Treasury or guaranteed by an agency or instrumentality
of the United States; or
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other
highly-rated securities.
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The
required collateralization level for a Farmer Mac I AgVantage security issued by
an institution without a long-term debt rating from a nationally recognized
statistical rating organization (“NRSRO”) ranges from 111 percent to
150 percent, depending on whether physical possession of the collateral is
maintained by Farmer Mac (11 percent overcollateralization) or whether a
specific pledge (20 percent overcollateralization) or a general pledge
(50 percent overcollateralization) of collateral is made by the
issuer. Historically, these types of Farmer Mac I AgVantage
securities have been retained by Farmer Mac and not sold to third
parties.
A Farmer
Mac I AgVantage security issued by an institution with a high long-term
debt rating from an NRSRO requires a collateralization level of at least
103 percent of the outstanding principal amount of the security
(3 percent overcollateralization), which level could be higher depending on
the rating of the issuer. Historically, these types of Farmer
Mac I AgVantage securities have been sold to third parties in the capital
markets.
In all
AgVantage transactions, Farmer Mac can require the issuer to remove from the
pool of pledged collateral any loan that becomes more than 30 days delinquent in
the payment of principal or interest and to substitute an eligible loan that is
current in payment to maintain the minimum required collateralization
level. As of December 31, 2008, Farmer Mac had not experienced
any credit losses, nor had it been called upon to make a guarantee payment, on
any of its AgVantage securities.
During
2008, Farmer Mac purchased $75.0 million of Farmer Mac I AgVantage
securities that had been issued and sold to third parties prior to 2008 and
subsequently sold $45.0 million of those acquired securities for a realized gain
of $1.5 million. As of December 31, 2008 and 2007, the outstanding
principal amount of Farmer Mac I AgVantage securities held by Farmer Mac
was $53.3 million and $30.8 million, respectively. In
August 2008, Farmer Mac guaranteed $475.0 million of off-balance sheet
Farmer Mac I AgVantage securities representing a three-year obligation of
M&I Marshall & Ilsley Bank (“M&I Bank”) and secured by a pool of
eligible loans, with a required collateralization level of
106 percent. In April 2007, Farmer Mac guaranteed
$1.0 billion of off-balance sheet Farmer Mac I AgVantage securities
representing a ten-year obligation of Metropolitan Life Insurance Company
(“MetLife”) and secured by a pool of eligible loans, with a required
collateralization level of 103 percent. As of December 31, 2008 and
2007, the aggregate outstanding principal amount of off-balance sheet AgVantage
securities issued under the Farmer Mac I program totaled $2.9 billion and
$2.5 billion, respectively. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Results of Operations—Business
Volume.”
Underwriting and Collateral Valuation (Appraisal)
Standards
As required by the Act, Farmer Mac has
established underwriting, security appraisal, and repayment standards for
eligible loans taking into account the nature, risk profile, and other
differences between different categories of qualified loans. These
standards for agricultural real estate mortgage loans under the Farmer Mac I
program at a minimum are intended to:
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provide
that no loan with a loan-to-value ratio (“LTV”) in excess of
80 percent may be eligible;
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require
each borrower to demonstrate sufficient cash-flow to adequately service
the loan;
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protect
the integrity of the appraisal process with respect to any loan;
and
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confirm
that the borrower is or will be actively engaged in agricultural
production.
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Loans
securing off-balance sheet Farmer Mac I AgVantage securities are required to
meet these statutory standards in place of the underwriting standards set forth
below.
Farmer Mac uses experienced internal
agricultural credit underwriters and external agricultural loan servicing and
collateral valuation contractors (under Farmer Mac supervision and review) to
perform those respective functions on loans that come into the Farmer Mac I
program. Farmer Mac believes that the combined expertise of its own
internal staff and those third-party service providers provides the Corporation
adequate resources for performing the necessary underwriting, collateral
valuation and servicing functions.
Underwriting. To
manage its credit risk, to mitigate the risk of loss from borrower defaults and
to provide guidance concerning the management, administration and conduct of
underwriting to all participating sellers and potential sellers in its programs,
Farmer Mac has adopted credit underwriting standards for the Farmer Mac I
program that vary by type of loan and program product under which the loan is
brought to Farmer Mac. These standards were developed based on
industry norms for similar mortgage loans and are designed to assess the
creditworthiness of the borrower, as well as the risk to Farmer Mac as the
guarantor of mortgage-backed securities representing interests in, or
obligations secured by, pools of such mortgage loans. Further, Farmer
Mac requires sellers of agricultural real estate mortgage loans to make
representations and warranties regarding the conformity of eligible mortgage
loans to these standards and any other requirements the Corporation may impose
from time to time.
Farmer
Mac I credit underwriting standards require that the LTV of any loan not exceed
70 percent, with the exception of a loan secured by a livestock facility and
supported by a contract with an approved integrator may have an LTV of up to 80
percent. Rural housing loans and agricultural real estate mortgage
loans secured primarily by owner-occupied residences may also have LTVs of up to
80 percent. Farmer Mac may require that a loan have a lower LTV
when it determines that such lower LTV is appropriate. The original
LTV of a loan is calculated by dividing the loan’s principal balance at the time
of guarantee, purchase or commitment by the appraised value at the date of loan
origination or, when available, updated appraised value at the time of
guarantee, purchase or commitment.
In the
case of newly-originated farm and ranch loans, borrowers on the loans must,
among other criteria set forth in Farmer Mac’s credit underwriting standards,
meet the following ratios on a pro forma basis (i.e., giving effect to the new
loan):
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total
debt service coverage ratio, including farm and non-farm income, of not
less than 1.25:1;
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debt-to-asset
ratio of 50 percent or less;
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ratio
of current assets to current liabilities of not less than 1:1;
and
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cash
flow debt service coverage ratio on the mortgaged property of not less
than 1:1.
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Farmer
Mac evaluates and adjusts these standards on an ongoing basis based on current
and anticipated market conditions. During the latter part of 2008,
Farmer Mac began requiring a more stringent total debt service coverage ratio
for farm and ranch loans with LTVs between 60 percent and
70 percent.
For loans
secured by agricultural real estate with building improvements other than a
residence contributing more than 60 percent of the appraised value of the
property (referred to by Farmer Mac as facility loans), the credit underwriting
standards are the same as for farm and ranch loans but more stringent with
respect to two ratios, requiring:
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total
debt service coverage ratio, including farm and non-farm income, of not
less than 1.35:1; and
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ratio
of current assets to current liabilities of not less than
1.25:1
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Loans
secured by eligible collateral with LTVs not greater than 55 percent made to
borrowers with high credit scores and adequate financial resources may be
accepted without further underwriting tests being
applied. Agricultural real estate mortgage loans secured primarily by
owner-occupied residences and rural housing loans are underwritten to industry
norms for conforming loans secured by primary residences, with fully verified
repayment capacity and assets and liabilities. Applicants’ credit
scores are obtained and used in the underwriting process.
In
addition, Farmer Mac’s underwriting standards provide for the acceptance of a
loan that, in the judgment of the underwriter, is a sound loan with a high
probability of repayment in accordance with its terms even though the loan does
not meet one or more of the underwriting ratios usually required for loans of
that type. In those cases, Farmer Mac permits exceptions to
applicable underwriting standards when a loan:
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exceeds
minimum requirements for one or more of the underwriting standards to a
degree that compensates for noncompliance with one or more other
standards, referred to as compensating strengths;
and
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is
made to a producer of particular agricultural commodities or products in a
segment of agriculture in which such compensating strengths are typical of
the financial condition of sound borrowers in that
segment.
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Despite
these underwriting approvals based on compensating strengths, no loan will be
approved if it does not at least meet all of Farmer Mac’s statutory underwriting
standards described at the beginning of this section.
Farmer
Mac’s use of compensating strengths is not intended to provide a basis for
waiving or lessening the requirement that eligible mortgage loans under the
Farmer Mac I program be of consistently high quality. In fact, loans
approved on the basis of compensating strengths are fully underwritten and have
not demonstrated a significantly different rate of default, or loss following
default, than loans that were approved on the basis of conformance with all
applicable underwriting ratios. As of December 31, 2008, a total of
$1.9 billion (38.9 percent) of the outstanding balance of loans held
and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities (excluding
AgVantage securities) were approved based upon compensating strengths ($104.4
million of which had original LTVs of greater than
70 percent). During 2008, $51.2 million (7.0 percent) of
the loans purchased or added under LTSPCs were approved based upon compensating
strengths ($9.2 million of which had original LTVs of greater than
70 percent), as compared to 2007 when $447.9 million (40.8 percent) of
the loans purchased or added under LTSPCs were approved based upon compensating
strengths ($49.8 million of which had original LTVs of greater than
70 percent). During the latter part of 2008, Farmer Mac
anticipated a leveling of agricultural real estate values and implemented a more
conservative approach to underwriting decisions, resulting in fewer approvals
based on compensating strengths.
In the
case of a seasoned loan, Farmer Mac considers sustained historical performance
to be a reliable alternative indicator of a borrower’s ability to pay the loan
according to its terms. A seasoned loan generally will be deemed
an eligible loan if:
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it
has been outstanding for at least five years and has an LTV of
60 percent or less;
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there
have been no payments more than 30 days past due during the previous three
years; and
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there
have been no material restructurings or modifications for credit reasons
during the previous five years.
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A
seasoned loan that has been outstanding for more than one year but less than
five years must substantially comply with the applicable underwriting standards
for newly originated loans as of the date the loan was originated by the
lender. The loan must also have a payment history that shows no
payment more than 30 days past due during the three-year period immediately
prior to the date the loan is either purchased by Farmer Mac or made subject to
an LTSPC. There is no requirement that each loan’s compliance with
the underwriting standards be re-evaluated after Farmer Mac accepts the loan
into its program.
Farmer
Mac performs due diligence before purchasing, guaranteeing securities backed by,
or committing to purchase seasoned loans, including:
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evaluating
loan database information to determine conformity to the criteria set
forth in the preceding paragraphs;
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confirming
that loan file data conform to database
information;
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validating
supporting credit information in the loan files;
and
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reviewing
loan documentation and collateral
valuations.
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Farmer
Mac performs these and other due diligence procedures using methods that give
due regard to the size, age, leverage and nature of the collateral for the
loans.
Required
documentation for all Farmer Mac I loans includes a first lien mortgage or deed
of trust, a written promissory note and assurance of Farmer Mac’s lien position
through either a title insurance policy or title opinion from an experienced
real estate attorney in geographic areas where title insurance is not the
industry practice.
As Farmer
Mac develops new Farmer Mac I credit products, it establishes underwriting
guidelines for them. Those guidelines result in industry-specific
measures that meet or exceed the statutory underwriting standards and provide
Farmer Mac the flexibility to deliver the benefits of a secondary market to
farmers, ranchers and rural homeowners in diverse sectors of the rural
economy.
Collateral Valuations
(Appraisals and Evaluations). Farmer Mac has adopted
collateral valuation standards for newly originated loans purchased or placed
under a Farmer Mac I Guaranteed Security or LTSPC. Those
standards require, among other things, that a current valuation be performed, or
has been performed within the preceding 12 months, independently of the credit
decision-making process. In addition, Farmer Mac requires appraisals
to conform to the Uniform Standards of Professional Appraisal Practice
promulgated by the Appraisal Standards Board.
Farmer
Mac’s collateral valuation standards require that the valuation function be
conducted or administered by an individual meeting specific qualification and
competence criteria who:
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is
not associated, except by the engagement for the collateral valuation,
with the credit underwriters making the loan decision, though the
appraiser or evaluator and the credit underwriter may be directly or
indirectly employed by a common
employer;
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receives
no financial or professional benefit of any kind by virtue of the report
content, valuation or credit decision made or based on the valuation
report; and
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has
no present or contemplated future direct or indirect interest in the
property serving or to serve as
collateral.
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Farmer
Mac’s collateral valuation standards require uniform reporting of reliable and
credible opinions of the market value based on analyses of comparable property
sales, including consideration of the property’s income producing capacity and,
if relevant, the market’s response to the cost of improvements, as well as
information regarding market trends. For seasoned loans, Farmer Mac
obtains collateral valuation updates as considered necessary in its assessment
of collateral risk determined in the due diligence process. If a
current or updated collateral valuation is required for a seasoned loan, the
collateral valuation standards described above would apply.
Portfolio Diversification
It is Farmer Mac’s policy to diversify
its portfolio of loans held and loans underlying Farmer Mac I Guaranteed
Securities and LTSPCs, both geographically and by agricultural
commodity/product. Farmer Mac directs its marketing efforts toward
agricultural lenders throughout the nation to achieve commodity/product and
geographic diversification in its exposure to credit risk. Farmer Mac
evaluates its credit exposure in particular geographic regions and
commodities/products, adjusted for the credit quality of the loans in those
particular geographic regions or commodity/product groups relative to the total
principal amount of all outstanding loans held and loans underlying Farmer Mac I
Guaranteed Securities and LTSPCs.
Farmer
Mac is not obligated to purchase, or commit to purchase, every loan that meets
its underwriting and collateral valuation standards submitted by an eligible
seller. Farmer Mac considers other factors such as its overall
portfolio diversification, commodity and farming forecasts and risk management
objectives in deciding whether to accept the loans into the Farmer Mac I
program. For example, if industry forecasts indicate possible
weakness in a geographic area or agricultural commodity or product, Farmer Mac
may decide not to purchase or commit to purchase an affected loan as part of
managing its overall portfolio exposure to areas of possible heightened risk
exposure. Because Farmer Mac effectively assumes the credit risk on
all loans under an LTSPC, Farmer Mac’s commodity/product and geographic
diversification disclosures reflect all loans under LTSPCs and any loans that
have been purchased out of LTSPC pools. For information regarding the
diversification of Farmer Mac’s existing portfolio, see “Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Risk
Management—Credit Risk - Loans” and Note 8 to the consolidated financial
statements.
As of
December 31, 2008, Farmer Mac had 256 approved loan sellers eligible to
participate in the Farmer Mac I program, ranging from single-office to
multi-branch institutions, spanning community banks, FCS institutions, mortgage
companies, commercial banks and insurance companies. The increase in
the number of approved Farmer Mac I loan sellers from 224 as of
December 31, 2007 is principally the result of Farmer Mac’s alliance with the
American Bankers Association, as well as lender informational seminars Farmer
Mac conducts in key regional locations and through the internet. In
addition to participating directly in the Farmer Mac I program, some of the
approved loan sellers facilitate indirect participation by other lenders in the
Farmer Mac I program by managing correspondent networks of lenders from which
they purchase loans to sell to Farmer Mac. As of December 31, 2008,
373 lenders were participating in one or both of the Farmer Mac I or Farmer Mac
II programs.
To be
considered for approval as a Farmer Mac I seller, a financial institution must
meet the criteria that Farmer Mac establishes. Those criteria include
the following requirements:
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own
a requisite amount of Farmer Mac Class A or Class B voting common stock
according to a schedule prescribed for the size and type of
institution;
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have,
in the judgment of Farmer Mac, the ability and experience to make or
purchase and sell loans eligible for the Farmer Mac I program and service
such loans in accordance with Farmer Mac requirements either through its
own staff or through contractors and
originators;
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maintain
a minimum adjusted net worth; and
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enter
into a Seller/Servicer agreement to comply with the terms of the Farmer
Mac Seller/Servicer Guide, including representations and warranties
regarding the eligibility of the loans and accuracy of loan data provided
to Farmer Mac.
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Farmer Mac generally does not directly
service loans held in its portfolio, although it does act as “master servicer”
for loans underlying Farmer Mac I Guaranteed Securities. Farmer Mac
also may assume direct servicing for defaulted loans. Loans held by
Farmer Mac or underlying Farmer Mac Guaranteed Securities are serviced only by
Farmer Mac-approved entities designated as “central servicers” that have entered
into central servicing contracts with Farmer Mac. Sellers of eligible
mortgage loans sold into the Farmer Mac I program have a right to retain certain
“field servicing” functions (typically direct borrower contacts) and may enter
into contracts with Farmer Mac’s central servicers that specify such servicing
functions. Loans underlying LTSPCs and AgVantage securities are
serviced by the holders of those loans in accordance with those lenders’
servicing procedures, which are reviewed and approved by Farmer Mac before
entering into those transactions.
Farmer Mac II
General
The Farmer Mac II program was initiated
in 1992 and is authorized under sections 8.0(3) and 8.0(9)(B) of Farmer Mac’s
statutory charter (12 U.S.C. §§ 2279aa(3) and 2279aa(9)(B)), which provide
that:
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USDA-guaranteed
portions of loans guaranteed under the Consolidated Farm and Rural
Development Act (7 U.S.C. § 1921 et seq.) are statutorily included in the
definition of loans eligible for Farmer Mac’s secondary market
programs;
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USDA-guaranteed
portions are exempted from the credit underwriting, collateral valuation,
documentation and other standards that other loans must meet to be
eligible for Farmer Mac programs, and are exempted from any
diversification and internal credit enhancement that may be required of
pools of other loans eligible for Farmer Mac programs;
and
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Farmer
Mac is authorized to pool and issue Farmer Mac Guaranteed Securities
backed by USDA-guaranteed portions.
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Summary of Farmer Mac II Transactions
Farmer Mac guarantees the timely
payment of principal and interest on Farmer Mac II Guaranteed Securities backed
by USDA-guaranteed portions. Farmer Mac does not guarantee the
repayment of the USDA-guaranteed portions, only the Farmer Mac II Guaranteed
Securities that are backed by USDA-guaranteed portions. In addition
to purchasing USDA-guaranteed portions for retention in its portfolio, Farmer
Mac offers Farmer Mac II Guaranteed Securities to lenders or to other investors
for cash.
During
the years ended December 31, 2008, 2007 and 2006, Farmer Mac issued
$303.9 million, $210.0 million and $234.7 million, respectively, of
Farmer Mac II Guaranteed Securities. As of
December 31, 2008, 2007 and 2006, $1.0 billion, $946.6 million
and $925.8 million, respectively, of Farmer Mac II Guaranteed Securities
were outstanding. The following table presents Farmer Mac II activity
for each of the years indicated:
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For
the Year Ended December 31,
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2008
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2007
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2006
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(in
thousands)
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||||||||||||
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Purchased
and retained
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$ | 291,335 | $ | 204,931 | $ | 234,684 | ||||||
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Purchased
and sold
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12,606 | 5,109 | - | |||||||||
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Total
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$ | 303,941 | $ | 210,040 | $ | 234,684 | ||||||
The
following table presents the outstanding balance of Farmer Mac II Guaranteed
Securities as of the dates indicated:
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Outstanding
Balance of
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Farmer
Mac II Guaranteed
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||||||||
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Securities
as of December 31,
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2008
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2007
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(in
thousands)
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On-balance
sheet
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$ | 1,013,330 | $ | 921,802 | ||||
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Off-balance
sheet
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30,095 | 24,815 | ||||||
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Total
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$ | 1,043,425 | $ | 946,617 | ||||
As of
December 31, 2008, Farmer Mac had experienced no credit losses on any of its
Farmer Mac II Guaranteed Securities. As of December 31, 2008, Farmer
Mac had outstanding $0.3 million of principal and interest advances on
Farmer Mac II Guaranteed Securities, compared to $0.4 million as of
December 31, 2007 and $0.1 million as of December 31, 2006.
United States
Department of Agriculture Guaranteed Loan Programs
The United States Department of
Agriculture (“USDA”), acting through its various agencies, currently administers
the federal rural credit programs first developed in the
mid-1930s. The USDA makes direct loans and guarantees portions of
loans made and serviced by USDA-qualified lenders for various
purposes. The USDA’s guarantee is supported by the full faith and
credit of the United States. USDA-guaranteed portions represent up to
95 percent of the principal amount of guaranteed loans. Through its
Farmer Mac II program, Farmer Mac is one of several competing purchasers of
USDA-guaranteed portions of farm ownership loans, farm operating loans, business
and industry loans, community facilities and other loans that are fully
guaranteed as to principal and interest by the USDA.
USDA
Guarantees. Each USDA guarantee is a full faith and credit
obligation of the United States and becomes enforceable if a lender fails to
repurchase the USDA-guaranteed portion from its owner within 30 days after
written demand from the owner when:
|
|
·
|
the
borrower under the guaranteed loan is in default not less than
60 days in the payment of any principal or interest due on the
USDA-guaranteed portion; or
|
|
|
·
|
the
lender has failed to remit to the owner the payment made by the borrower
on the USDA-guaranteed portion or any related loan subsidy within
30 days after the lender’s receipt of the
payment.
|
If the lender does not repurchase the
USDA-guaranteed portion as provided above, the USDA is required to purchase the
unpaid principal balance of the USDA-guaranteed portion together with accrued
interest (including any loan subsidy) to the date of purchase, less the
servicing fee, within 30 days after written demand upon the USDA by the
owner. While the USDA guarantee will not cover the note interest to
the owner on USDA-guaranteed portions accruing after 90 days from the date
of the original demand letter of the owner to the lender requesting repurchase,
Farmer Mac has established procedures to require prompt tendering of
USDA-guaranteed portions.
If, in the opinion of the lender (with
the concurrence of the USDA) or in the opinion of the USDA, repurchase of the
USDA-guaranteed portion is necessary to service the related guaranteed loan
adequately, the owner will sell the USDA-guaranteed portion to the lender or
USDA for an amount equal to the unpaid principal balance and accrued interest
(including any loan subsidy) on such USDA-guaranteed portion less the lender’s
servicing fee. Federal regulations prohibit the lender from
repurchasing USDA-guaranteed portions for arbitrage purposes.
Lenders. Any
lender authorized by the USDA to obtain a USDA guarantee on a loan may be a
seller in the Farmer Mac II program. As of December 31, 2008, there
were 187 active sellers in the Farmer Mac II program, consisting mostly of
community and regional banks, compared to 151 sellers as of December 31, 2007,
for an increase of 36 active sellers. In the aggregate, 373 sellers
were participating directly in one or both of the Farmer Mac I or Farmer Mac II
programs during 2008.
Loan
Servicing. The lender on each guaranteed loan is required by
regulation to retain the unguaranteed portion of the guaranteed loan, to service
the entire underlying guaranteed loan, including the USDA-guaranteed portion,
and to remain mortgagee and/or secured party of record. The
USDA-guaranteed portion and the unguaranteed portion of the underlying
guaranteed loan are to be secured by the same security with equal lien
priority. The USDA-guaranteed portion cannot be paid later than, or
in any way be subordinated to, the related unguaranteed portion.
Rural Utilities
In May
2008, Congress expanded Farmer Mac’s authority to permit purchases, and
guarantees of securities backed by, rural electric and telephone loans made by
cooperative lenders to borrowers who have received or are eligible to receive
loans under the Rural Electrification Act of 1936 (“REA”). The REA is
administered by the Rural Utilities Service (“RUS”), an agency of the
USDA. Pursuant to this new authority, during second quarter 2008,
Farmer Mac placed its guarantee on $1.3 billion of investment securities
previously held as mission-related investments under authority granted by FCA,
thereby creating Farmer Mac Guaranteed Securities – Rural
Utilities. Those securities consisted of $430.7 million of
securities representing interests in rural electric cooperative loans and
$900.0 million of obligations collateralized by rural electric cooperative
loans. During third quarter 2008, $500.0 million of the
obligations collateralized by rural electric cooperative loans matured and was
repaid. During fourth quarter 2008, Farmer Mac guaranteed and
purchased $230.0 million of new Farmer Mac Guaranteed Securities – Rural
Utilities representing the direct obligation of a cooperative lender secured by
eligible rural electric loans. None of Farmer Mac's business to date under the
Rural Utilities program has involved telecommunications loans.
Loan
Eligibility
The list
below summarizes Farmer Mac’s eligibility requirements for rural utilities
loans:
|
|
·
|
the
loan, or interest in a loan, is for an electric or telephone facility by a
cooperative lender to a borrower that has received or is eligible to
receive a loan under the REA;
|
|
|
·
|
collateral
is performing and not more than 30 days delinquent;
and
|
|
|
·
|
in
conformance with the Farmer Mac rural utility underwriting standards and
guidelines.
|
In order
for Farmer Mac to manage its credit risk, to mitigate the risk of loss from
borrower defaults and to provide guidance concerning the management,
administration and conduct of underwriting to all participating sellers in its
programs, Farmer Mac has adopted credit underwriting standards that vary by type
of loan, be it to electric distribution cooperatives or
electric generation and transmission (G&T) cooperatives, and
program product under which the loan is brought to Farmer Mac. These
standards were developed based on rural utility industry norms for similar loans
and are designed to assess the creditworthiness of the borrower, as well as the
risk to Farmer Mac either as purchaser of or the guarantor of securities
representing interests in, or obligations secured by, pools of such
loans. Further, Farmer Mac requires sellers of rural utilities loans
to make representations and warranties regarding the conformity of eligible
loans to these standards and any other requirements the Corporation may impose
from time to time.
Farmer
Mac’s credit underwriting standards for rural utilities loans on which it has
assumed direct credit exposure (e.g., with no general obligation of an issuer
involved in the transaction) through the Rural Utilities program
require:
|
|
·
|
each
electric or telephone cooperative to have received or be eligible to
receive a loan under the REA;
|
|
|
·
|
each
borrower to demonstrate sufficient cash-flow to adequately service the
rural utility loan; and
|
|
|
·
|
each
borrower’s leverage position to be adequate based on industry
standards.
|
Farmer
Mac’s credit underwriting standards for AgVantage transactions under the Rural
Utilities program, in which Farmer Mac has indirect credit exposure on loans
securing the general obligation of a lender, require:
|
|
·
|
the
credit rating of the counterparty issuing the general obligation to be
investment grade as determined by an NRSRO, or equivalent as
determined by Farmer Mac analysis;
|
|
|
·
|
the
collateral to be comprised of loans, or interests in loans, for electric
or telephone facilities by a cooperative lender to a borrower that has
received or is eligible to receive a loan under the
REA;
|
|
|
·
|
the
collateral to be performing and not more than 30 days delinquent;
and
|
|
|
·
|
the
collateralization (consisting of current, performing loans) to be
maintained at the contractually prescribed level, in an amount at least
equal to the outstanding principal amount of the
security.
|
The due
diligence Farmer Mac performs before purchasing, guaranteeing securities backed
by, or committing to purchase rural utilities loans includes:
|
|
·
|
evaluation
of loan database information to determine conformity to Farmer Mac’s
underwriting standards and
guidelines;
|
|
|
·
|
confirmation
that loan file data conform to database
information;
|
|
|
·
|
validation
of supporting credit information in the loan files;
and
|
|
|
·
|
review
of loan documentation.
|
It is
customary in loans to distribution cooperatives for the lender to take a
security interest in substantially all of the borrower’s assets, and collateral
is required to secure term loans. In cases where Farmer Mac purchases
a loan and another rural utility lender has a lien on all assets, Farmer Mac
verifies that a lien accommodation results in either a shared first lien or a
first lien in favor of Farmer Mac. In cases where public debt
indentures are utilized, broader collateral exceptions can be expected and
Farmer Mac determines if available collateral is adequate to support the loan
program.
Farmer
Mac generally does not directly service loans held in its portfolio, although it
does act as “master servicer” for pools of loans and loans underlying Farmer
Mac Guaranteed Securities- Rural Utilities. Farmer Mac also may
assume direct servicing for defaulted loans. Rural utilities loans
held by Farmer Mac or underlying Farmer Mac Guaranteed Securities - Rural
Utilities are serviced by the holders of those loans. Rural
utilities loans underlying AgVantage securities are serviced by the holders of
those loans in accordance with those lenders’ servicing procedures, which are
reviewed and approved by Farmer Mac before entering into those transactions.
National Rural currently services all of the rural utilities loan in Farmer
Mac's portfolio.
The
statutory authorities that authorize Farmer Mac to become involved in rural
utilities lending specify that the loans be sourced from a cooperative
lender. Currently the cooperative rural utilities lending space
contains only two lenders, the National Rural Utilities Cooperative Finance
Corporation (“National Rural”) and CoBank, ACB, ("Co Bank") an institution of
the Farm Credit System. As of December 31, 2008, these
cooperatives had approximately $18.0 billion in loans outstanding to
distribution cooperatives and $5.5 billion in loans outstanding to G&T
cooperatives.
Portfolio Diversification
It is Farmer Mac’s policy to diversify
its rural utilities portfolio of loans held and loans underlying Farmer Mac
Guaranteed Securities-Rural Utilities geographically. Since the
cooperative rural utilities lending space contains only two lenders, National
Rural and CoBank, these lenders geographically cover the entire United
States. Farmer Mac analyzes the geographic distribution of loans to
cooperatives and is not obligated to purchase, or commit to purchase, every loan
that meets its underwriting standards and guidelines submitted by an eligible
seller if a sizable concentration of loans accumulates in specific
region.
The
maximum cumulative direct credit exposure on eligible rural utilities loans
(e.g., purchases of loans or securities representing interests in loans) to any
one borrower or related borrowers is $20.0 million. For indirect
credit exposures on rural utilities loans (e.g., AgVantage transactions)
the maximum loan exposure to any one borrower or related borrowers is $35.0
million, with the amount of any direct exposure to a borrower also counting
towards the $35.0 million limit. Farmer Mac’s cumulative exposure to
loans to electric G&T facilities, whether through direct or indirect credit
exposure, is limited to no more than 20 percent of Farmer Mac’s cumulative
direct and indirect exposure to all Rural Utilities
loans. Additionally, Farmer Mac’s cumulative direct credit exposure
to G&T facilities is limited to no more than 10 percent of Farmer Mac’s
cumulative direct and indirect exposure to all Rural Utilities
loans.
Funding of Guarantee and LTSPC Obligations
The principal sources of funding for
the payment of Farmer Mac’s obligations under its guarantees and LTSPCs are the
fees for its guarantees and commitments, net interest income and the proceeds of
debt issuances. Farmer Mac satisfies its obligations under LTSPCs and
its guarantees by purchasing defaulted loans out of LTSPCs and from the related
trusts for Farmer Mac Guaranteed Securities. Farmer Mac typically
recovers a significant portion of the value of defaulted loans purchased either
through borrower payments, loan payoffs, payments by third parties or
foreclosure and sale of the property securing the loans. Ultimate
losses arising from Farmer Mac’s guarantees and commitments are reflected in the
Corporation’s charge-offs against its allowance for losses and gains and losses
on the sale of real estate owned. During 2008, Farmer Mac’s net
charge-offs were $5.3 million, compared to $0.5 million during
2007.
The Act
requires Farmer Mac to set aside in a segregated account a portion of the
guarantee fees it receives from its guarantee activities. That
segregated account must be exhausted before Farmer Mac may issue obligations to
the U.S. Treasury against the $1.5 billion that Farmer Mac is
statutorily authorized to borrow from the U.S. Treasury to fulfill its guarantee
obligations. That borrowing authority is not intended to be a routine
funding source and has never been used. As of December 31, 2008, the
amount in that reserve account was $63.2 million. Farmer Mac’s
total outstanding guarantees and LTSPCs exceed the cumulative amount (1) held as
an allowance for losses, (2) the amount in the segregated account, and (3) the
amount Farmer Mac may borrow from the U.S. Treasury; however, Farmer Mac does
not expect its obligations under its guarantees and LTSPCs to exceed amounts
available to satisfy those obligations. For information regarding
Farmer Mac’s allowance for losses, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Risk Management—Credit Risk -
Loans” and Note 2(j) and Note 8 to the consolidated financial
statements. For a more detailed discussion of Farmer Mac’s borrowing
authority from the U.S. Treasury, see “Business—Farmer Mac’s Authority to Borrow
from the U.S. Treasury.”
Debt
Issuance
Section
8.6(e) of Farmer Mac’s statutory charter (12 U.S.C. § 2279aa-6(e))
authorizes Farmer Mac to issue debt obligations to purchase eligible loans,
USDA-guaranteed portions and Farmer Mac Guaranteed Securities and to maintain
reasonable available cash and cash equivalents for business operations,
including adequate liquidity. Farmer Mac funds its purchases of
program and non-program assets primarily by issuing debt obligations of various
maturities in the public capital markets. Debt obligations issued by
Farmer Mac include discount notes and fixed and floating rate medium-term notes,
including callable notes. Farmer Mac also issues discount notes and
medium-term notes to obtain funds to finance its investments, transaction costs,
guarantee payments and LTSPC purchase obligations.
The
interest and principal on Farmer Mac’s debt are not guaranteed by and do not
constitute debts or obligations of FCA or the United States or any agency or
instrumentality of the United States other than Farmer Mac. Farmer
Mac is an institution of the FCS, but is not liable for any debt or obligation
of any other institution of the FCS. Likewise, neither the FCS nor
any other individual institution of the FCS is liable for any debt or obligation
of Farmer Mac. Income to the purchaser of a Farmer Mac discount note
or medium-term note is not exempt under federal law from federal, state or local
taxation. The Corporation’s discount notes and medium-term notes are
not currently rated by an NRSRO.
Farmer
Mac’s board of directors has authorized the issuance of up to $7.0 billion
of discount notes and medium-term notes (of which $4.6 billion was
outstanding as of December 31, 2008), subject to periodic review of the
adequacy of that level relative to Farmer Mac’s borrowing
requirements. Farmer Mac invests the proceeds of such issuances in
loans, Farmer Mac Guaranteed Securities, and non-program investment assets in
accordance with policies established by its board of directors that comply with
its Investment Regulations, including dollar amount, issuer concentration and
credit quality limitations. Farmer Mac’s regular debt issuance and
non-program investment assets support its access to the capital markets and
provide an alternative source of funds should market conditions be
unfavorable. Farmer Mac’s current policies authorize non-program
investments in:
|
|
·
|
obligations
of the United States;
|
|
|
·
|
obligations
of government-sponsored enterprises
(“GSEs”);
|
|
|
·
|
municipal
securities;
|
|
|
·
|
international
and multilateral development bank
obligations;
|
|
|
·
|
money
market instruments;
|
|
|
·
|
diversified
investment funds;
|
|
|
·
|
asset-backed
securities;
|
|
|
·
|
corporate
debt securities; and
|
|
|
·
|
mortgage
securities.
|
For more
information about Farmer Mac’s outstanding investments and indebtedness, see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Balance Sheet Review” and Note 4, Note 7, and Note 15 to the
consolidated financial statements.
Equity
Issuance
The Act authorizes Farmer Mac to issue
voting common stock, non-voting common stock and non-voting preferred
stock. Only banks, other financial entities, insurance companies and
institutions of the FCS eligible to participate in one or more of Farmer Mac’s
programs may hold voting common stock. No holder of Class A voting
common stock may directly or indirectly be a beneficial owner of more than
33 percent of the outstanding shares of Class A voting common
stock. There are no restrictions on the maximum holdings of Class B
voting common stock. No ownership restrictions apply to Class C
non-voting common stock or preferred stock, and they are freely
transferable.
Upon
liquidation, dissolution or winding up of the business of Farmer Mac, after
payment and provision for payment of outstanding debt of the Corporation, the
holders of shares of preferred stock would be paid in full at par value, plus
all accrued dividends, before the holders of shares of common stock received any
payment. The dividend rights of all three classes of the
Corporation’s common stock are the same, and dividends may be paid on common
stock only when, as, and if declared by Farmer Mac’s board of directors in its
sole discretion, subject to the payment of dividends on outstanding preferred
stock.
As of
December 31, 2008, the following shares of Farmer Mac common and preferred stock
were outstanding:
|
|
·
|
1,030,780
shares of Class A voting common
stock;
|
|
|
·
|
500,301 shares
of Class B voting common stock;
|
|
|
·
|
8,601,352 shares
of Class C non-voting common stock;
|
|
|
·
|
150,000
shares of Series B non-voting redeemable cumulative preferred stock;
and
|
|
|
·
|
9,200
shares of Series C non-voting redeemable cumulative preferred
stock.
|
In
December 2008, Farmer Mac repurchased and retired 700,000 shares of Series A
non-voting cumulative preferred stock for $35.0 million. Farmer Mac
may obtain additional capital from future issuances of voting and non-voting
common stock and non-voting preferred stock.
The
following table presents the dividends declared on the common stock during and
subsequent to 2008:
|
Date
|
Per
|
For
|
For
|
||||||
|
Dividend
|
Share
|
Period
|
Period
|
Date
|
|||||
|
Declared
|
Amount
|
Beginning
|
Ending
|
Paid
|
|||||
|
February
7, 2008
|
$ | 0.10 |
January
1, 2008
|
March
31, 2008
|
March
31, 2008
|
||||
|
April
3, 2008
|
0.10 |
April
1, 2008
|
June
30, 2008
|
June
30, 2008
|
|||||
|
August
7, 2008
|
0.10 |
July
1, 2008
|
September
30, 2008
|
September
30, 2008
|
|||||
|
December
16, 2008
|
0.10 |
October
1, 2008
|
December
31, 2008
|
December
31, 2008
|
|||||
|
March
11, 2009
|
0.05 |
January
1, 2009
|
March
31, 2009
|
*
|
|||||
* The
dividend declared on March 11, 2009 is scheduled to be paid on April 3,
2009.
Farmer
Mac’s ability to declare and pay common stock dividends could be restricted if
it were to fail to comply with its regulatory capital
requirements. See Note 9 to the consolidated financial statements and
“Business—Government Regulation of Farmer Mac—Regulation—Capital
Standards—Enforcement Levels.”
Series A Preferred
Stock
On
December 15, 2008, Farmer Mac repurchased and retired all $35.0 million of
the outstanding Series A cumulative preferred stock in conjunction with the
issuance of $70.0 million of Series B-3 cumulative preferred stock to the
holder of the Series A preferred stock. The following table presents
the dividends declared on Series A preferred stock during 2008:
|
Date
|
Per
|
For
|
For
|
||||||
|
Dividend
|
Share
|
Period
|
Period
|
Date
|
|||||
|
Declared
|
Amount
|
Beginning
|
Ending
|
Paid
|
|||||
|
February
7, 2008
|
$ | 0.80 |
January
1, 2008
|
March
31, 2008
|
March
31, 2008
|
||||
|
April
3, 2008
|
0.80 |
April
1, 2008
|
June
30, 2008
|
June
30, 2008
|
|||||
|
August
7, 2008
|
0.80 |
July
1, 2008
|
September
30, 2008
|
September
30,
2008
|
|||||
Series B Preferred
Stock
On September 30, 2008, Farmer Mac
issued 60,000 shares of its newly issued Series B-1 Senior Cumulative Perpetual
Preferred Stock (“Initial Series B-1 Preferred Stock”) and 5,000 shares of its
newly issued Series B-2 Senior Cumulative Perpetual Preferred Stock (“Series B-2
Preferred Stock”), each having a par value and initial liquidation preference of
$1,000 per share (collectively, the Initial Series B-1 Preferred Stock and
Series B-2 Preferred Stock, the “Initial Series B Preferred Stock”) for an
aggregate purchase price of $65.0 million, or $1,000 per
share. Farmer Mac incurred $4.0 million of direct costs related
to the issuance of the Initial Series B Preferred Stock, which reduced the
amount of mezzanine equity recorded as of September 30, 2008.
On
December 15, 2008, Farmer Mac issued 70,000 shares of its newly issued Series
B-3 Senior Cumulative Perpetual Preferred Stock (“Series B-3 Preferred Stock”)
having a par value and initial liquidation preference of $1,000 per share for a
purchase price of $70.0 million and an additional 15,000 shares of Series
B-1 Preferred Stock (the “Supplemental Series B-1 Preferred Stock”) for a
purchase price of $15.0 million. Farmer Mac incurred
$1.8 million of direct costs related to the issuance of the Series B-3
Preferred Stock and Supplemental Series B-1 Preferred Stock, which reduced the
amount of mezzanine equity recorded as of December 31, 2008. The
Initial Series B Preferred Stock, the Supplemental Series B-1 Preferred Stock
and the Series B-3 Preferred Stock are together referred to as the “Series B
Preferred Stock.”
The Series B Preferred Stock ranks
senior to Farmer Mac’s outstanding Class A voting common stock, Class B voting
common stock, Class C non-voting common stock, Series C Preferred Stock and any
other class of capital stock issuable in the future with respect to dividends,
distributions upon a change in control, liquidation, and dissolution or winding
up of Farmer Mac. Each series of Series B Preferred Stock ranks pari passu with the
others.
Dividends on the Series B Preferred
Stock compound quarterly at an annual rate of 10.0 percent of the
then-applicable Liquidation Preference (as defined below) per
share. On approximately each of the first three anniversary dates
after the related issuance date, the annual rate on the Series B Preferred Stock
will increase to 12.0 percent, 14.0 percent, and 16.0 percent,
respectively. Dividends on the Series B Preferred Stock accrue and
cumulate from the date last paid, whether or not declared by Farmer Mac’s board
of directors, and are payable quarterly in arrears out of legally available
funds when and as declared by the board of directors on each dividend payment
date. Farmer Mac may pay dividends on the Series B Preferred Stock
without paying dividends on any outstanding class or series of stock that ranks
junior to the Series B Preferred Stock.
Farmer Mac has the right, but not the
obligation, to redeem all, but not less than all, of the issued and outstanding
shares of Series B Preferred Stock at a price equal to the then-applicable
Liquidation Preference amount beginning nine months from issuance and on each
subsequent dividend payment date. In addition, Farmer Mac must redeem
all, but not less than all, of the outstanding shares of Series B Preferred
Stock at a price equal to the then-applicable Liquidation Preference amount
under specified circumstances, including (1) in the event that any indebtedness
of Farmer Mac or its subsidiaries (“Farmer Mac Debt”) becomes or is declared due
and payable prior to the stated maturity thereof or is not paid when it becomes
due and payable, (2) an event of default occurs with respect to any Farmer Mac
Debt, or (3) Farmer Mac becomes bankrupt or insolvent or a receiver or
conservator is appointed for Farmer Mac. The redemption price for any
shares of Series B Preferred Stock redeemed by Farmer Mac will be payable in
cash equal to the par value of the Series B Preferred Stock ($1,000 per share),
plus all accrued but unpaid dividends (the “Liquidation Preference”) or, at the
election of Farmer Mac, payable in Farmer Mac program assets or other assets
acceptable to the holders of the Series B Preferred Stock. Because of
these mandatory redemption features, the Series B Preferred Stock is classified
as mezzanine equity on Farmer Mac’s consolidated balance
sheet. Although the Series B Preferred Stock is classified as
mezzanine equity, outside of the equity section of the consolidated balance
sheet, it is a component of Farmer Mac’s core capital for statutory and
regulatory capital compliance purposes.
Upon a change in control of Farmer Mac,
holders of the Series B Preferred Stock will be entitled to receive an amount in
cash equal to the Liquidation Preference. Except as required by
applicable law, the holders of the Series B Preferred Stock are not entitled to
any voting rights. The following table presents the dividends declared on Series
B preferred stock during and subsequent to 2008:
|
Date
|
Per
|
For
|
For
|
||||||
|
Dividend
|
Share
|
Period
|
Period
|
Date
|
|||||
|
Declared
|
Amount
|
Beginning
|
Ending
|
Paid
|
|||||
|
December
16, 2008
|
$ | 25.00 |
October
1, 2008
|
December
31, 2008
|
December
31, 2008
|
||||
|
February
28, 2009
|
25.00 |
January
1, 2009
|
March
31, 2009
|
*
|
|||||
* The
dividend declared on February 28, 2009 is scheduled to be paid on March 31,
2009.
Series C Preferred
Stock
To ensure
that Farmer Mac has adequate capital to support new business in fulfilling its
mission, in fourth quarter 2008 Farmer Mac initiated the requirement that
sellers who place pools of loans in excess of $20.0 million into a Farmer
Mac program purchase an equity interest in Farmer Mac in the form of shares of
Farmer Mac’s Series C Non-Voting Cumulative Preferred Stock (“Series C
Preferred Stock”). The amount of the required investment is currently
an amount equal to 1.25 percent greater than the Corporation’s required
statutory minimum capital for the pool of loans being accepted by Farmer
Mac.
Series C
Preferred Stock has a par value of $1,000 per share, an initial liquidation
preference of $1,000 per share and shall consist of up to 75,000 shares. Series
C Preferred Stock ranks senior to Farmer Mac’s outstanding Class A voting common
stock, Class B voting common stock, Class C non-voting common stock and any
other common stock of Farmer Mac issued in the future. Series C
Preferred Stock ranks junior to Farmer Mac’s outstanding Series B Preferred
Stock.
Dividends
on Series C Preferred Stock compound quarterly at an annual rate of
5.0 percent of the then-applicable Liquidation Preference per
share. The annual rate will increase to (1) 7.0 percent on
the January 1st
following the fifth anniversary of the applicable issue date and (2)
9.0 percent on the January 1st
following the tenth anniversary of the applicable issue
date. Dividends on Series C Preferred Stock will accrue and
cumulate from the applicable issue date whether or not declared by the board of
directors and will be payable quarterly in arrears out of legally available
funds when and as declared by the board of directors on each dividend payment
date—March 31, June 30, September 30 and December 31 of each year,
beginning March 31, 2009. Farmer Mac may pay dividends on
Series C Preferred Stock without paying dividends on any outstanding class
or series of stock that ranks junior to Series C Preferred Stock.
Farmer
Mac has the right, but not the obligation, to redeem some or all of the issued
and outstanding shares of Series C Preferred Stock at a price equal to the
then-applicable Liquidation Preference beginning on the first anniversary of the
applicable issue date and on each subsequent dividend payment
date. Farmer Mac’s redemption right with respect to Series C
Preferred Stock is subject to receipt of the prior written approval of FCA, if
required, and the consent of at least two-thirds of the then-outstanding shares
of Series B-1, if any. The following table presents the dividends
declared on Series C preferred stock subsequent to 2008.
|
Date
|
Per
|
For
|
For
|
|||||||
|
Dividend
|
Share
|
Period
|
Period
|
Date
|
||||||
|
Declared
|
Amount
|
Beginning
|
Ending
|
Paid
|
||||||
|
February
28, 2009
|
$ | 12.50 |
January
1, 2009
|
March
31, 2009
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* The
dividend declared on February 28, 2009 is scheduled to be paid on March 31,
2009.
On
December 24, 2008, Farmer Mac sold 9,200 shares of its newly issued Series C
Preferred Stock to National Rural. Farmer Mac sold those shares
without registration under the Securities Act of 1933, as amended (the
“Securities Act”), in reliance upon the exemption provided by Section 3(a)(2),
for an aggregate purchase price of $9.2 million, or $1,000 per
share. Subsequent to year-end, Farmer Mac sold an additional 10,800
shares of Series C Preferred Stock to National Rural, resulting in 20,000 shares
of Series C Preferred Stock outstanding as of March 2, 2009.
Common Stock
Repurchases
During
2008, 2007, and 2006 Farmer Mac repurchased 31,691, 1,086,541, and
796,450 shares,
respectively, of
its Class C non-voting common stock at an average
price of
$26.13, $26.61, and $26.82 per share, respectively, pursuant to the
Corporation’s stock repurchase programs. These
repurchases reduced the Corporation’s stockholders’ equity by approximately
$0.8 million, $29.0 million, and $22.0 million,
respectively. The aggregate number of shares purchased by
Farmer Mac under the stock repurchase programs reached the maximum number of
authorized shares during first quarter 2008, thereby terminating the program
according to its terms.
All of
the shares repurchased under Farmer Mac’s stock repurchase programs were
purchased in open market transactions and were retired to become authorized but
unissued shares available for future issuance.
FARMER MAC’S AUTHORITY TO BORROW FROM THE U.S.
TREASURY
Farmer Mac may issue obligations to the
U.S. Treasury in a cumulative amount not to exceed
$1.5 billion. The proceeds of such obligations may be used
solely for the purpose of fulfilling Farmer Mac’s guarantee obligations under
the Farmer Mac I, Farmer Mac II, and Rural Utilities
programs. The Act provides that the U.S. Treasury is required to
purchase such obligations of Farmer Mac if Farmer Mac certifies
that:
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a
portion of the guarantee fees assessed by Farmer Mac has been set aside in
a segregated account as a reserve against losses arising out of Farmer
Mac’s guarantee activities in an amount determined by Farmer Mac’s board
of directors to be necessary and such reserve has been exhausted;
and
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the
proceeds of such obligations are needed to fulfill Farmer Mac’s guarantee
obligations.
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Such
obligations would bear interest at a rate determined by the U.S. Treasury,
taking into consideration the average rate on outstanding marketable obligations
of the United States as of the last day of the last calendar month ending before
the date of the purchase of the obligations from Farmer Mac, and would be
required to be repurchased from the U.S. Treasury by Farmer Mac within a
“reasonable time.” As of December 31, 2008, Farmer Mac had not utilized
this borrowing authority and does not expect does to utilize this borrowing
authority in the future.
The United States government does not
guarantee payments due on Farmer Mac Guaranteed Securities, funds invested in
the equity or debt securities of Farmer Mac, any dividend payments on shares of
Farmer Mac stock or the profitability of Farmer Mac.
GOVERNMENT REGULATION OF FARMER MAC
In 1987, Congress created Farmer Mac in
the aftermath of the collapse of the agricultural credit delivery
system. Farmer Mac’s primary committees of jurisdiction in the U.S.
House of Representatives and the U.S. Senate—the Agriculture Committees—added
requirements for Farmer Mac that had not been included in any of the other
statutes establishing other GSEs.
Unlike
the other existing GSEs at the time, Farmer Mac’s initial 1987 legislation
required the Corporation to be regulated by an independent regulator, the Farm
Credit Administration, which has the authority to regulate Farmer Mac’s safety
and soundness. The statute creating Farmer Mac expressly requires
that qualified loans meet minimum credit and appraisal standards that represent
sound loans to profitable farm businesses. The enabling legislation
also required Farmer Mac to comply with the periodic reporting requirements of
the SEC, including quarterly reports on the financial status of the Corporation
and interim reports when there are significant developments. Farmer
Mac’s statutory charter also requires offerings of Farmer Mac Guaranteed
Securities to be registered under the Securities Act unless an exemption for an
offering is available.
In May
2008, Congress enacted the Food, Conservation and Energy Act of 2008 (the “Farm
Bill”), which expanded Farmer Mac’s charter to authorize the Corporation to
purchase, and guarantee securities backed by, loans made by cooperative lenders
to cooperative borrowers to finance electrification and telecommunications
systems in rural areas. Farmer Mac’s authorities and regulatory
structure were not revised by subsequent legislation adopted in 2008 to regulate
other GSEs.
Office of Secondary
Market Oversight (OSMO)
As an institution of the FCS, Farmer
Mac is subject to the regulatory authority of FCA. FCA, acting
through OSMO, has general regulatory and enforcement authority over Farmer Mac,
including the authority to promulgate rules and regulations governing the
activities of Farmer Mac and to apply its general enforcement powers to Farmer
Mac and its activities. The Director of OSMO, who is selected by and
reports to the FCA board, is responsible for the examination of Farmer Mac and
the general supervision of the safe and sound performance by Farmer Mac of the
powers and duties vested in it by the Act. The Act requires an annual
examination of the financial transactions of Farmer Mac and authorizes FCA to
assess Farmer Mac for the cost of its regulatory activities, including the cost
of any examination. Farmer Mac is required to file quarterly reports
of condition with FCA.
Capital
Standards
General. The
Act, as amended by the Farm Credit System Reform Act of 1996 (the “1996 Act”),
established three capital standards for Farmer Mac:
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Statutory
minimum capital requirement – Farmer Mac’s minimum capital level is an
amount of core capital (stockholders’ equity less accumulated other
comprehensive (loss)/income plus mezzanine equity) equal to the sum of
2.75 percent of Farmer Mac’s aggregate on-balance sheet assets, as
calculated for regulatory purposes, plus 0.75 percent of Farmer Mac’s
aggregate off-balance sheet obligations, specifically
including:
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the
unpaid principal balance of outstanding Farmer Mac Guaranteed
Securities;
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instruments
issued or guaranteed by Farmer Mac that are substantially equivalent to
Farmer Mac Guaranteed Securities, including LTSPCs;
and
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other
off-balance sheet obligations of Farmer
Mac.
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Statutory
critical capital requirement – Farmer Mac’s critical capital level is an
amount of core capital equal to 50 percent of the total minimum capital
requirement at that time.
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Risk-based
capital – The Act directs FCA to establish a risk-based capital stress
test for Farmer Mac, using specified stress-test
parameters.
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Farmer
Mac is required to comply with the higher of the minimum capital requirement or
the risk-based capital requirement.
The
risk-based capital stress test promulgated by FCA is intended to determine the
amount of regulatory capital (core capital plus the allowance for losses, but
excluding the valuation allowance for real estate owned) that Farmer Mac would
need to maintain positive capital during a ten-year period in
which:
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annual
losses occur at a rate of default and severity “reasonably related” to the
rates of the highest sequential two years in a limited U.S. geographic
area; and
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interest
rates increase to a level equal to the lesser of 600 basis points or
50 percent of the ten-year U.S. Treasury rate, and interest rates remain
at such level for the remainder of the
period.
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The
risk-based capital stress test then adds an additional 30 percent to the
resulting capital requirement for management and operational
risk. FCA promulgated a revised risk-based capital stress test that
became effective July 25, 2008.
As of
December 31, 2008, Farmer Mac’s minimum and critical capital requirements were
$193.5 million and $96.7 million, respectively, and its actual core
capital level was $207.0 million, $13.5 million above the minimum
capital requirement and $110.2 million above the critical capital
requirement. Based on the risk-based capital stress test, Farmer
Mac’s risk-based capital requirement as of December 31, 2008 was
$57.3 million and Farmer Mac’s regulatory capital of $223.4 million
exceeded that amount by approximately $166.1 million. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources—Capital Requirements” for a
presentation of Farmer Mac’s current regulatory capital position.
Enforcement
Levels. The Act directs FCA to classify Farmer Mac within one
of four enforcement levels for purposes of determining compliance with capital
standards. As of December 31, 2008, Farmer Mac was classified as
within level I—the highest compliance level.
Failure
to comply with the applicable required capital level in the Act would result in
Farmer Mac being classified as within level II (below the applicable risk-based
capital level, but above the minimum capital level), level III (below the
minimum capital level, but above the critical capital level) or level IV (below
the critical capital level). In the event that Farmer Mac were
classified as within level II, III or IV, the Act requires the Director of OSMO
to take a number of mandatory supervisory measures and provides the Director
with discretionary authority to take various optional supervisory measures
depending on the level in which Farmer Mac is classified. The
mandatory measures applicable to levels II and III include:
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requiring
Farmer Mac to submit and comply with a capital restoration
plan;
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prohibiting
the payment of dividends if such payment would result in Farmer Mac being
reclassified as within a lower level and requiring the pre-approval of any
dividend payment even if such payment would not result in reclassification
as within level IV; and
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reclassifying
Farmer Mac as within one level lower if it does not submit a capital
restoration plan that is approved by the Director, or the Director
determines that Farmer Mac has failed to make, in good faith, reasonable
efforts to comply with such a plan and fulfill the schedule for the plan
approved by the Director.
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If Farmer
Mac were classified as within level III, then, in addition to the foregoing
mandatory supervisory measures, the Director of OSMO could take any of the
following discretionary supervisory measures:
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imposing
limits on any increase in, or ordering the reduction of, any obligations
of Farmer Mac, including off-balance sheet
obligations;
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limiting
or prohibiting asset growth or requiring the reduction of
assets;
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requiring
the acquisition of new capital in an amount sufficient to provide for
reclassification as within a higher
level;
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terminating,
reducing or modifying any activity the Director determines creates
excessive risk to Farmer Mac; or
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appointing
a conservator or a receiver for Farmer
Mac.
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The Act
does not specify any supervisory measures, either mandatory or discretionary, to
be taken by the Director in the event Farmer Mac were classified as within level
IV.
The Director of OSMO has the
discretionary authority to reclassify Farmer Mac to a level that is one level
below its then current level (for example, from level I to level II) if the
Director determines that Farmer Mac is engaging in any action not approved by
the Director that could result in a rapid depletion of core capital or if the
value of property subject to mortgages backing Farmer Mac Guaranteed Securities
has decreased significantly.
Item 1A. Risk Factors
Farmer
Mac’s business activities, financial performance and results of operations are,
by their nature, subject to a number of risks and
uncertainties. Consequently, the Corporation’s net interest income,
total revenues and net income have been, and are likely to continue to be,
subject to fluctuations that reflect the effect of many factors, including the
risk factors described below. Other sections of this Annual Report on
Form 10-K may include additional factors that could adversely affect Farmer
Mac’s business and its financial performance and results of
operations. Furthermore, because new risk factors likely will emerge
from time to time, management can neither predict all such risk factors nor
assess the effects of such factors on Farmer Mac’s business, operating results
and financial condition or the extent to which any factor, or combination of
factors, may affect the Corporation’s actual results and financial
condition. If any of the following risks materialize, Farmer Mac’s
business, financial condition or results of operations could be materially
adversely affected.
An
inability to access the debt capital markets could have a material adverse
effect on Farmer Mac’s business, operating results, financial condition and
capital levels.
Farmer Mac’s ability to operate its
business, meet its obligations, grow its assets and fulfill its statutory
purpose depends on the Corporation’s ability to issue substantial amounts of
debt frequently and at favorable rates. The issuance of short-term
and long-term debt securities in the U.S. financial markets is the primary
source of funding for Farmer Mac’s purchases of program and non-program assets
and for repaying or refinancing existing debt. Moreover, one of the
primary sources of the Corporation’s revenue is the net interest income earned
from the difference, or “spread,” between the return received on assets held and
the related borrowing costs. Farmer Mac’s ability to obtain funds
through the issuance of debt, and the cost at which these funds may be obtained,
depends on many factors, including:
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Farmer
Mac’s corporate and regulatory structure, including its status as a GSE
and perceptions about the viability of stockholder-owned GSEs in
general;
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compliance
with regulatory capital requirements and any measures imposed by Farmer
Mac’s regulator if the Corporation were to fail to remain in compliance
with those requirements;
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Farmer
Mac’s financial results and changes in its financial
condition;
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the
public’s perception of the risks to and financial prospects of Farmer
Mac’s business;
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prevailing
conditions in the capital
markets;
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competition
from other issuers of GSE debt;
and
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legislative
or regulatory actions relating to Farmer Mac’s business, including any
actions that would affect the Corporation’s GSE status or add additional
requirements that would restrict or reduce its ability to issue
debt.
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Farmer
Mac’s ability to meet its regulatory capital requirements has been, and may
continue to be, adversely affected by market conditions and other
factors.
Farmer Mac’s ability to meet its
regulatory capital requirements has been, and may continue to be, adversely
affected by various factors, including market volatility and investor interest
in Farmer Mac securities. Factors that could adversely affect the
adequacy of Farmer Mac’s capital levels in the future include:
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the
potential for additional other-than-temporary impairment
charges;
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adverse
changes in interest rates or credit spreads;
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potential losses on any asset sales determined to be necessary to reduce the Corporation’s need for capital; |
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the
potential need to increase the level of the allowance for losses on
program assets in the future;
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legislative
or regulatory actions that increase Farmer Mac’s applicable capital
requirements; and
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changes
in generally accepted accounting
practices.
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Any
actions taken to maintain compliance with capital requirements or to increase
capital levels could adversely affect stockholders.
Farmer Mac may take a variety of
actions to increase its capital levels or to reduce its capital requirements to
meet applicable regulatory capital requirements, including:
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issuing
additional common or preferred
stock;
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reducing,
eliminating or delaying dividends on common and preferred
stock;
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constraining
growth in the portfolio of program assets by forgoing new business
opportunities; and
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reducing
the size of its program and non-program portfolios through asset
sales.
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Farmer
Mac’s ability to execute any of these actions or their effectiveness may be
limited, especially in today’s volatile and illiquid markets, and could
adversely affect the Corporation’s business, operating results, financial
condition and earnings. For example, Farmer Mac’s ability to issue
additional preferred or common stock would depend, in part, on market
conditions, and Farmer Mac may not be able to raise additional capital in the
amounts and at the time needed, on favorable terms or at
all. Furthermore, issuances of new common or preferred stock are
likely to be dilutive to existing stockholders and may carry other terms and
conditions that could adversely affect the value of the common or preferred
stock held by existing stockholders. Farmer Mac may also incur
significant costs and expenses related to any issuances of new common or
preferred stock.
Farmer
Mac’s business, operating results, financial condition and capital levels may be
materially and adversely affected by external factors that may be beyond its
control.
Farmer
Mac’s business, operating results, financial condition and capital levels may be
materially and adversely affected by external factors that may be beyond its
control, including, but not limited to:
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continuing
disruptions in the capital markets, which could adversely affect the value
and performance of Farmer Mac’s program and non-program assets, the
Corporation’s liquidity position and Farmer Mac’s ability to fund assets
at favorable levels by issuing debt securities and to raise capital by
selling equity securities;
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legislative
or regulatory developments or interpretations of Farmer Mac’s statutory
charter that could adversely affect Farmer Mac, its ability to offer new
products, the ability or motivation of certain lenders to participate in
its programs or the terms of any such participation, or increase the cost
of regulation and related corporate
activities;
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Farmer
Mac’s access to the debt markets at favorable rates and
terms;
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competitive
pressures in the purchase of agricultural real estate mortgage loans and
the sale of Farmer Mac Guaranteed Securities and debt
securities;
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substantial
changes in interest rates, agricultural land values, commodity prices,
export demand for U.S. agricultural products, the general economy, and
other factors that may affect delinquency levels and credit losses on
agricultural real estate mortgage
loans;
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protracted
adverse weather, animal and plant disease outbreaks, costs of agricultural
production inputs for farmers and ranchers, availability and cost of
agricultural workers, market or other conditions affecting particular
geographic regions or particular agricultural commodities or products
related to agricultural real estate mortgage loans backing Farmer Mac I
Guaranteed Securities or under
LTSPCs;
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the
effects of any changes in federal assistance for agriculture on the
agricultural economy or the value of agricultural real
estate;
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energy
policy changes that adversely affect the loan repayment capacity of
ethanol plants; and
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public
policy changes that adversely affect rural electric cooperatives,
including carbon capture or limitation on coal-fired power
generation.
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Farmer
Mac’s business development, profitability and capital depend on the continued
growth of the secondary market for agricultural real estate mortgage loans and
the establishment of a secondary market for rural utilities loans, the future
for both of which remains uncertain.
Continued
growth in Farmer Mac’s business and future profitability may be constrained by
conditions that limit the need or ability for lenders to obtain the benefits of
Farmer Mac’s programs, including, but not limited to:
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reduced
growth rates in the agricultural mortgage market due to the continued
slowdown of the overall economy;
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the
availability of other sources of capital for customers of Farmer Mac,
including through federal programs;
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the
acceptance by Federal Home Loan Banks of agricultural real estate mortgage
loans as collateral;
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the
historical preference of many agricultural lending institutions to retain
loans in their portfolios rather than to sell them into the secondary
market;
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the
small number of business partners that currently provide a significant
proportion of Farmer Mac’s business volume, resulting in vulnerability as
the status of these business partners may evolve;
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expanded
funding available from the federal government for rural utilities lenders;
and
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legislative
and regulatory developments that affect the agricultural and rural
utilities sectors.
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Farmer
Mac is a government-sponsored enterprise whose continued growth may be adversely
affected by legislative and regulatory developments.
Farmer
Mac is a government-sponsored enterprise that is governed by a statutory charter
controlled by the U.S. Congress and regulated by governmental
agencies. While Farmer Mac is not aware of any pending legislative
proposals which would adversely affect the Corporation at this time, Farmer Mac
is subject to risks and uncertainties related to legislative, regulatory or
political developments. Such developments could affect the ability of
lenders to participate in Farmer Mac’s programs or the terms on which they may
participate. Further, from time to time, legislative or regulatory
initiatives are commenced that, if successful, could result in the enactment of
legislation or the promulgation of regulations that could affect negatively the
growth or operation of the secondary market for agricultural mortgages and rural
utilities loans. Any of these political or regulatory developments
could have a material and adverse effect on Farmer Mac’s business, operating
results, financial condition and capital levels. See “Government
Regulation of Farmer Mac” in Item 1 of this Annual Report on Form 10-K for
additional discussion on the rules and regulations governing Farmer Mac’s
activities.
Farmer
Mac Guaranteed Securities and LTSPCs expose Farmer Mac to significant contingent
liabilities and its ability to fulfill its obligations under its guarantees and
LTSPCs may be limited.
Farmer
Mac assumes the ultimate credit risk of borrower defaults on the loans it holds
as well as the loans underlying Farmer Mac Guaranteed Securities and
LTSPCs. In the Farmer Mac I program, repayment of eligible loans
typically depends on the success of the related farming operation, which, in
turn, depends on many variables and factors over which farmers may have little
or no control, such as weather conditions, animal and plant disease outbreaks,
economic conditions (both domestic and international) and political
conditions.
In the
Rural Utilities program, eligible utilities operations include the distribution
of electricity, the generation and transmission of electricity, and
telecommunications. Each type of utility operation has different
inherent risks associated with it, but all share a common risk posed by
potential changes in public and regulatory policies. Business cash
flows can be disrupted as a result of storms, though distribution cooperatives
have in place cost-sharing arrangements with providers in other regions that
mitigate this exposure. Historically, natural disasters have resulted
in disaster area declarations and financial aid to utilities providers through
the Federal Emergency Management Agency and other conduits. The
electrical distribution and generation sectors can be adversely affected by
changes in fuel costs and prices received from consumers, as well as by
contractual power obligations that do not match up with supply or
demand. The depth and pace of technological change in the
telecommunications industry can also provide significant challenges, as the
industry requires heavy capital investment and correct judgments about the
sustainability of new technologies in an area with many
competitors.
Widespread
repayment shortfalls on loans in the Farmer Mac I program or Rural Utilities
program could require Farmer Mac to pay under its guarantees and LTSPCs and
could have a material adverse effect on the Corporation’s financial condition,
results of operations and liquidity.
Farmer
Mac Guaranteed Securities and LTSPCs are obligations of Farmer Mac only, and are
not backed by the full faith and credit of the United States, FCA or any other
agency or instrumentality of the United States other than Farmer
Mac. Farmer Mac’s principal source of funds for the payment of claims
under its guarantees and purchase commitments are the fees received in
connection with outstanding Farmer Mac Guaranteed Securities and
LTSPCs. These amounts are, and will continue to be, substantially
less than the amount of Farmer Mac’s aggregate contingent liabilities under its
guarantees and LTSPCs. Farmer Mac is required to set aside a portion
of the fees it receives as a reserve against losses from its guarantee and
commitment activities. Farmer Mac expects that its future contingent
liabilities for its guarantee and commitment activities will continue to grow
and will exceed Farmer Mac’s resources, including amounts in the Corporation’s
allowance for losses and its limited ability to borrow from the U.S.
Treasury.
Farmer
Mac is exposed to credit risk and interest rate risk that could materially and
adversely affect its business, operating results, financial condition, capital
levels and future earnings.
The
primary types of risk in the conduct of Farmer Mac’s business are:
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credit
risk associated with the agricultural mortgages and rural utilities loans
that Farmer Mac purchases or commits to purchase or that back Farmer Mac
Guaranteed Securities;
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interest
rate risk on interest-earning assets and related interest-bearing
liabilities due to possible timing differences in the associated cash
flows;
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credit
risk associated with Farmer Mac’s business relationships with other
institutions, such as counterparties to interest rate swap contracts and
other hedging arrangements; and
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risks
as to the creditworthiness of the issuers of AgVantage securities and the
Corporation’s non-program
investments.
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Farmer
Mac has been, and may continue to be, adversely affected by weak economic
conditions and market turmoil.
The
recent significant disruptions in world financial markets have adversely
affected Farmer Mac by requiring material writedowns of assets and may continue
to have an adverse effect on the value and performance of Farmer Mac’s assets,
as well as its liquidity position, ability to issue debt securities, or access
to capital. The possible duration and severity of the adverse
economic cycle is unknown, as the efficacy of recent efforts and programs to
stabilize the economy and the banking system are uncertain. There can
be no assurance that market conditions will improve in the near future or that
results will not continue to be adversely affected.
Farmer
Mac has recorded material writedowns in the value of its investment securities
and could experience further writedowns of its investments in future periods,
which could adversely affect the Corporation’s business, operating results,
financial condition and capital levels.
Farmer Mac has recorded material
other-than-temporary impairment charges on its investment portfolio, and that
portfolio continues to have significant exposure to securities issued by
financial institutions. Continued deterioration in financial and
credit market conditions could further reduce the fair value of these and other
investment securities, particularly those securities that are less liquid and
more subject to volatility.
Market
conditions have also increased the amount of judgment required to be exercised
by management to value certain securities. Furthermore, Farmer Mac
relies on internal models to determine the fair value of certain investment
securities, and those models could fail to produce reliable
results. Subsequent valuations of investment securities, in light of
factors then prevailing, may result in significant changes in the value of the
Corporation’s investment securities in the future. If Farmer Mac
decides to sell any of the securities in its investment portfolio, the price
ultimately realized will depend on the demand and liquidity in the market at
that time and may be materially lower than their current fair
value.
Changes
in interest rates may cause volatility in financial results and capital
levels.
Farmer
Mac enters into financial derivatives transactions to hedge interest rate risks
inherent in its business and applies fair value accounting to its financial
derivatives transactions pursuant to SFAS 133; it does not apply hedge
accounting to those derivatives. Although Farmer Mac’s financial
derivatives provide highly effective economic hedges of interest rate risk,
SFAS 133 requires the losses on financial derivatives to be reflected in
net income, while a majority of the offsetting economic gains on the hedged
items are not. In addition to volatile earnings under accounting
principles generally accepted in the United States (“GAAP”), another consequence
of the changes in the fair values of financial derivatives being accounted for
in earnings is the resulting effect on Farmer Mac’s regulatory core capital
required to meet the Corporation’s statutory minimum capital
requirement.
If
Farmer Mac’s management of risk associated with its program and non-program
assets is not effective, its business, operating results, financial condition
and capital levels could be materially adversely affected.
The unprecedented events in the
financial markets relating to, for example, volatility, liquidity and credit,
since at least the second half of 2007 have challenged financial institutions,
including Farmer Mac, to adapt and further develop profitability and risk
management models adequate to address a wider range of possible market
developments. Farmer Mac’s techniques and strategies may not be
effective in mitigating its risk exposure in all economic market environments or
against all types of risk, including risks that Farmer Mac fails to identify or
anticipate. Some of Farmer Mac’s qualitative tools and metrics for
managing risk are based upon its use of observed historical market
behavior. Farmer Mac applies statistical and other tools to these
observations to quantify its risks. These tools and metrics may fail
to predict future risk. Such failures could, for example, arise from
factors Farmer Mac did not anticipate or correctly evaluate in its
models. In addition, Farmer Mac’s quantified modeling does not take
into account all risks. Its more qualitative approach to managing
those risks could prove insufficient, exposing it to material unanticipated
losses. The inability of Farmer Mac to effectively identify and
manage the risks inherent in its business could have a material adverse effect
on its business, operating results, financial condition and capital
levels.
Any of
these risks could materially and adversely affect Farmer Mac’s business,
operating results, financial condition, capital levels and future
earnings. For additional discussion about the Corporation’s risk
management, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operation—Risk Management” in Item 7 of this Annual Report on
Form 10-K.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Farmer Mac currently occupies its
principal offices, which are located at 1133 Twenty-First Street, N.W.,
Washington, D.C. 20036, under the terms of a lease that expires on
November 30, 2011 and covers approximately 13,500 square feet of office
space. Farmer Mac also maintains an office located at 1517 North
Ankeny Boulevard, Ankeny, Iowa 50021, under the terms of a lease that expires on
November 14, 2010 and covers approximately 1,358 square feet of office
space. Farmer Mac’s offices are suitable and adequate for its
current and currently anticipated needs.
Item 3. Legal
Proceedings
On December 5, 2008, a lawsuit was
filed in the United States District Court for the District of Columbia against
Farmer Mac and certain of its present and former officers and directors on
behalf of purchasers of the securities of the Corporation between March 15, 2007
and September 12, 2008. The lawsuit alleges, among other things,
violations of Section 10(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”) and Rule 10b-5 promulgated thereunder by all defendants and
violations of Section 20(a) of the Exchange Act by the individual defendants in
relation to alleged statements and omissions concerning the financial condition
of the Corporation alleged to be materially false or misleading. The
complaint seeks class certification, compensatory damages, and other
remedies. On February 23, 2009, the Court appointed lead plaintiffs
for the litigation, and the lead plaintiffs are expected to file an amended
complaint, which the defendants expect to move to dismiss. Farmer Mac
intends to defend against plaintiffs’ claims vigorously.
Item 4. Submission of Matters to
a Vote of Security Holders
There were no matters submitted to a
vote of Farmer Mac’s security holders during fourth quarter 2008.
PART II
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
(a) Farmer Mac
has three classes of common stock outstanding. Ownership of Class A
voting common stock is restricted to banks, insurance companies and other
financial institutions or similar entities that are not institutions of the
FCS. Ownership of Class B voting common stock is restricted to
institutions of the FCS. There are no ownership restrictions on the
Class C non-voting common stock. Under the terms of the original
public offering of the Class A and Class B voting common stock, the Corporation
reserved the right to redeem at book value any shares of either class held by an
ineligible holder.
Farmer
Mac’s Class A voting common stock and Class C non-voting common stock trade on
the New York Stock Exchange under the symbols AGM.A and AGM,
respectively. The Class B voting common stock, which has a limited
market and trades infrequently, is not listed or quoted on any exchange or other
medium, and Farmer Mac is unaware of any publicly available quotations or prices
for that class of common stock.
The
information below represents the high and low closing sales prices for the Class
A and Class C common stocks for the periods indicated as reported by the New
York Stock Exchange.
|
Sales
Prices
|
||||||||||||||||
|
Class
A Stock
|
Class
C Stock
|
|||||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||||
|
(per
share)
|
||||||||||||||||
|
2009
|
||||||||||||||||
|
First
quarter (through March 2, 2009)
|
$ | 3.50 | $ | 2.45 | $ | 4.47 | $ | 2.93 | ||||||||
|
2008
|
||||||||||||||||
|
Fourth
quarter
|
$ | 9.14 | $ | 1.25 | $ | 10.99 | $ | 2.38 | ||||||||
|
Third
quarter
|
22.06 | 2.25 | 32.25 | 2.28 | ||||||||||||
|
Second
quarter
|
22.05 | 14.75 | 33.85 | 24.52 | ||||||||||||
|
First
quarter
|
20.15 | 15.50 | 29.92 | 21.63 | ||||||||||||
|
2007
|
||||||||||||||||
|
Fourth
quarter
|
$ | 25.38 | $ | 15.79 | $ | 34.78 | $ | 24.44 | ||||||||
|
Third
quarter
|
25.15 | 17.54 | 35.81 | 25.02 | ||||||||||||
|
Second
quarter
|
25.70 | 19.55 | 35.73 | 27.00 | ||||||||||||
|
First
quarter
|
20.00 | 17.95 | 28.25 | 24.49 | ||||||||||||
As of
March 2, 2009, Farmer Mac estimates that there were 1,204 registered owners of
the Class A voting common stock, 87 registered owners of the Class B
voting common stock and 1,121 registered owners of the Class C non-voting
common stock.
The
dividend rights of all three classes of the Corporation’s common stock are the
same, and dividends may be paid on common stock only when, as and if declared by
Farmer Mac’s board of directors in its sole discretion. From fourth
quarter 2004 through fourth quarter 2008, Farmer Mac paid a quarterly dividend
of $0.10 per share on all classes of the Corporation’s common
stock. On March 11, 2009, Farmer Mac’s board of directors declared a
quarterly dividend of $0.05 per share on the Corporation’s common stock payable
on April 3, 2009. The board reduced the dividend to preserve capital
based on its assessment of the uncertain outlook for capital market conditions
and to ensure that Farmer Mac has adequate capital to meet its statutory capital
requirements and support new business. Farmer Mac’s ability to pay
dividends on its common stock is subject to the payment of dividends on its
outstanding preferred stock. Farmer Mac’s ability to declare and pay
dividends could also be restricted if it were to fail to comply with regulatory
capital requirements. See “Business—Government Regulation of Farmer
Mac—Regulation—Capital Standards—Enforcement Levels.”
Information
about securities authorized for issuance under Farmer Mac’s equity compensation
plans appears under “Equity Compensation Plans” in the Corporation’s definitive
proxy statement to be filed on or about April 22, 2009. That portion
of the definitive proxy statement is incorporated by reference into this Annual
Report on Form 10-K.
Farmer
Mac is a federally chartered instrumentality of the United States and its common
stock is exempt from registration pursuant to Section 3(a)(2) of the Securities
Act. Two types of transactions related to Farmer Mac common stock
occurred during fourth quarter 2008 that were not registered under the
Securities Act and not otherwise reported on a Current Report on
Form 8-K. On October 2, 2008, Farmer Mac granted stock
appreciation rights under its 2008 Omnibus Incentive Plan with respect to an
aggregate of 90,000 shares of Class C non-voting common stock, at an exercise
price of $7.35 per share, to nine non-officer employees as incentive
compensation. On October 22, 2008, pursuant to Farmer Mac’s policy
that permits directors of Farmer Mac to elect to receive shares of Class C
non-voting common stock in lieu of their cash retainers, Farmer Mac issued an
aggregate of 2,923 shares of its Class C non-voting common stock to the five
directors who elected to receive such stock in lieu of their cash
retainers. The number of shares issued to the directors was
calculated based on a price of $4.10 per share, which was the closing price
of the Class C non-voting common stock on September 30, 2008 as reported by
the New York Stock Exchange.
Performance
Graph. The following graph compares the performance of Farmer
Mac’s Class A voting common stock and Class C non-voting common stock with
the performance of the New York Stock Exchange Composite Index (the “NYSE Comp”)
and the Standard & Poor’s 500 Diversified Financials Index (the “S&P Div
Fin”) over the period from December 31, 2003 to December 31,
2008. The graph assumes that $100 was invested on December 31,
2003 in each of: Farmer Mac’s Class A voting common stock;
Farmer Mac’s Class C non-voting common Stock; the NYSE Comp; and the S&P Div
Fin. The graph also assumes that all dividends were reinvested into
the same securities throughout the past five years. Farmer Mac
obtained the information contained in the performance graph from SNL
Financial.
This
performance graph shall not be deemed to be “soliciting material” or to be
“filed” with the SEC, and such performance graph shall not be incorporated by
reference into any of Farmer Mac’s filings under the Securities Act or the
Exchange Act, whether made before or after the date hereof and irrespective of
any general incorporation language contained in such filing (except to the
extent Farmer Mac specifically incorporates this section by reference into such
filing).
|
(b)
|
Not
applicable.
|
(c) Farmer
Mac did not repurchase any shares of its common stock during fourth quarter
2008. See “Business—Farmer Mac Programs—Financing—Equity
Issuance—Common Stock Repurchases” for information regarding Farmer Mac’s
repurchases of its Class C non-voting common stock during 2008, 2007 and
2006.
|
Selected
Financial Data
|
The
selected consolidated financial data presented below is summarized from Farmer
Mac’s consolidated balance sheet data as of December 31, 2008 and the
five-year period then ended, as well as selected results of
operations data for the five-year period then ended. This data should
be reviewed in conjunction with the audited consolidated financial statements
and related notes and with “Item 7—Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included in this Annual Report on
Form 10-K.
|
As of December 31,
|
||||||||||||||||||||
|
Summary
of Financial Condition:
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 278,412 | $ | 101,445 | $ | 877,714 | $ | 458,852 | $ | 430,504 | ||||||||||
|
Investment
securities
|
1,235,859 | 2,624,366 | 1,830,904 | 1,621,941 | 1,056,143 | |||||||||||||||
|
Farmer
Mac Guaranteed Securities
|
2,451,244 | 1,298,823 | 1,330,418 | 1,330,976 | 1,376,847 | |||||||||||||||
|
Loans,
net
|
774,596 | 766,219 | 775,421 | 799,516 | 882,874 | |||||||||||||||
|
Total
assets
|
5,107,307 | 4,977,613 | 4,953,673 | 4,341,445 | 3,847,410 | |||||||||||||||
|
Notes
payable:
|
||||||||||||||||||||
|
Due
within one year
|
3,757,099 | 3,829,698 | 3,298,097 | 2,587,704 | 2,620,172 | |||||||||||||||
|
Due
after one year
|
887,999 | 744,649 | 1,296,691 | 1,406,527 | 864,412 | |||||||||||||||
|
Total
liabilities
|
4,947,743 | 4,754,020 | 4,705,184 | 4,095,416 | 3,612,176 | |||||||||||||||
|
Mezzanine
equity
|
144,216 | - | - | - | - | |||||||||||||||
|
Stockholders'
equity
|
15,348 | 223,593 | 248,489 | 246,029 | 235,234 | |||||||||||||||
|
Selected
Financial Ratios:
|
||||||||||||||||||||
|
Return
on average assets
|
-3.06 | % | 0.09 | % | 0.64 | % | 1.15 | % | 0.96 | % | ||||||||||
|
Return
on average common equity
|
-158.24 | % | 2.20 | % | 14.03 | % | 22.87 | % | 20.76 | % | ||||||||||
|
Average
equity to assets
|
2.37 | % | 4.75 | % | 5.32 | % | 5.88 | % | 5.47 | % | ||||||||||
|
For
the Year Ended December 31,
|
||||||||||||||||||||
|
Summary
of Operations:
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||
|
Interest
Income:
|
||||||||||||||||||||
|
Net
interest income after recovery/ (provision) for loan
losses
|
$ | 74,184 | $ | 44,668 | $ | 40,686 | $ | 50,689 | $ | 65,763 | ||||||||||
|
Non-interest
(loss)/income:
|
||||||||||||||||||||
|
Guarantee
and commitment fees
|
28,381 | 25,232 | 21,815 | 19,554 | 20,977 | |||||||||||||||
|
(Losses)/gains
on financial derivatives and trading assets
|
(141,042 | ) | (40,274 | ) | 1,617 | 11,537 | (14,687 | ) | ||||||||||||
|
Impairment
losses on available-for-sale investment securities
|
(106,240 | ) | - | - | - | - | ||||||||||||||
|
Gains
on asset sales and debt repurchases
|
2,689 | 288 | 1,150 | 116 | 567 | |||||||||||||||
|
Gains
on the sale of real estate owned
|
- | 130 | 809 | 34 | 523 | |||||||||||||||
|
Representation
and warranty claims income
|
- | - | 718 | 79 | 2,816 | |||||||||||||||
|
Other
income
|
1,413 | 1,411 | 1,001 | 1,872 | 1,295 | |||||||||||||||
|
Non-interest
(loss)/income
|
(214,799 | ) | (13,213 | ) | 27,110 | 33,192 | 11,491 | |||||||||||||
|
Non-interest
expense
|
32,612 | 24,877 | 23,094 | 11,518 | 16,263 | |||||||||||||||
|
(Loss)/income
before income taxes
|
(173,227 | ) | 6,578 | 44,702 | 72,363 | 60,991 | ||||||||||||||
|
Income
tax (benefit)/expense
|
(22,864 | ) | (83 | ) | 12,689 | 23,091 | 19,751 | |||||||||||||
|
Net
(loss)/income
|
(150,363 | ) | 6,661 | 32,013 | 49,272 | 41,240 | ||||||||||||||
|
Preferred
stock dividends
|
(3,717 | ) | (2,240 | ) | (2,240 | ) | (2,240 | ) | (2,240 | ) | ||||||||||
|
Net
(loss)/income available to common stockholders
|
$ | (154,080 | ) | $ | 4,421 | $ | 29,773 | $ | 47,032 | $ | 39,000 | |||||||||
|
Allowance
for Losses Activity:
|
||||||||||||||||||||
|
Provision/(recovery)
for losses
|
$ | 17,840 | $ | (142 | ) | $ | (3,408 | ) | $ | (8,777 | ) | $ | (412 | ) | ||||||
|
Net
charge-offs/(recoveries)
|
5,292 | 526 | 690 | (329 | ) | 4,540 | ||||||||||||||
|
Ending
balance
|
16,435 | 3,887 | 4,555 | 8,653 | 17,101 | |||||||||||||||
|
Earnings
Per Common Share and Dividends:
|
||||||||||||||||||||
|
Basic
(loss)/earnings per common share
|
$ | (15.40 | ) | $ | 0.43 | $ | 2.74 | $ | 4.14 | $ | 3.24 | |||||||||
|
Diluted
(loss)/earnings per common share
|
(15.40 | ) | 0.42 | 2.68 | 4.09 | 3.20 | ||||||||||||||
|
Common
stock dividends per common share
|
0.40 | 0.40 | 0.40 | 0.40 | 0.10 | |||||||||||||||
|
Regulatory
Capital:
|
||||||||||||||||||||
|
Statutory
minimum capital requirement
|
$ | 193,476 | $ | 186,032 | $ | 174,539 | $ | 142,439 | $ | 128,931 | ||||||||||
|
Core
capital
|
206,976 | 226,386 | 243,533 | 244,792 | 237,734 | |||||||||||||||
|
Minimum
capital surplus
|
13,500 | 40,354 | 68,994 | 102,353 | 108,803 | |||||||||||||||
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
Financial information as of and for
each of the years ended December 31, 2008, 2007 and 2006 is consolidated to
include the accounts of Farmer Mac and its wholly-owned subsidiary, Farmer Mac
Mortgage Securities Corporation.
This
discussion and analysis of financial condition and results of operations should
be read together with Farmer Mac’s consolidated financial statements and the
related notes to the consolidated financial statements for the fiscal years
ended December 31, 2008, 2007 and 2006.
The
discussion below is not necessarily indicative of future results.
Forward-Looking Statements
Some
statements made in this Annual Report on Form 10-K are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995 pertaining to management’s current expectations as to Farmer Mac’s
future financial results, business prospects and business
developments. Forward-looking statements include any statement that
may predict, forecast, indicate or imply future results, performance or
achievements, and typically are accompanied by, and identified with, such terms
as “anticipates,” “believes,” “expects,” “intends,” “should” and similar
phrases. The following discussion and analysis includes
forward-looking statements addressing Farmer Mac’s:
|
|
·
|
prospects
for earnings;
|
|
|
·
|
prospects
for growth in loan purchase, guarantee, securitization and LTSPC
volume;
|
|
|
·
|
trends
in net interest income;
|
|
|
·
|
trends
in portfolio credit quality, delinquencies and provisions for
losses;
|
|
|
·
|
trends
in expenses;
|
|
|
·
|
trends
in non-program investments;
|
|
|
·
|
prospects
for asset impairments and allowance for
losses;
|
|
|
·
|
changes
in capital position; and
|
|
|
·
|
other
business and financial matters.
|
Management’s
expectations for Farmer Mac’s future necessarily involve a number of assumptions
and estimates and the evaluation of risks and uncertainties. Various
factors or events could cause Farmer Mac’s actual results to differ materially
from the expectations as expressed or implied by the forward-looking statements,
including the factors discussed under “Risk Factors” in Part I, Item 1A of this
Annual Report on Form 10-K and uncertainties regarding:
|
|
·
|
the
ability of Farmer Mac to increase its capital in an amount sufficient to
enable it to continue to operate profitably and provide a secondary market
for agricultural mortgage and rural utilities
loans;
|
|
|
·
|
the
availability of reasonable rates and terms of debt financing to Farmer
Mac;
|
|
|
·
|
fluctuations
in the fair value of assets held by Farmer Mac, particularly in volatile
markets;
|
|
|
·
|
the
rate and direction of development of the secondary market for agricultural
mortgage and rural utilities loans, including lender interest in Farmer
Mac credit products and the Farmer Mac secondary
market;
|
|
|
·
|
the
general rate of growth in agricultural mortgage and rural utilities
indebtedness;
|
|
|
·
|
borrower
preferences for fixed rate agricultural mortgage
indebtedness;
|
|
|
·
|
legislative
or regulatory developments that could affect Farmer
Mac;
|
|
|
·
|
increases
in general and administrative expenses attributable to changes in the
business and regulatory environment, including the hiring of additional
personnel with expertise in key functional
areas;
|
|
|
·
|
the
willingness of investors to invest in Farmer Mac Guaranteed Securities;
and
|
|
|
·
|
developments
in the financial markets, including possible investor, analyst and rating
agency reactions to events involving GSEs, including Farmer
Mac.
|
In light
of these potential risks and uncertainties, no undue reliance should be placed
on any forward-looking statements expressed in this Annual Report on Form
10-K. Furthermore, Farmer Mac undertakes no obligation to release
publicly the results of revisions to any forward-looking statements that may be
made to reflect new information or any future events or circumstances, except as
otherwise mandated by the SEC.
Critical Accounting Policies and Estimates
The
preparation of Farmer Mac’s consolidated financial statements in conformity with
GAAP requires the use of estimates and assumptions that affect the amounts
reported in the consolidated financial statements and related notes for the
periods presented. Actual results could differ from those
estimates. The critical accounting policies that are both important
to the portrayal of Farmer Mac’s financial condition and results of operations
and require complex, subjective judgments are the accounting policies
for: (1) the allowance for losses, (2) fair value measurement,
and (3) other-than-temporary impairment.
Allowance
for Losses
Farmer
Mac maintains an allowance for losses to cover estimated losses on loans held,
real estate owned and loans underlying LTSPCs, Farmer Mac I Guaranteed
Securities, and Farmer Mac Guaranteed Securities – Rural Utilities in accordance
with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies
(“SFAS 5”) and Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for
Impairment of a Loan, as amended (“SFAS 114”).
Farmer
Mac’s allowance for losses is presented in three components on its consolidated
balance sheet:
|
|
·
|
an
“Allowance for loan losses” on loans
held;
|
|
|
·
|
a
valuation allowance on real estate owned, which is included in the balance
sheet under “Real estate owned”;
and
|
|
|
·
|
an
allowance for losses on loans underlying Farmer Mac I Guaranteed
Securities, LTSPCs and Farmer Mac Guaranteed Securities – Rural Utilities,
which is included in the balance sheet under “Reserve for
losses.”
|
Farmer
Mac’s provision for losses is presented in two components on the consolidated
statement of operations:
|
|
·
|
a
“Provision for loan losses,” which represents losses on Farmer Mac’s loans
held; and
|
|
|
·
|
a
“Provision for losses,” which represents losses on loans underlying Farmer
Mac I Guaranteed Securities, LTSPCs, Farmer Mac Guaranteed Securities –
Rural Utilities and real estate
owned.
|
The
purpose of the allowance for losses is to provide for estimated losses that are
probable to have occurred as of the balance sheet date, and not to predict or
account for future potential losses. The determination of the
allowance for losses requires management to make significant estimates based on
information available as of the balance sheet date, including the amounts and
timing of losses and current market and economic conditions. These
estimates are subject to change in future reporting periods if such conditions
and information change. For example, a decline in the national or
agricultural economy could result in an increase in delinquencies or
foreclosures, which may require additional allowances for losses in future
periods.
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:
|
|
·
|
economic
conditions;
|
|
|
·
|
geographic
and agricultural commodity/product concentrations in the
portfolio;
|
|
|
·
|
the
credit profile of the portfolio;
|
|
|
·
|
delinquency
trends of the portfolio;
|
|
|
·
|
historical
charge-off and recovery activities of the portfolio;
and
|
|
|
·
|
other
factors to capture current portfolio trends and characteristics that
differ from historical experience.
|
Farmer
Mac separately evaluates the cooperative lender obligations and loans underlying
its Farmer Mac Guaranteed Securities – Rural Utilities to determine if there are
probable losses inherent in the securities or the underlying rural utilities
loans.
Farmer
Mac also analyzes impaired assets in accordance with
SFAS 114. 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);
|
|
|
·
|
loans
for which Farmer Mac had adjusted the timing of borrowers’ payment
schedules, but still expects to collect all amounts due and has not made
economic concessions; and
|
|
|
·
|
additional
performing loans that have previously been delinquent or are secured by
real estate that produces agricultural commodities or products currently
under stress.
|
For loans
with an updated appraised value, other updated collateral valuation or
management’s estimate of discounted collateral value, this analysis includes the
measurement of the fair value of the underlying collateral for individual loans
relative to the total recorded investment, including principal, interest and
advances. In the event that the collateral value does not support the
total recorded investment, Farmer Mac specifically allocates an allowance for
the loan for the difference between the recorded investment and its fair value,
less estimated costs to liquidate the collateral. For the remaining
impaired assets without updated valuations, this analysis is performed in the
aggregate in consideration of the similar risk characteristics of the assets and
historical statistics.
Management believes that its use of
this methodology produces a reliable estimate of probable losses, as of the
balance sheet date, in accordance with SFAS 5 and SFAS 114.
The
allowance for losses is increased through periodic provisions for loan losses
that are charged against net interest income and provisions for losses charged
to non-interest expense and reduced by charge-offs for actual losses, net of
recoveries. Negative provisions for loan losses or negative
provisions for losses are recorded in the event that the estimate of probable
losses as of the end of a period is lower than the estimate at the beginning of
the period. The establishment of and periodic adjustments to the
valuation allowance for real estate owned are charged against income as a
portion of the provision for losses charged to non-interest
expense. Gains and losses on the sale of real estate owned are
recorded in income based on the difference between the recorded investment at
the time of sale and liquidation proceeds and are reported as “Gains on the sale
of real estate owned” in the consolidated statements of operations.
No
allowance for losses has been provided for AgVantage securities or Farmer Mac II
Guaranteed Securities. Each AgVantage security is a general
obligation of an issuing institution approved by Farmer Mac and is secured by
eligible loans in an amount at least equal to the outstanding principal amount
of the security. As of December 31, 2008, there were no probable
losses inherent in Farmer Mac’s AgVantage securities due to the credit quality
of the obligors, as well as the underlying collateral. As of December
31, 2008, Farmer Mac had not experienced any credit losses on any AgVantage
securities. The guaranteed portions collateralizing Farmer Mac II
Guaranteed Securities are guaranteed by USDA. Each USDA guarantee is
an obligation backed by the full faith and credit of the United
States. As of December 31, 2008, Farmer Mac had not experienced any
credit losses on any Farmer Mac II Guaranteed Securities.
Further
information regarding the allowance for losses is included in “—Risk
Management—Credit Risk - Loans.”
Fair
Value Measurement
A
significant portion of Farmer Mac’s assets consists of financial instruments
that are measured at fair value in the consolidated balance
sheets. For financial instruments that are complex in nature or for
which observable inputs are not available, the measurement of fair value
requires significant management judgments and assumptions. These
judgments and assumptions, as well as changes in market conditions, may have a
material impact on the consolidated balance sheets and statements of
operations.
Statement
of Financial Accounting Standards No. 157, Fair Value Measurements
(“SFAS 157”) defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in a transaction between market
participants at the measurement date (also referred to as an exit
price). The amount of judgment involved in measuring the fair value
of a financial instrument is affected by a number of factors, such as the type
of investment, the liquidity of the markets for the instrument and the
contractual characteristics of the instrument. Farmer Mac uses one of
the following three practices for estimating fair value, the selection of which
is based on the reliability and availability of relevant market data: (1) quoted
market prices for identical instruments, (2) quoted prices, from multiple third
parties, in markets that are not active or for which all significant inputs are
observable, either directly or indirectly, or (3) analytical models that employ
techniques such as discounted cash flow approach and that include market-based
assumptions such as prepayment speeds, forward yield curves and discount rates
commensurate with the risks involved. Price transparency tends to be
limited in less liquid markets where quoted market prices or observable market
data may not be available. Farmer Mac refines and enhances its
valuation methodologies to correlate more closely to observable market
data. When observable market prices or data are not readily available
or do not exist, the estimation of fair value may require significant management
judgment and assumptions. The estimates are subject to change in
future reporting periods if such conditions and information
change. For example, volatility in credit markets could result in
wider credit spreads, which may change fair value measurements for certain
financial instruments.
Farmer
Mac’s assets and liabilities presented at fair value in the consolidated balance
sheet on a recurring basis include:
|
|
·
|
investment
securities;
|
|
|
·
|
Farmer
Mac Guaranteed Securities classified as available-for-sale and trading;
and
|
|
|
·
|
financial
derivatives.
|
The
changes in fair value from period to period are recorded either in the
consolidated balance sheet to accumulated other comprehensive (loss)/income or
in the consolidated statement of operations as gains/(losses) on financial
derivatives or gains/(losses) on trading assets.
The fair
value hierarchy established in SFAS 157 ranks the quality and reliability of the
information used to determine fair values. The hierarchy gives
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities and the lowest priority to unobservable
inputs. The standard describes the following three levels used to
classify fair value measurements:
|
|
Level
1
|
Unadjusted
quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or
liabilities.
|
|
|
Level
2
|
Quoted
prices in markets that are not active or financial instruments for which
all significant inputs are observable, either directly or
indirectly.
|
|
|
Level
3
|
Prices
or valuations that require unobservable inputs that are significant to the
fair value measurement.
|
As of
December 31, 2008, Farmer Mac’s assets and liabilities recorded at fair value
included financial instruments valued at $2.8 billion whose fair values were
estimated by management in the absence of readily determinable fair values
(i.e., Level 3). These financial instruments measured as Level 3
represented 55 percent of total assets and 72 percent of financial
instruments measured at fair value as of December 31, 2008. Assets
underlying these financial instruments measured as Level 3 primarily include the
following:
|
Type of Financial
Instrument
|
Underlying Assets
|
|
Farmer
Mac I Guaranteed Securities
|
Agricultural
real estate mortgage loans eligible under the standards for the Farmer Mac
I program.
|
|
Farmer
Mac II Guaranteed Securities
|
Portions
of loans guaranteed by the USDA pursuant to the Consolidated Farm Rural
Development Act.
|
|
Farmer
Mac Guaranteed Securities – Rural Utilities
|
General
obligations of National Rural and/or loans made to rural electric
distribution cooperatives by National Rural.
|
|
Auction-rate
certificates (“ARCs”)
|
Guaranteed
student loans that are backed by the full faith and credit of the United
States.
|
|
GSE
preferred stock
|
Preferred
stock investments in CoBank, ACB and AgFirst Farm Credit Bank, both of
which are institutions of the Farm Credit System, a government-sponsored
enterprise.
|
Further information regarding fair value
measurement is included in Note 13 to the consolidated financial
statements.
Other-than-Temporary
Impairment
Other-than-temporary
impairment occurs when the fair value of an available-for-sale security is below
its amortized cost, and it is determined that it is not probable that all
contractual principal and interest payments will be collected or that management
does not have the intent and ability to hold the security until it recovers to
its amortized cost or is repaid in full. Many factors considered in
this determination involve significant judgment, including recent events
specific to the issuer or the related industry, changes in external credit
ratings, the severity and duration of the impairment, the probability that all
amounts contractually due will be collected, and the intent and ability to hold
the securities until recovery or repayment. Other-than-temporary
impairment charges may subsequently be recovered if contractual principal and
interest payments are collected or if the security is subsequently sold at an
amount greater than its carrying value.
Generally,
changes in the fair value of available-for-sale securities resulting from
changes in interest rates are determined to be temporary if management has the
positive intent and ability to hold the security until the earlier of the
recovery of the unrealized loss amount or maturity. If the decision
is made to sell a security or that a security may be sold in the future prior to
recovery, the security is determined to be other-than-temporarily impaired in
the period of the decision. With respect to an available-for-sale
security in an unrealized loss position due to factors other than changes in
interest rates, such as deterioration in the credit of the issuer or the general
widening of credit spreads, management evaluates the probability that all
contractual cash flows will be collected. Generally, if management
believes that it is probable that all contractual cash flows will be collected
and management has the positive intent and ability to hold the security until
recovery or maturity, the unrealized loss is determined to be
temporary.
Results of Operations
Overview. The ongoing
world-wide credit market disruptions and economic slowdown have caused
unprecedented financial market volatility, which adversely affected Farmer Mac’s
2008 financial results and capital position. Farmer Mac’s net loss to
common stockholders for 2008 was $154.1 million or $15.40 per diluted
common share, compared to net income of $4.4 million or $0.42 per
diluted common share for 2007 and $29.8 million or $2.68 per diluted common
share for 2006.
The most
significant events related to Farmer Mac’s disappointing results for 2008 were
Fannie Mae entering into conservatorship on September 7, 2008 and Lehman
Brothers Holdings Inc. (“Lehman Brothers”) declaring bankruptcy on September 15,
2008. At the time of these events, Farmer Mac held in its investment
portfolio $50.0 million of Fannie Mae floating rate preferred stock and
$60.0 million of Lehman Brothers senior debt securities. As a
result of these events, Farmer Mac recognized a total of $106.2 million
other-than-temporary impairment charges on these holdings during
2008. These two investments were acquired in 2005 and 2007,
respectively, as part of the Corporation’s non-program investment portfolio,
which is designed to provide liquidity in the event of a market disruption,
facilitate Farmer Mac’s regular debt issuance program, and provide net interest
income to support Farmer Mac’s Congressional mission. Following the
recognition of these significant losses, Farmer Mac conducted an extensive
review of its investment policies and operations with a view to strengthening
policies, procedures and oversight of its investment portfolio and related
funding strategies. This review was concluded during first quarter
2009 and its findings are currently being implemented, with the goals of
minimizing the Corporation’s exposure to financial market volatility, preserving
capital and supporting the Corporation’s access to the debt
markets.
In 2008,
Farmer Mac recorded losses of $130.4 million on financial derivatives used to
manage interest rate risk, compared with losses of $39.9 million in 2007 and
gains of $1.6 million in 2006. Although Farmer Mac’s financial
derivatives provide highly effective economic hedges of interest rate risk, the
accounting treatment elected under Statement of Financial Accounting Standards
No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended
(“SFAS 133”) required the losses on financial derivatives to be reflected
in net income, while a substantial portion of the offsetting economic gains on
the hedged items was not. To date, the resulting cumulative effect of
the application of SFAS 133 on Farmer Mac’s regulatory core capital has been a
reduction of approximately $100.2 million. Beginning in October 2008,
Farmer Mac discontinued entering into pay-fixed interest rate
swaps. Over time, this cessation will lead to a reduction of
the volatility in earnings, and as Farmer Mac’s existing pay-fixed
interest rate swaps approach maturity, the negative impact on Farmer Mac’s core
capital of the fair value of those swaps will decline
substantially. Accordingly, such reductions will be restored to
earnings and capital over time, as the pay-fixed interest rate swaps and the
items being economically hedged mature. Farmer Mac may use pay-fixed
interest rate swaps as necessary in the future to manage specific interest rate
risks for specific transactions. Other derivatives such as
receive-fixed interest rate swaps may still affect earnings and capital,
although to a much lesser extent.
Farmer
Mac’s overall delinquencies and non-performing assets increased significantly
during fourth quarter 2008 due primarily to adverse developments in Farmer Mac’s
ethanol portfolio. As of December 31, 2008, Farmer Mac’s
ethanol portfolio consisted of loan participations with a cumulative unpaid
principal amount of $280.4 million with exposure to 29 different plants in
11 states. As of that date, Farmer Mac also had $41.5 million of
undisbursed commitments with respect to ethanol loans. That exposure
level is at Farmer Mac’s maximum tolerance level for ethanol, and Farmer Mac is
not seeking to add additional ethanol loans to its
portfolio. Other than the ethanol loans in Farmer Mac’s
portfolio, the loans underlying the Corporation’s guarantees and commitments
continued to perform well during 2008, with delinquencies on non-ethanol
loans remaining near historically low levels consistent with the strength
of the U.S. agricultural economy through the end of the year. In
total, Farmer Mac recorded provisions for losses of $17.8 million and
charge-offs of $5.3 million during 2008, both primarily related to ethanol
loans. Given the potential decline in the profitability of certain
agricultural industries, Farmer Mac expects that delinquencies are likely to
increase in 2009 and beyond, although any such delinquencies are expected to
remain within manageable levels. See “—Results of Operations—Outlook
for 2009” and “—Risk Management—Credit Risk – Loans” for more detail about the
outlook for certain agricultural industries.
Beyond
the effects of the items discussed above, there were positive developments in
Farmer Mac’s business during 2008. The Farm Bill expanded Farmer
Mac’s authorities to include providing a secondary market for rural electric and
telephone loans made by cooperative lenders to cooperative
borrowers. This expanded authority resulted in new program volume in
2008, as Farmer Mac placed its guarantee on $1.3 billion of investment
securities previously held as mission-related investments ($500.0 million of
which matured and was repaid during third quarter 2008) and the Corporation
guaranteed and purchased $230.0 million of new Farmer Mac Guaranteed Securities
– Rural Utilities during fourth quarter 2008. During 2008, Farmer Mac
added $3.1 billion of program volume, compared to $2.3 billion in
2007. Farmer Mac’s outstanding program volume as of December 31, 2008
was $10.1 billion, compared to $8.5 billion as of December 31, 2007
and $7.2 billion as of December 31, 2006.
During
2008, Farmer Mac achieved growth in its guarantee and commitment fees associated
with its core business. Guarantee and commitment fees increased to
$28.4 million for 2008, compared to $25.2 million and
$21.8 million for 2007 and 2006, respectively. Farmer Mac also
maintained access to the capital markets at favorable rates throughout 2008, as
the Corporation’s short-term borrowing costs were significantly more
advantageous than historical levels. Consequently, Farmer Mac’s net
interest income on program assets and investments was significantly higher
during 2008 than in previous years. For 2008, net interest income
including (expensive)/income related to financial derivatives was $61.7
million, compared to $44.5 million and $35.4 million for 2007 and
2006, respectively. Given the volatility in the debt markets, the
federal government’s effective guarantee of certain corporate debt and questions
concerning the status of all GSEs, it is uncertain whether Farmer Mac’s
advantageous short-term borrowing costs will continue and, if so, for how
long.
To assist
in the comparison of results to prior periods, the table below summarizes many
of the significant items discussed above as they relate to Farmer Mac’s results
of operations for the years ended December 31, 2008, 2007 and 2006 and
reconciles those items as separate components of net (loss)/income available to
common stockholders, distinct from the recurring items during the periods
presented.
|
For
the Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Recurring
items:
|
||||||||||||
|
Guarantee
and commitment fees
|
$ | 28,381 | $ | 25,232 | $ | 21,815 | ||||||
|
Net
interest income including realized gains/(losses) and amortization on
financial derivatives
|
59,441 | 43,235 | 33,741 | |||||||||
|
Other
income
|
1,413 | 1,411 | 1,001 | |||||||||
|
Credit
related (charges)/benefit
|
(17,956 | ) | 300 | 4,812 | ||||||||
|
Operating
costs
|
(29,187 | ) | (24,832 | ) | (23,983 | ) | ||||||
|
Related
tax expense
|
(12,509 | ) | (13,486 | ) | (10,128 | ) | ||||||
|
Preferred
stock dividends
|
(3,717 | ) | (2,240 | ) | (2,240 | ) | ||||||
|
Subtotal
|
25,866 | 29,620 | 25,018 | |||||||||
|
Items
resulting from fair value fluctuations:
|
||||||||||||
|
Fair
value changes in financial derivatives
|
(101,129 | ) | (38,729 | ) | 6,156 | |||||||
|
Fair
value changes in trading assets
|
(10,639 | ) | (327 | ) | 10 | |||||||
|
Related
tax benefit/(expense)
|
39,119 | 13,670 | (2,158 | ) | ||||||||
|
Subtotal
|
(72,649 | ) | (25,386 | ) | 4,008 | |||||||
|
Unusual
items:
|
||||||||||||
|
Impairment
losses on available-for-sale investment securities
|
(106,240 | ) | - | - | ||||||||
|
Gains
on asset sales and debt repurchases
|
2,689 | 288 | 1,150 | |||||||||
|
Related
tax expense
|
(3,746 | ) | (101 | ) | (403 | ) | ||||||
|
Subtotal
|
(107,297 | ) | 187 | 747 | ||||||||
|
Net
(loss)/income available to common stockholders
|
$ | (154,080 | ) | $ | 4,421 | $ | 29,773 | |||||
A
detailed presentation of Farmer Mac’s financial results for the years ended
December 31, 2008, 2007 and 2006 follows.
Net
Interest Income. Net interest income was $88.7 million
for 2008, $44.5 million for 2007 and $38.3 million for 2006. The
net interest yield was 162 basis points for the year ended December 31,
2008, compared to 85 basis points for each of the years ended December 31,
2007 and 2006. The following table provides information regarding
interest-earning assets and funding for the years ended December 31, 2008, 2007
and 2006. The balance of non-accruing loans is included in the
average balance of interest-earning loans and Farmer Mac Guaranteed Securities
presented, though the related income is accounted for on the cash
basis. Therefore, as the balance of non-accruing loans and the income
received increases or decreases, the net interest yield will fluctuate
accordingly.
| For the Year Ended December 31, | |||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
|||||||||||||||||||||||||||||||
|
Average
|
Income/
|
Average
|
Average
|
Income/
|
Average
|
Average
|
Income/
|
Average
|
|||||||||||||||||||||||||
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
|||||||||||||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||||||||||||||||
|
Interest-earning
assets:
|
|||||||||||||||||||||||||||||||||
|
Cash
and investments
|
$ | 2,928,424 | $ | 113,722 |
3.88%
|
$ | 3,195,475 | $ | 174,196 |
5.45%
|
$ | 2,474,900 | $ | 128,199 |
5.18%
|
||||||||||||||||||
|
Loans
and Farmer Mac Guaranteed Securities
|
2,540,802 | 141,973 |
5.59%
|
2,020,290 | 123,562 |
6.12%
|
2,055,657 | 121,723 |
5.92%
|
||||||||||||||||||||||||
|
Total
interest-earning assets
|
5,469,226 | 255,695 |
4.68%
|
5,215,765 | 297,758 |
5.71%
|
4,530,557 | 249,922 |
5.52%
|
||||||||||||||||||||||||
|
Funding:
|
|||||||||||||||||||||||||||||||||
|
Notes
payable due within one year
|
3,731,051 | 98,049 |
2.63%
|
3,493,047 | 176,786 |
5.06%
|
2,731,245 | 134,084 |
4.91%
|
||||||||||||||||||||||||
|
Notes
payable due after one year (1)
|
1,521,305 | 68,931 |
4.53%
|
1,521,738 | 76,519 |
5.03%
|
1,583,592 | 77,548 |
4.90%
|
||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
5,252,356 | 166,980 |
3.18%
|
5,014,785 | 253,305 |
5.05%
|
4,314,837 | 211,632 |
4.90%
|
||||||||||||||||||||||||
|
Net
non-interest-bearing funding
|
216,870 | - |
0.00%
|
200,980 | - |
0.00%
|
215,720 | - |
0.00%
|
||||||||||||||||||||||||
|
Total
funding
|
$ | 5,469,226 | 166,980 |
3.05%
|
$ | 5,215,765 | 253,305 |
4.86%
|
$ | 4,530,557 | 211,632 |
4.67%
|
|||||||||||||||||||||
|
Net
interest income/yield
|
$ | 88,715 |
1.62%
|
$ | 44,453 |
0.85%
|
$ | 38,290 |
0.85%
|
||||||||||||||||||||||||
(1)
Includes current portion of long-term notes.
The
average rate earned on cash and investments reflects lower short-term interest
rates in 2008 compared to 2007 and 2006, and the short-term or floating rate
nature of most investments acquired and outstanding during 2008. The
lower average rate on loans and Farmer Mac Guaranteed Securities reflects the
reset of adjustable rate mortgages to lower rates and the acquisition of new
lower-yielding loans compared to rates on loans that have
matured. The lower average rate on Farmer Mac’s notes payable due
within one year is consistent with general trends in average short-term rates
during the periods presented. The downward trend in the average rate
on notes payable due after one year reflects the retirement of older debt at
higher market rates and the issuance of new debt at lower market rates during
2008.
The
following table sets forth information regarding the changes in the components
of Farmer Mac’s net interest income for the periods indicated. For
each category, information is provided on changes attributable to changes in
volume (change in volume multiplied by old rate) and changes in rate (change in
rate multiplied by old volume). Combined rate/volume variances, the
third element of the calculation, are allocated based on their relative
size. The decreases in income due to changes in rate reflect the
reset of variable-rate investments and adjustable rate mortgages to lower rates
and the acquisition of new lower-yielding investments, loans and Farmer Mac
Guaranteed Securities, as described above. The decreases in expense
reflect the decreased cost of short-term or floating rate funding due to the
decrease in short-term interest rates.
|
2008
vs. 2007
|
2007
vs. 2006
|
|||||||||||||||||||||||
|
Increase/(Decrease)
Due to
|
Increase/(Decrease)
Due to
|
|||||||||||||||||||||||
|
Rate
|
Volume
|
Total
|
Rate
|
Volume
|
Total
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Income
from interest-earning assets:
|
||||||||||||||||||||||||
|
Cash
and investments
|
$ | (46,859 | ) | $ | (13,615 | ) | $ | (60,474 | ) | $ | 7,014 | $ | 38,983 | $ | 45,997 | |||||||||
|
Loans
and Farmer Mac Guaranteed Securities
|
(11,364 | ) | 29,775 | 18,411 | 3,957 | (2,118 | ) | 1,839 | ||||||||||||||||
|
Total
|
(58,223 | ) | 16,160 | (42,063 | ) | 10,971 | 36,865 | 47,836 | ||||||||||||||||
|
Expense
from interest-bearing liabilities
|
(97,821 | ) | 11,496 | (86,325 | ) | 6,477 | 35,196 | 41,673 | ||||||||||||||||
|
Change
in net interest income
|
$ | 39,598 | $ | 4,664 | $ | 44,262 | $ | 4,494 | $ | 1,669 | $ | 6,163 | ||||||||||||
The
following table presents the net effective spread between Farmer Mac’s interest
earning assets and its net funding costs. This spread is measured by
adding (expense)/income related to financial derivatives to net interest income
and subtracting yield maintenance payments.
|
For
the Year Ended December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Dollars
|
Yield
|
Dollars
|
Yield
|
Dollars
|
Yield
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Net
interest income/yield
|
$ | 88,715 | 1.62 | % | $ | 44,453 | 0.85 | % | $ | 38,290 | 0.85 | % | ||||||||||||
|
(Expense)/income
related to financial derivatives
|
(26,975 | ) | -0.49 | % | 76 | 0.00 | % | (2,903 | ) | -0.07 | % | |||||||||||||
|
Yield
maintenance payments
|
(3,556 | ) | -0.07 | % | (3,896 | ) | -0.07 | % | (3,889 | ) | -0.09 | % | ||||||||||||
|
Net
spread
|
$ | 58,184 | 1.06 | % | $ | 40,633 | 0.78 | % | $ | 31,498 | 0.69 | % | ||||||||||||
Farmer
Mac’s borrowing costs during 2008 were significantly more advantageous than
historical levels. Consequently, during 2008 the spread between
Farmer Mac’s cost of funds and the interest income earned on its
interest-earning assets was significantly higher than prior years.
Yield
maintenance payments represent the present value of expected future interest
income streams and accelerate the recognition of interest income from the
related loans. While the amount of yield maintenance payments has
been relatively consistent over the past three years, the timing and amounts of
these payments could vary greatly. Future variations in yield
maintenance payments would not necessarily indicate positive or negative trends
upon which gauge future financial results. For the years ended
December 31, 2008, 2007 and 2006, the after-tax effects of yield maintenance
payments on net income and diluted earnings per share were $2.3 million or $0.23
per diluted share, $2.5 million or $0.24 per diluted share and
$2.5 million or $0.23 per diluted share, respectively.
Provision
for Loan Losses. During 2008, Farmer Mac provided for $14.5
million of loan losses compared to recoveries during 2007 and 2006 of $0.2
million and $2.4 million, respectively. The $14.5 million of
provisions for loan losses during 2008 were largely attributable to defaulted
ethanol loans purchased from
Agstar Financial Services, a related party, pursuant to the term, of an LTSPC
Agreement. See
“—Risk Management—Credit Risk – Loans.”
Guarantee
and Commitment Fees. Guarantee and commitment fees, which
compensate Farmer Mac for assuming the credit risk on loans underlying Farmer
Mac Guaranteed Securities and LTSPCs, were $28.4 million for 2008, compared to
$25.2 million for 2007 and $21.8 million for 2006. The
amounts of these fees have risen with increases in the average balance of
outstanding guarantees and LTSPCs.
Gains
and Losses on Financial Derivatives. SFAS 133 requires the
change in the fair values of financial derivatives to be reflected in a
company’s net income or accumulated other comprehensive
(loss)/income. As discussed in Note 6 to the consolidated financial
statements, Farmer Mac accounts for its financial derivatives as undesignated
financial derivatives and does not apply hedge accounting available under SFAS
133.
The net
effect of gains and losses on financial derivatives recorded in Farmer Mac’s
consolidated statements of operations was a net loss of $130.4 million for 2008,
a net loss of $39.9 million for 2007 and a net gain of $1.6 million for
2006. The components of gains and losses on financial derivatives for
the years ended December 31, 2008, 2007 and 2006 are summarized in the following
table:
|
For
the Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Realized:
|
||||||||||||
|
(Expense)/income
related to financial derivatives
|
$ | (26,975 | ) | $ | 76 | $ | (2,903 | ) | ||||
|
Losses
due to terminations or net settlements
|
(1,876 | ) | (720 | ) | (809 | ) | ||||||
|
Unrealized
(losses)/gains due to fair value changes
|
(101,129 | ) | (38,729 | ) | 6,156 | |||||||
|
Amortization
of SFAS 133 transition adjustment
|
(423 | ) | (574 | ) | (837 | ) | ||||||
|
(Losses)/gains
on financial derivatives
|
$ | (130,403 | ) | $ | (39,947 | ) | $ | 1,607 | ||||
The
accrual of periodic cash settlements for interest paid or received from Farmer
Mac’s interest rate swap portfolio is shown as (expense)/income related to
financial derivatives in the table above. Payments or receipts to
terminate derivative positions or net cash settle forward sales contracts on
mortgage-backed securities and the debt of other GSEs and U.S. Treasury futures
are included in losses due to terminations or net
settlements. Changes in the fair value of Farmer Mac’s open
derivative positions are captured in unrealized (losses)/gains due to fair value
changes and are primarily the result of fluctuations in market interest
rates. The amortization of the SFAS 133 transition adjustment
reflects the reclassification into earnings the unrealized losses on financial
derivatives included in accumulated other comprehensive (loss)/income as a
result of the adoption of SFAS 133. 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.
Gains
and Losses on Trading Assets. On January 1, 2008, with the
adoption of SFAS 159, Farmer Mac elected to measure $600.5 million of
investment securities and $427.3 million of Farmer Mac II Guaranteed
Securities at fair value, with changes in fair value reflected in earnings as
they occur. Upon adoption, Farmer Mac recorded a cumulative effect of
adoption adjustment of $12.1 million, net of tax, as an increase to the
beginning balance of retained earnings. During 2008, Farmer Mac
elected to measure an additional $113.3 million of Farmer Mac II Guaranteed
Securities at fair value, with changes in fair value reflected in earnings as
they occur. One of the FASB’s stated objectives of SFAS 159 was
to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. Consistent with that objective, Farmer Mac selected all
of these assets for the fair value option under SFAS 159 because they were
funded or hedged principally with financial
derivatives. Consequently, Farmer Mac expected that the changes in
fair value of the assets would provide partial economic and financial reporting
offsets to the related financial derivatives. Due to the significant
declines in the fair values of investment securities attributable to the
widening of credit spreads experienced during 2008, such financial reporting
offsets were not achieved. For 2008, Farmer Mac recorded net losses
on trading assets of $5.6 million for changes in fair values of the assets
selected for the fair value option. Losses on all trading assets
totaled $10.6 million in 2008. Farmer Mac incurred losses on
trading assets of $0.3 million during 2007 and gains of $10,000 during
2006. Effective January 1, 2009, Farmer Mac will no longer elect the
fair value option for new purchases of Farmer Mac II Guaranteed
Securities.
During
fourth quarter 2008, Farmer Mac elected to measure put rights related to
$119.9 million (par value) of its ARC holdings at fair value upon the
election of the fair value option as permitted by SFAS 159. See Note
4 and Note 15 to the consolidated financial statements for more information
related to these put rights.
Gains on
Sale of Available-for-Sale Investment Securities. During 2008,
2007 and 2006, Farmer Mac recognized realized net gains of $0.3 million, $0.3
million and $1.2 million, respectively, from the sale of securities from
its available-for-sale portfolio.
Gain on
Sale of Farmer Mac Guaranteed Securities. During 2008,
Farmer Mac recognized a gain on sale of Farmer Mac Guaranteed Securities of $1.5
million. That gain resulted from the purchase and subsequent sale of
an AgVantage security that had previously been an off-balance sheet Farmer Mac
Guaranteed Security. There were no gains or losses on the sale of
Farmer Mac Guaranteed Securities during 2007 or 2006.
Representation
and Warranty Claims Income. During 2006,
Farmer Mac recovered approximately $0.7 million from sellers (one of which was
Zions First National Bank, a related party, as described in Note 3 to the
consolidated financial statements) for breaches of representations and
warranties associated with prior sales of agricultural mortgage loans to Farmer
Mac. Farmer Mac had previously charged off these amounts as losses on
the associated loans. Because these payments are received from
sellers rather than borrowers, such recoveries are reported as income and are
not reflected as recoveries in the net losses charged against the allowance for
losses. Farmer Mac did not have any such recoveries for breaches of
representations and warranties during 2008 or 2007.
Other
Income. Other income was $1.4 million, $1.4 million and
$1.0 million for the years ended December 31, 2008, 2007 and 2006,
respectively. The increase in 2007 compared to 2006 was the result of
a higher level of late fees received and increased income on recovered loan
valuations on loans held-for-sale.
Compensation
and Employee Benefits. Compensation and
employee benefits were $15.3 million, $14.2 million and
$11.9 million for 2008, 2007 and 2006, respectively. The
increases from 2006 reflect a higher level of incentive compensation paid in
2007 compared to both 2006 and 2008. The decrease in incentive
compensation from 2007 to 2008 was offset by accruals in 2008 for
severance payments to the former Chief Executive Officer and Chief Financial
Officer.
General
and Administrative Expenses. General and
administrative expenses, including legal, independent audit, and consulting
fees, were $11.9 million, $8.5 million and $9.8 million for 2008,
2007 and 2006, respectively. The increase from 2007 to 2008 was
largely attributable to advisory fees related to the issuance of Series B
Preferred Stock and legal and other advisory fees related to the development of
Farmer Mac programs and corporate governance matters. The decrease
from 2006 to 2007 was largely attributable to reduced legal fees in 2007, as
Farmer Mac incurred above-average legal fees related to large AgVantage
transactions and regulatory compliance matters in 2006. Farmer Mac
expects all of the above-mentioned expenses to continue at approximately the
same levels for 2009.
Regulatory
Fees. Regulatory fees
were $2.1 million, $2.2 million and $2.3 million for 2008, 2007 and
2006, respectively. FCA has advised Farmer Mac that its estimated
assessment for 2009 is $2.1 million. The regulatory assessments
from FCA for each of the examination periods corresponding approximately with
each of the years ended December 31, 2008, 2007 and 2006 include both their
originally estimated assessments and revisions to those estimates that reflect
actual costs incurred. These revisions have resulted in both
additional assessments and refunds in the past.
Provision
for Losses. The provision
for losses was $3.3 million for 2008, compared to a provision of $0.1 million
for 2007 and recoveries of $1.0 million during 2006. Similar to the
provision for loan losses discussed above, the increase in 2008 was largely
attributable to Farmer Mac’s general exposure to the ethanol
industry. See “—Risk Management—Credit Risk –
Loans.”
Income
Tax (Benefit)/Expense. Income tax (benefit)/expense totaled
$(22.9) million in 2008, compared to $(0.1) million in 2007 and
$12.7 million in 2006. Farmer Mac’s effective tax rates for
2008, 2007 and 2006 were approximately (13.2) percent, (1.3) percent and 28.4
percent, respectively. Farmer Mac’s negative tax rate for 2008 was
largely attributable to significant pre-tax losses recognized on Farmer Mac’s
derivative and investment portfolios, which were partially offset by the
recognition of a deferred tax valuation allowance. The negative tax
rate for 2007 was a result of a portion of Farmer Mac’s dividend income on
investment securities being non-taxable. During 2007, the effect of
that non-taxable dividend income on investment securities exceeded Farmer Mac’s
tax expense at its statutory tax rate.
During
2008, Farmer Mac recorded a deferred tax asset valuation allowance against the
deferred tax assets resulting from impairment losses and losses on preferred
stock classified as trading assets because the losses were capital losses and
any tax benefits can only be realized to the extent Farmer Mac would have
offsetting capital gains. Farmer Mac does not currently expect to
produce sufficient capital gains to recognize any material tax benefits related
to these losses. As of December 31, 2008, that deferred tax asset
valuation allowance totaled $40.0 million. For more information
about income taxes, see Note 10 to the consolidated financial
statements.
Business
Volume. During 2008, Farmer Mac added $3.1 billion of
program volume, compared to $2.3 billion and $3.0 billion in 2007 and 2006,
respectively. Farmer Mac’s outstanding program volume as of
December 31, 2008 was $10.1 billion, compared to $8.5 billion as
of December 31, 2007 and $7.2 billion as of December 31,
2006. During 2008, Farmer Mac:
|
|
·
|
purchased
$196.6 million of newly originated Farmer Mac I eligible
loans;
|
|
|
·
|
added
$530.4 million of Farmer Mac I eligible loans under
LTSPCs;
|
|
|
·
|
guaranteed
$475.0 million of AgVantage securities through the Farmer Mac I
program;
|
|
|
·
|
purchased
or placed its guarantee on $1.6 billion of Farmer Mac Guaranteed
Securities - Rural Utilities ($1.3 billion of which were investment
securities held as mission-related investments at the time of the
enactment of the Farm Bill and $230.0 million of which the
Corporation guaranteed and purchased during fourth quarter 2008);
and
|
|
|
·
|
purchased
$303.9 million of Farmer Mac II USDA-guaranteed
portions.
|
The
following table sets forth Farmer Mac I, Farmer Mac II and Rural Utilities loan
purchase, LTSPC and guarantee activities for newly originated and current
seasoned loans during the periods indicated:
|
Farmer Mac Loan Purchases, Guarantees and
LTSPCs
|
||||||||||||
|
For
the Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Farmer
Mac I:
|
||||||||||||
|
Loans
and Guaranteed Securities
|
$ | 196,622 | $ | 127,709 | $ | 98,673 | ||||||
|
AgVantage
|
475,000 | 1,000,000 | 1,500,000 | |||||||||
|
LTSPCs
|
530,363 | 970,789 | 1,139,699 | |||||||||
|
Farmer
Mac II Guaranteed Securities
|
303,941 | 210,040 | 234,684 | |||||||||
|
Farmer
Mac Guaranteed Securities - Rural Utilities
|
1,560,676 | - | - | |||||||||
|
Total
purchases, guarantees and commitments
|
$ | 3,066,602 | $ | 2,308,538 | $ | 2,973,056 | ||||||
The
purchase price of newly originated and seasoned eligible loans and portfolios,
none of which are delinquent at the time of purchase, is the fair value based on
current market interest rates and Farmer Mac’s target net yield, which includes
an amount to compensate Farmer Mac for credit risk that is similar to the
guarantee or commitment fee it receives for assuming credit risk on loans
underlying Farmer Mac I Guaranteed Securities and
LTSPCs.
Based on
market conditions, Farmer Mac either retains the loans it purchases or
securitizes them and sells Farmer Mac Guaranteed Securities backed by those
loans. Farmer Mac’s decision to retain loans it purchases is based on
analysis of the underlying funding costs and resulting net interest income
achievable over the lives of the loans. The weighted-average age of
the Farmer Mac I newly originated and current seasoned loans purchased and
retained (excluding the purchases of defaulted loans) during both 2008 and 2007
was less than one year. Of those loans, 59 percent and 72 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 16.3 and 17.3 years, respectively.
During
2008, 2007 and 2006, Farmer Mac securitized loans it purchased and sold the
resulting Farmer Mac Guaranteed Securities in the amount of $98.8 million,
$1.3 million and $4.0 million, respectively. Of the 2008
transactions, $96.1 million was sold to Zions First National Bank (“Zions”) and
$2.7 million was sold to AgStar Financial Services, ACA
(“AgStar”). All of the 2007 and 2006 transactions were sold to
AgStar. Both Zions and AgStar are related parties with respect to
Farmer Mac. Additionally, during 2007 and 2006, Farmer Mac issued
$681.7 million and $1.0 billion, respectively, of Farmer Mac I
Guaranteed Securities as the result of conversions of LTSPCs, of which $400.2
million and $470.2 million, respectively, were issued to related
parties. All of those 2007 transactions were with
AgStar. Of the 2006 transactions, $341.2 million was with AgStar
and $129.0 million was with Sacramento Valley Farm Credit, ACA, another
related party with respect to Farmer Mac. See Note 3 to the
consolidated financial statements for more information about related party
transactions.
The
following table sets forth information regarding the Farmer Mac I Guaranteed
Securities issued during the periods indicated:
|
Farmer
Mac I Guaranteed Securities Activity
|
||||||||||||
|
For
the Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Loans
securitized and sold as Farmer Mac I
|
||||||||||||
|
Guaranteed
Securities
|
$ | 98,843 | $ | 1,324 | $ | 3,994 | ||||||
|
AgVantage
securities
|
475,000 | 1,000,000 | 1,500,000 | |||||||||
|
Conversions
of LTSPCs into Farmer Mac I
|
||||||||||||
|
Guaranteed
Securities
|
- | 681,732 | 1,034,860 | |||||||||
|
Total
Farmer Mac Guaranteed Securities Issuances
|
$ | 573,843 | $ | 1,683,056 | $ | 2,538,854 | ||||||
The
outstanding principal balance of loans held and loans underlying LTSPCs and on-
and off-balance sheet Farmer Mac Guaranteed Securities (including Agvantage
securities) increased 18.0 percent to $10.1 billion as of December 31,
2008 from $8.5 billion as of December 31, 2007. The following
table sets forth information regarding those outstanding balances as of the
dates indicated:
|
Outstanding
Balance of Farmer Mac Loans and Loans Underlying
|
||||||||||||
|
Farmer
Mac Guaranteed Securities and LTSPCs
|
||||||||||||
|
As
of December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Farmer
Mac I:
|
||||||||||||
|
Loans
and Guaranteed Securities
|
$ | 5,759,773 | $ | 5,648,197 | $ | 4,343,755 | ||||||
|
LTSPCs
|
2,224,181 | 1,948,941 | 1,969,734 | |||||||||
|
Farmer
Mac II
|
1,043,425 | 946,617 | 925,799 | |||||||||
|
Farmer
Mac Guaranteed Securities -
|
||||||||||||
|
Rural
Utilities
|
1,054,941 | - | - | |||||||||
|
Total
|
$ | 10,082,320 | $ | 8,543,755 | $ | 7,239,288 | ||||||
As part
of fulfilling its guarantee obligations for Farmer Mac I Guaranteed Securities
and commitments to purchase eligible loans underlying LTSPCs, Farmer Mac
purchases defaulted loans, all of which are at least 90 days delinquent at
the time of purchase, out of the loan pools underlying those securities and
LTSPCs, and records the purchased loans as such on its balance
sheet. The purchase price for defaulted loans purchased out of Farmer
Mac I Guaranteed Securities is the current outstanding principal balance of the
loan plus accrued and unpaid interest. The purchase price for
defaulted loans purchased under an LTSPC is the then-current outstanding
principal balance of the loan, with accrued and unpaid interest on the defaulted
loans payable out of any future loan payments or liquidation proceeds as
received. The purchase price of a defaulted loan is not an indicator
of the expected loss on that loan; many other factors affect expected loss, if
any, on loans so purchased. See “—Risk Management—Credit Risk -
Loans.”
The
following table presents Farmer Mac’s purchases of newly originated and current
seasoned loans and purchases of defaulted loans underlying Farmer Mac I
Guaranteed Securities and LTSPCs.
|
For
the Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Farmer
Mac I newly originated and current seasoned loan purchases
|
$ | 196,622 | $ | 127,709 | $ | 98,673 | ||||||
|
Defaulted
loans purchased underlying off-balance sheet Farmer Mac I Guaranteed
Securities
|
647 | 1,562 | 707 | |||||||||
|
Defaulted
loans purchased underlying LTSPCs
|
56,560 | 1,033 | 7,449 | |||||||||
|
Defaulted
loans underlying on-balance sheet Farmer Mac I Guaranteed Securities
transferred to loans
|
1,072 | 1,316 | 1,467 | |||||||||
The
purchases of defaulted loans underlying Farmer Mac I Guaranteed Securities and
LTSPCs are pursuant to Farmer Mac’s obligations as guarantor and under its
contractual commitments, respectively. Farmer Mac may, in its sole
discretion, purchase the defaulted loans underlying Farmer Mac Guaranteed
Securities and is obligated to purchase those underlying an
LTSPC. With respect to the transfer of loans from on-balance sheet
Farmer Mac I Guaranteed Securities to loans, when particular criteria are met,
such as the default of the borrower, Farmer Mac becomes entitled to purchase the
defaulted loans underlying Farmer Mac I Guaranteed Securities (commonly referred
to as “removal-of-account” provisions). Farmer Mac records all such
defaulted loans at their fair values during the period in which Farmer Mac
becomes entitled to purchase the loans and therefore regains effective control
over the transferred loans. Fair values are determined by current
collateral valuations or management’s estimate of discounted collateral
values. Farmer Mac records, at acquisition, the difference between
each loan’s acquisition cost and its fair value, if any, as a charge-off to the
reserve for losses. The weighted-average age of delinquent loans
purchased out of securitized pools and LTSPCs during 2008, 2007 and 2006 was
3 years, 8 years and 7 years, respectively.
For
information regarding sellers in the Farmer Mac I and Farmer Mac II
programs, see “Business—Farmer Mac Programs—Farmer Mac I—Sellers” and
“Business—Farmer Mac Programs—Farmer Mac II—United States Department of
Agriculture Guaranteed Loan Programs.”
Related
Party Transactions. As provided by Farmer Mac’s statutory
charter, only banks, insurance companies and other financial institutions or
similar entities may hold Farmer Mac’s Class A voting common stock and only
institutions of the Farm Credit System may hold Farmer Mac’s Class B voting
common stock. Farmer Mac’s statutory charter also provides that Class
A stockholders elect five members of Farmer Mac’s 15-member board of directors
and that Class B stockholders elect five members of the board of
directors. Additionally, in order to participate in the Farmer Mac I
program, a financial institution must own a requisite amount of Farmer Mac
Class A or Class B voting common stock, based on the size and type of
institution. As a result of these requirements, Farmer Mac regularly
conducts business with related parties. These transactions are
conducted in the ordinary course of business, with terms and conditions
comparable to those available to any other third party. For more
information about related party transactions, see Note 3 to the consolidated
financial statements.
Outlook
for 2009. In 2008, the repercussions from the collapse of
markets for subprime mortgage securities cascaded into higher grade mortgage
securities, then other types of asset-backed securities and then broader classes
of assets heavily financed with securitized debt or bank loans. Those
disruptions in the capital markets led to a sharp downturn in the national
economy. In early 2009, there are only faint signs of recovery from
this downturn.
Conditions
in the agricultural sector have been relatively better and more stable than the
national economy in general, but the sector is not insulated from the effects of
the economic downturn. The agricultural sector is made up of diverse
industries that respond in different ways to changes in economic conditions and,
in fact, often compete with one another. While some industries
continue to prosper, others, such as ethanol producers and the protein sector
(i.e., cattle, poultry and pork producers) are being pressured by falling
prices for their products and elevated input costs. In addition, the
dairy sector is currently experiencing losses from operations due to oversupply
and the worldwide economic slowdown, and significant portions of California and
Texas are facing issues related to persistent drought. Farmer Mac
will continue to monitor closely developments in those industries and areas
experiencing stress, but anticipates that loan problems in those industries and
areas are likely to increase in 2009, which could lead to higher delinquencies
provisions for losses and charge-offs, although any such credit issues are
expected to remain within manageable levels.
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, there should be 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.
There
will also be opportunities for loan growth in the rural utilities segment, a new
area for Farmer Mac as a result of the legislative expansion of its charter in
May 2008. Farmer Mac expects to continue the growth it experienced in
this sector during 2008 in providing financing to rural utilities
lenders. Farmer Mac expects that demand for rural utilities loans
will be robust, particularly as the industry adds significant new capacity for
the first time since the 1970s. Also, additional power transmission
lines will need to be constructed as the development of wind and solar power
plants increase the demand for means to transfer power from the source of clean
power generation to the ultimate consumer. 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 and its overall risk
tolerance. Public policy shifts in the energy sector may also alter
Farmer Mac’s opportunities in this area, as electrical power generated by and
for rural electric cooperatives tends to be biased toward coal as a
fuel.
With
respect to rural utilities business prospects:
|
|
·
|
The
U.S. electric power industry is a $326 billion dollar industry that has
seen a 20 percent increase in public demand over the last 10
years.
|
|
|
·
|
Outstanding
loan balances for the rural electric industry are in excess of $57
billion, and capital needs over the next 10 year period are expected to
exceed $40 billion.
|
|
|
·
|
RUS
alone has already committed $356 million in rural electric funding for
2009.
|
|
|
·
|
National
Rural, one of the primary sources for supplemental capital in rural
electric financing, has maintained stable counterparty credit rating
outlooks moving into 2009.
|
These
statistics do not assure increased business volume for Farmer Mac, but do
evidence a strong and growing industry with needs for future financing from
capital markets. Both National Rural and CoBank have seen a
substantial increase in the rate of portfolio growth from 2007 to
2008. This may be a harbinger of the things to come, as significant
capital requirements are anticipated for the rural utilities industry within the
next five to ten years. This capital will be needed to finance the
construction of new generation and transmission facilities, modernize existing
equipment, and comply with environmental regulations.
With
respect to the agricultural operating and lending markets in general, USDA’s
most recent publications (as available on USDA’s website as of March 1, 2009)
forecast:
|
|
·
|
2009
net cash farm income to be $77.3 billion, a decrease of
$16.0 billion over 2008 figures, but still $5.5 billion over the
10-year average of
$71.8 billion.
|
|
|
·
|
2009
net farm income to be $71.2 billion, a very sizable decrease from
2008 estimates, but still a 9 percent increase over the 10-year average of
$65.3 billion.
|
|
|
·
|
Total
direct U.S. government payments to be $11.4 billion in 2009, down
from $12.4 billion in 2008, and 27 percent below the 5-year
average. Direct payment rates are fixed in legislation and are
not affected by the level of program crop
prices.
|
|
|
·
|
Countercyclical
payments to increase to $1.2 billion in 2009 from $720.0 million in
2008.
|
|
|
·
|
Marketing
loan benefits – which include loan deficiency payments, marketing loan
gains, and certificate exchange gains – are expected to have dropped to
$90.0 million in 2008 from $1.1 billion in 2007. The value of
these benefits is forecast to increase to $685.0 million in 2009, realized
almost exclusively by cotton
producers.
|
|
|
·
|
The
value of U.S. farm real estate to increase a modest 2.1 percent in 2009 to
$2.1 trillion from the current projection of $2.0 trillion for
2008.
|
|
|
·
|
The
amount of farm real estate debt to increase by 2.5 percent in 2009 to
$113.9 billion, compared to the current projection of
$111.1 billion in 2008.
|
The USDA
forecasts referenced above relate to U.S. agriculture generally, but should
collectively be favorable for Farmer Mac’s financial condition relative to its
exposure to outstanding guarantees and commitments, as the forecasts indicate
adequate borrower cash flows. Recent farmland sales have not
reflected the level of buyer confidence that has been evident over the past
several years, though farm real estate values appear stable to slightly lower in
most U.S. agricultural regions. Farm input costs and current
commodity prices have significantly squeezed profits and the related demand for
farmland, especially in the protein sector and stressed irrigation water
areas. Additionally, non-farmer investors who bought farmland during
the past several years contributed to the rise in farm real estate values over
that time, and these farmland buyers are notably fewer under current economic
and market conditions. Based on these factors, Farmer Mac does not
expect the rapid farm real estate value appreciation of the past several years
to continue into 2009.
Balance Sheet Review
Assets. Total
assets as of December 31, 2008 were $5.1 billion, compared to $5.0 billion as of
December 31, 2007. On-balance sheet program assets (Farmer Mac
Guaranteed Securities and loans) increased $1.2 billion during 2008 to a total
of $3.2 billion. Farmer Mac’s non-program assets decreased $1.0 billion to
$1.9 billion as of December 31, 2008. As of December 31,
2008, Farmer Mac had $278.4 million of cash and cash equivalents compared to
$101.4 million as of December 31, 2007. As of December 31, 2008,
Farmer Mac had $1.2 billion of investment securities compared to
$2.6 billion as of December 31, 2007. The decrease in
investment securities during the year ended December 31, 2008 reflects the
transfer of $1.4 billion of rural utilities loan-related securities from
investment securities to Farmer Mac Guaranteed Securities with Farmer Mac’s
guarantee of those securities pursuant to the expanded authorities granted in
the Farm Bill. During third quarter 2008, $500.0 million of
those Farmer Mac Guaranteed Securities matured and was repaid. Farmer
Mac also guaranteed and purchased $230.0 million of new Farmer Mac Guaranteed
Securities – Rural Utilities during fourth quarter 2008. Accordingly,
during 2008 Farmer Mac Guaranteed Securities increased by a net amount of
$1.2 billion to $2.5 billion.
As noted above, Farmer Mac’s 2008
financial results were adversely affected by losses on certain investment
securities. The following table summarizes Farmer Mac’s
$1.2 billion of investment securities and the unrealized gains and losses
as of December 31, 2008.
|
As
of December 31, 2008
|
||||||||||||||||
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans (1)
|
$ | 193,950 | $ | - | $ | (15,373 | ) | $ | 178,577 | |||||||
|
Floating
rate asset-backed securities
|
85,005 | 1 | (3,750 | ) | 81,256 | |||||||||||
|
Floating
rate corporate debt securities
|
458,428 | - | (39,363 | ) | 419,065 | |||||||||||
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
338,907 | 270 | (3,512 | ) | 335,665 | |||||||||||
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
7,375 | 188 | - | 7,563 | ||||||||||||
|
Floating
rate GSE subordinated debt
|
70,000 | - | (20,811 | ) | 49,189 | |||||||||||
|
Floating
rate GSE preferred stock
|
781 | - | - | 781 | ||||||||||||
|
Total
available-for-sale
|
1,154,446 | 459 | (82,809 | ) | 1,072,096 | |||||||||||
|
Trading:
|
||||||||||||||||
|
Floating
rate asset-backed securities
|
7,494 | - | (5,283 | ) | 2,211 | |||||||||||
|
Fixed
rate GSE preferred stock
|
180,579 | - | (19,027 | ) | 161,552 | |||||||||||
|
Total
trading
|
188,073 | - | (24,310 | ) | 163,763 | |||||||||||
|
Total
investment securities
|
$ | 1,342,519 | $ | 459 | $ | (107,119 | ) | $ | 1,235,859 | |||||||
|
(1)
|
AAA-rated
callable auction-rate certificates collateralized by pools of Federal
Family Education Loan Program ("FFELP") guaranteed student loans that are
backed by the full faith and credit of the United States, the interest
rates of which are reset through an auction process, most commonly at
intervals of 28 days. The fair value of these securities as of
December 31, 2008 are inclusive of the fair value of Farmer Mac's put
rights related to $119.9 million (par value) of its auction-rate
certificates. See Note 15 to the consolidated financial
statements for more information on these auction-rate
certificates.
|
The
unrealized losses on the investment securities classified as trading have been
recognized in earnings and, as such, reduced Farmer Mac’s core capital for
regulatory compliance purposes as of December 31, 2008. The
unrealized losses on available-for-sale investment securities are recorded as
reductions to Accumulated other comprehensive (loss)/income in the equity
section of Farmer Mac’s balance sheet. Accumulated other
comprehensive (loss)/income is not a component of Farmer Mac’s core capital for
regulatory capital compliance purposes. Therefore, such losses do not
impact Farmer Mac’s regulatory capital compliance measures. If such
losses were realized, either through sale or determination that the unrealized
losses were other-than-temporary, Farmer Mac’s regulatory capital compliance
measures would be affected as such items would be recorded through retained
earnings, which is a component of Farmer Mac’s core capital for regulatory
capital compliance purposes.
As shown
in the table above, unrealized losses on the investment securities are
concentrated in four categories: floating rate auction-rate
certificates backed by Government guaranteed student loans, floating rate
corporate debt securities, floating rate GSE subordinated debt, and fixed rate
GSE preferred stock. The GSE subordinated debt and the GSE preferred
stock are investments in CoBank and AgFirst Farm Credit Bank, both of which are
institutions of the Farm Credit System, a government-sponsored
enterprise. The floating rate corporate debt securities with
significant unrealized losses, the issuers of which are
primarily financial institutions, are summarized in the following
table:
|
As
of December 31, 2008
|
|||||||||||||||||
|
Amortized
|
Unrealized
|
Fair
|
S&P
Credit
|
||||||||||||||
|
Cost
|
Losses
|
Value
|
Rating
|
Maturity
|
|||||||||||||
|
In thousands
|
|||||||||||||||||
|
Goldman
Sachs
|
$ | 61,706 | $ | (9,338 | ) | $ | 52,368 |
A
|
February
2012
|
||||||||
|
HSBC Finance (1)
|
49,892 | (9,264 | ) | 40,628 |
AA-
|
Various
through July 2012
|
|||||||||||
|
Merrill
Lynch (2)
|
49,986 | (6,257 | ) | 43,729 |
A
|
November
2011
|
|||||||||||
|
Morgan
Stanley
|
34,926 | (3,858 | ) | 31,068 |
A
|
Various
through January 2011
|
|||||||||||
|
Credit
Suisse
|
55,000 | (3,225 | ) | 51,775 |
A+
|
Various
through August 2011
|
|||||||||||
|
Sallie
Mae
|
25,005 | (1,440 | ) | 23,565 |
|
BBB-
|
July
2009
|
||||||||||
|
CIT
|
35,000 | (1,360 | ) | 33,640 |
BBB+
|
August
2009
|
|||||||||||
|
John Deere Capital Corp (3)
|
20,000 | (1,266 | ) | 18,734 |
A2
|
July
2010
|
|||||||||||
|
Lehman Brothers (4)
|
5,400 | - | 5,400 |
Not
Rated
|
Various
through May 2010
|
||||||||||||
|
Other (5)
|
121,513 | (3,355 | ) | 118,158 |
A
(Minimum)
|
Various
through October 2011
|
|||||||||||
| $ | 458,428 | $ | (39,363 | ) | $ | 419,065 | |||||||||||
|
(1)
HSBC Finance was downgraded by S&P to a credit rating of A in March
2009.
|
|||||||||||||||||
| (2) Merrill Lynch & Co., Inc. was acquired by Bank of America in January 2009. | |||||||||||||||||
|
(3)
This investment was rated by Moody's.
|
|||||||||||||||||
|
(4)
The amortized cost of this investment was written down to its fair value
resulting in no unrealized loss as of December 31,
2008.
|
|||||||||||||||||
|
(5)
Consists of 8 corporate debt securities with unrealized losses ranging
from $11 thousand to $979
thousand.
|
|||||||||||||||||
Farmer
Mac continues to evaluate the inherent risks of holding each of the investment
securities in an unrealized loss position. That evaluation includes
the assessment of the potential losses that could be realized (including
other-than-temporary impairment charges), the likelihood of recovery (including
an evaluation of the time to maturity and likelihood of repayment), the impact
of recent and planned interventions by several governments and their agencies to
support financial institutions, as well as the adequacy of Farmer Mac’s core
capital to absorb a realized loss on the sale of a security.
On
February 6, 2009, Farmer Mac sold the Lehman Brothers senior debt securities in
its portfolio for $8.6 million, resulting in the recovery of $3.2 million of the
$54.5 million of other-than-temporary impairment losses recognized on those
securities during 2008. At this time, selling the remaining corporate
debt securities would adversely affect the level of Farmer Mac’s excess capital
above its statutory minimum capital requirement. As of December 31,
2008, that excess capital was $13.5 million. Farmer Mac currently has
the intent and ability to retain all of the investments identified above until
either the market values recover or the securities mature. Management
will continue to evaluate each of these investment positions in light of the
inherent risks and Farmer Mac’s capital position.
Liabilities. Total
liabilities increased to $4.9 billion as of December 31, 2008 from
$4.8 billion as of December 31, 2007. The increase in
liabilities was due primarily to an overall increase in financial derivatives
liability due to the decline in fair value resulting from changes in interest
rates. For more information about Farmer Mac’s funding and interest
rate risk practices and how financial derivatives are used, see “—Risk
Management—Interest Rate Risk.” For more information about Farmer
Mac’s reserve for losses, see “—Risk Management—Credit Risk –
Loans.”
Capital. As
of December 31, 2008, Farmer Mac had mezzanine equity of $144.2 million
resulting from issuances of preferred stock in 2008 and stockholders’ equity of
$15.3 million, compared to stockholders’ equity of $223.6 million as
of December 31, 2007. The decrease in stockholders’ equity was
primarily due to the $146.5 million reduction to retained earnings, $44.6
million of increased accumulated other comprehensive losses due to unrealized
losses on investment securities and Farmer Mac Guaranteed Securities classified
as available-for-sale, and the redemption of $35.0 million of Farmer Mac’s
Series A preferred stock. Those reductions to stockholders’ equity
were partially offset by the issuance of $9.2 million of Series C Preferred
Stock. Farmer Mac’s $144.2 million of mezzanine equity is included in
its core capital for the purposes of meeting its statutory minimum capital
requirement and risk-based capital standards.
Farmer
Mac was in compliance with its statutory minimum capital requirement and its
risk-based capital standard as of December 31, 2008. Farmer Mac is
required to hold capital at the higher of its statutory minimum capital
requirement or the amount required by its risk-based capital stress
test. As of December 31, 2008, Farmer Mac’s core capital totaled
$207.0 million and exceeded its statutory minimum capital requirement of $193.5
million by $13.5 million. As of December 31, 2007, Farmer Mac’s core
capital totaled $226.4 million and exceeded its statutory minimum capital
requirement of $186.0 million by $40.4 million. As of December 31,
2008, Farmer Mac’s risk-based capital stress test generated a risk-based capital
requirement of $57.3 million. Farmer Mac’s regulatory capital of
$223.4 million exceeded that amount by approximately $166.1
million. Accumulated other comprehensive (loss)/income is not a
component of Farmer Mac’s core capital or regulatory capital. For
further information, see “—Liquidity
and Capital Resources—Capital Requirements.”
Farmer
Mac is currently evaluating its capital position and structure with respect to
its statutory and regulatory capital requirements and expected prospective
business opportunities. Strategies to further strengthen Farmer Mac’s regulatory
capital position may include asset sales as well as offerings of common and
preferred equity. Strengthening the Corporation’s capital position
will provide greater flexibility to ensure continued compliance with its
statutory and regulatory capital requirements and accomplish its Congressional
mission.
Risk Management
Credit
Risk – Loans. Farmer Mac is
exposed to credit risk resulting from the inability of borrowers to repay their
loans in conjunction with a deficiency in the value of the collateral relative
to the amount outstanding balance of the loan and the costs of
liquidation. Farmer Mac is exposed to credit risk on:
|
|
·
|
loans
held;
|
|
|
·
|
loans
underlying Farmer Mac Guaranteed Securities;
and
|
|
|
·
|
loans
underlying LTSPCs.
|
Farmer
Mac generally assumes 100 percent of the credit risk on loans held and
loans underlying Farmer Mac I Guaranteed Securities, LTSPCs and Farmer Mac
Guaranteed Securities – Rural Utilities. Farmer Mac’s credit
exposure on USDA-guaranteed portions is covered by the full faith and credit of
the United States. Farmer Mac believes it has little or no credit
risk exposure to USDA-guaranteed portions because of the USDA
guarantee. As of December 31, 2008, Farmer Mac had not experienced
any credit losses on any Farmer Mac II Guaranteed Securities and does not expect
to incur any such losses in the future.
For
accepting the credit risk on loans underlying Farmer Mac Guaranteed Securities
and LTSPCs, Farmer Mac receives guarantee fees and commitment fees,
respectively. Farmer Mac conducts guarantee fee adequacy analyses,
using stress-test models developed internally and with the assistance of outside
experts. These analyses have taken into account the diverse and
dissimilar characteristics of the various asset categories for which Farmer Mac
manages its risk exposures, and have evolved as the mix and character of assets
under management has shifted with growth in the business and the addition of new
asset categories. Based on current information, Farmer Mac believes
that the guarantee fees charged for various products provide adequate
compensation for the credit risk that it assumes.
Farmer
Mac has established underwriting, collateral valuation and documentation
standards (including interest rate shock tests for adjustable rate mortgages
with initial reset periods of five years or less) for agricultural real estate
mortgage loans to mitigate the risk of loss from borrower defaults and to
provide guidance concerning the management, administration and conduct of
underwriting and appraisals to all participating sellers and potential sellers
in its programs. These standards were developed on the basis of
industry norms for agricultural real estate mortgage loans and are designed to
assess the creditworthiness of the borrower, as well as the value of the
collateral securing the loan. Farmer Mac evaluates and adjusts these
standards on an ongoing basis based on current and anticipated market
conditions. Farmer Mac also requires sellers to make representations
and warranties regarding the conformity of eligible mortgage loans to these
standards, the accuracy of loan data provided to Farmer Mac and other
requirements related to the loans. Sellers are responsible to Farmer
Mac for breaches of those representations and warranties that result in economic
losses to the Corporation. Pursuant to contracts with Farmer Mac and
in consideration for servicing fees, Farmer Mac-approved central servicers
service loans in accordance with Farmer Mac requirements. Central
servicers are responsible to Farmer Mac for serious errors in the servicing of
those mortgage loans. Detailed information regarding Farmer Mac’s
underwriting and collateral valuation standards and seller eligibility
requirements are presented in “Business—Farmer Mac Programs—Farmer Mac
I—Underwriting and Collateral Valuation (Appraisal) Standards” and
“Business—Farmer Mac Programs—Farmer Mac I—Sellers” and “Business—Farmer Mac
Programs—Rural Utilities.”
Farmer
Mac maintains an allowance for losses to cover estimated probable losses on
loans held, real estate owned, and loans underlying Farmer Mac I Guaranteed
Securities, LTSPCs and Farmer Mac Guaranteed Securities – Rural Utilities, in
accordance with SFAS 5 and SFAS 114. The methodology that Farmer
Mac uses to determine the level of its allowance for losses is described in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Critical Accounting Policies and Estimates—Allowance for
Losses.” Management believes that this methodology produces a
reliable estimate of probable losses, as of the balance sheet date, for all
loans held, real estate owned and loans underlying Farmer Mac Guaranteed
Securities and LTSPCs, in accordance with SFAS 5 and
SFAS 114.
The
following table summarizes the components of Farmer Mac’s allowance for losses
as of December 31, 2008 and December 31, 2007.
|
As
of,
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Allowance
for loan losses
|
$ | 10,929 | $ | 1,690 | ||||
|
Real
estate owned valuation allowance
|
- | - | ||||||
|
Reserve
for losses:
|
||||||||
|
On-balance
sheet Farmer Mac I Guaranteed Securities
|
869 | 857 | ||||||
|
Off-balance
sheet Farmer Mac I Guaranteed Securities
|
535 | 655 | ||||||
|
LTSPCs
|
4,102 | 685 | ||||||
|
Farmer
Mac Guaranteed Securities - Rural Utilities
|
- | - | ||||||
|
Total
|
$ | 16,435 | $ | 3,887 | ||||
The
following table summarizes the changes in the components of Farmer Mac’s
allowance for losses for each year in the five-year period ended
December 31, 2008:
|
Allowance
|
REO
|
Total
|
||||||||||||||
|
for
Loan
|
Valuation
|
Reserve
|
Allowance
|
|||||||||||||
|
Losses
|
Allowance
|
for
Losses
|
for
Losses
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Balance
as of January 1, 2004
|
$ | 5,967 | $ | 238 | $ | 15,848 | $ | 22,053 | ||||||||
|
Provision/(recovery)
for losses
|
1,589 | 1,137 | (3,138 | ) | (412 | ) | ||||||||||
|
Charge-offs
|
(3,326 | ) | (1,375 | ) | (4 | ) | (4,705 | ) | ||||||||
|
Recoveries
|
165 | - | - | 165 | ||||||||||||
|
Balance
as of December 31, 2004
|
$ | 4,395 | $ | - | $ | 12,706 | $ | 17,101 | ||||||||
|
Provision/(recovery)
for losses
|
(3,335 | ) | 206 | (859 | ) | (3,988 | ) | |||||||||
|
Charge-offs
|
(105 | ) | (206 | ) | - | (311 | ) | |||||||||
|
Recoveries
|
640 | - | - | 640 | ||||||||||||
|
Change
in accounting estimate
|
3,281 | - | (8,070 | ) | (4,789 | ) | ||||||||||
|
Balance
as of December 31, 2005
|
$ | 4,876 | $ | - | $ | 3,777 | $ | 8,653 | ||||||||
|
Provision/(recovery)
for losses
|
(2,396 | ) | 155 | (1,167 | ) | (3,408 | ) | |||||||||
|
Charge-offs
|
(900 | ) | (155 | ) | - | (1,055 | ) | |||||||||
|
Recoveries
|
365 | - | - | 365 | ||||||||||||
|
Balance
as of December 31, 2006
|
$ | 1,945 | $ | - | $ | 2,610 | $ | 4,555 | ||||||||
|
Provision/(recovery)
for losses
|
(215 | ) | 100 | (27 | ) | (142 | ) | |||||||||
|
Charge-offs
|
(60 | ) | (100 | ) | (386 | ) | (546 | ) | ||||||||
|
Recoveries
|
20 | - | - | 20 | ||||||||||||
|
Balance
as of December 31, 2007
|
$ | 1,690 | $ | - | $ | 2,197 | $ | 3,887 | ||||||||
|
Provision/(recovery)
for losses
|
14,531 | - | 3,309 | 17,840 | ||||||||||||
|
Charge-offs
|
(5,308 | ) | - | - | (5,308 | ) | ||||||||||
|
Recoveries
|
16 | - | - | 16 | ||||||||||||
|
Balance
as of December 31, 2008
|
$ | 10,929 | $ | - | $ | 5,506 | $ | 16,435 | ||||||||
Farmer
Mac provided $17.8 million to the allowance for losses during 2008, compared to
a release of $0.1 million in 2007. During 2008 and 2007, Farmer Mac
charged off $5.3 million and $0.5 million, respectively, in losses
against the allowance for losses. The charge-offs for 2008 and 2007
did not include any amounts related to previously accrued or advanced interest
on loans or Farmer Mac I Guaranteed Securities.
As of
December 31, 2008, Farmer Mac’s allowance for losses totaled $16.4 million, or
33 basis points of the outstanding principal balance of loans held and
loans underlying LTSPCs and Farmer Mac I Guaranteed Securities (excluding
AgVantage securities), compared to $3.9 million (8 basis points)
as of December 31, 2007. The year-to-year increase in this ratio
is largely attributable to provisions for losses related to the ethanol industry
and general exposure to the ethanol industry.
As of
December 31, 2008, Farmer Mac’s 90-day delinquencies were $67.1 million
(1.35 percent), compared to $10.6 million (0.21 percent) as of
December 31, 2007. Those delinquencies are concentrated in the
Corporation’s ethanol portfolio, with ethanol loans comprising $49.2 million of
all 90-day delinquencies as of December 31, 2008. Other than the
ethanol portfolio, the loans underlying the Corporation’s guarantees and
commitments continued to perform well during 2008, with delinquencies on
non-ethanol loans remaining near historically low levels consistent with
the strength of the U.S. agricultural economy through the end of the
year. As of December 31, 2008, there were no delinquencies or
non-performing assets in Farmer Mac’s portfolio of rural utilities
loans. As of December 31, 2008, Farmer Mac’s non-performing
assets totaled $80.0 million (1.61 percent), compared to $31.9 million
(0.63 percent) as of December 31, 2007. Loans that have
been restructured were insignificant and are included within the reported 90-day
delinquency and non-performing asset disclosures. From quarter to
quarter, Farmer Mac anticipates that 90-day delinquencies and non-performing
assets will fluctuate, both in dollars and as a percentage of the outstanding
portfolio, with higher levels likely at the end of the first and third quarters
of each year corresponding to the semi-annual (January 1st and
July 1st)
payment characteristics of most Farmer Mac I loans.
As of
December 31, 2008, Farmer Mac’s ethanol portfolio consisted of loan
participations with a cumulative unpaid principal amount of $280.4 million with
exposure to 29 different plants in 11 states. As of that date,
Farmer Mac also had $41.5 million of undisbursed commitments with respect
to ethanol loans. That exposure level is at Farmer Mac’s maximum
tolerance level for ethanol, and Farmer Mac is not seeking to add additional
ethanol loans to its portfolio. During fourth quarter 2008, VeraSun
Energy Corporation and its subsidiaries filed for chapter 11
bankruptcy. VeraSun’s subsidiaries include four ethanol plants with
$41.2 million of outstanding loans in Farmer Mac’s portfolio with the largest
single exposure to any one plant of $11.2 million. As of December 31,
2008, Farmer Mac provided a specific allowance for loan losses of $8.6 million
for the VeraSun subsidiary loans. One additional ethanol non-VeraSun
loan for $12.0 million in Farmer Mac’s portfolio became 90 days delinquent
during fourth quarter 2008, and Farmer Mac charged off $4.0 million related
to that loan. In total, Farmer Mac recorded provisions for losses of
$17.8 million during 2008.
The
following table presents historical information regarding Farmer Mac’s
non-performing assets and 90-day delinquencies in the Farmer Mac I program
compared to the principal balance of all loans held and loans underlying Farmer
Mac I Guaranteed Securities (excluding AgVantage securities) and
LTSPCs:
|
Outstanding
|
||||||||||||||||||||||||
|
Loans,
|
Less:
|
|||||||||||||||||||||||
|
Guarantees
(1),
|
Non-
|
REO
and
|
||||||||||||||||||||||
|
LTSPCs,
|
performing
|
Performing
|
90-day
|
|||||||||||||||||||||
|
and
REO
|
Assets
|
Percentage
|
Bankruptcies
|
Delinquencies
|
Percentage
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
As
of:
|
||||||||||||||||||||||||
|
December
31, 2008
|
$ | 4,983,963 | $ | 80,032 | 1.61 | % | $ | 12,912 | $ | 67,120 | 1.35 | % | ||||||||||||
|
September
30, 2008
|
4,989,755 | 32,883 | 0.66 | % | 21,402 | 11,481 | 0.23 | % | ||||||||||||||||
|
June
30, 2008
|
4,937,870 | 28,230 | 0.57 | % | 23,060 | 5,170 | 0.11 | % | ||||||||||||||||
|
March
31, 2008
|
4,933,720 | 31,640 | 0.64 | % | 20,666 | 10,974 | 0.22 | % | ||||||||||||||||
|
December
31, 2007
|
5,063,164 | 31,924 | 0.63 | % | 21,340 | 10,584 | 0.21 | % | ||||||||||||||||
|
September
30, 2007
|
4,891,525 | 37,364 | 0.76 | % | 20,341 | 17,023 | 0.35 | % | ||||||||||||||||
|
June
30, 2007
|
4,904,592 | 37,225 | 0.76 | % | 22,462 | 14,763 | 0.30 | % | ||||||||||||||||
|
March
31, 2007
|
4,905,244 | 50,026 | 1.02 | % | 21,685 | 28,341 | 0.58 | % | ||||||||||||||||
|
December
31, 2006
|
4,784,983 | 39,232 | 0.82 | % | 19,577 | 19,655 | 0.41 | % | ||||||||||||||||
|
September
30, 2006
|
4,621,083 | 44,862 | 0.97 | % | 16,425 | 28,437 | 0.62 | % | ||||||||||||||||
|
June
30, 2006
|
4,633,841 | 40,083 | 0.87 | % | 19,075 | 21,008 | 0.46 | % | ||||||||||||||||
|
March
31, 2006
|
4,224,669 | 49,475 | 1.17 | % | 20,713 | 28,762 | 0.68 | % | ||||||||||||||||
|
December
31, 2005
|
4,399,189 | 48,764 | 1.11 | % | 23,303 | 25,461 | 0.58 | % | ||||||||||||||||
|
(1)
Excludes loans underlying AgVantage securities.
|
||||||||||||||||||||||||
As of December 31, 2008, Farmer Mac
individually analyzed $80.8 million of its $119.6 million of impaired
assets for collateral shortfalls against updated appraised values, other updated
collateral valuations or discounted values. Farmer Mac evaluated the
remaining $38.8 million of impaired assets for which updated valuations
were not available in the aggregate in consideration of their similar risk
characteristics and historical statistics. Farmer Mac recorded
specific allowances of $8.6 million for under-collateralized assets as of
December 31, 2008. Farmer Mac’s non-specific or general allowances
were $7.8 million as of December 31, 2008.
Loans in
the Farmer Mac I program are all first mortgage agricultural real estate
loans. Accordingly, Farmer Mac’s exposure on a loan is limited to the
difference between the total of the accrued interest, advances and the principal
balance of a loan and the value of the property. Measurement of that
excess or shortfall is the best predictor and determinant of loss, compared to
other measures that evaluate the efficiency of a particular farm
operator. Debt service ratios depend upon farm operator efficiency
and leverage, which can vary widely within a geographic region, commodity type,
or an operator’s business and farming skills. Original LTVs
(calculated by dividing the loan principal balance at the time of guarantee,
purchase or commitment by the appraised value at the date of loan origination
or, when available, updated appraised value at the time of guarantee, purchase
or commitment) are one of many factors Farmer Mac considers in evaluating loss
severity. Other factors include, but are not limited to, other
underwriting standards, commodity and farming forecasts and regional economic
and agricultural conditions.
LTVs
depend upon the market value of a property, as determined in accordance with
Farmer Mac’s collateral valuation standards. As of December 31, 2008,
the weighted-average original LTV for loans held and loans underlying LTSPCs and
Farmer Mac I Guaranteed Securities (excluding AgVantage securities) was
50 percent, and the weighted-average original LTV for all non-performing
assets was 60 percent.
The
following table presents outstanding loans held and loans underlying LTSPCs and
Farmer Mac I Guaranteed Securities (excluding AgVantage securities)
and non-performing assets as of December 31, 2008 by year of origination,
geographic region and commodity/collateral type:
|
Farmer
Mac I Non-performing Assets
|
|||||||||||||||
|
as
of December 31, 2008
|
|||||||||||||||
|
Distribution
of
|
|||||||||||||||
|
Outstanding
|
Outstanding
|
||||||||||||||
|
Loans,
|
Loans,
|
Non-
|
Non-
|
||||||||||||
|
Guarantees
and
|
Guarantees
and
|
performing
|
performing
|
||||||||||||
|
LTSPCs
|
LTSPCs
(1)
|
Assets
|
Asset
Rate
|
||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||
|
By
year of origination:
|
|||||||||||||||
|
Before
1997
|
9 | % | $ | 441,940 | $ | 6,591 |
1.49%
|
||||||||
|
1997
|
4 | % | 183,308 | 3,445 |
1.88%
|
||||||||||
|
1998
|
6 | % | 300,238 | 4,714 |
1.57%
|
||||||||||
|
1999
|
7 | % | 344,911 | 2,246 |
0.65%
|
||||||||||
|
2000
|
3 | % | 176,728 | 2,438 |
1.38%
|
||||||||||
|
2001
|
7 | % | 328,021 | 1,754 |
0.53%
|
||||||||||
|
2002
|
8 | % | 422,441 | 1,267 |
0.30%
|
||||||||||
|
2003
|
9 | % | 443,677 | 2,286 |
0.52%
|
||||||||||
|
2004
|
7 | % | 331,120 | 149 |
0.04%
|
||||||||||
|
2005
|
10 | % | 503,105 | 186 |
0.04%
|
||||||||||
|
2006
|
12 | % | 588,604 | 47,169 |
8.01%
|
||||||||||
|
2007
|
9 | % | 470,815 | 3,293 |
0.70%
|
||||||||||
|
2008
|
9 | % | 449,055 | 4,494 |
1.00%
|
||||||||||
|
Total
|
100 | % | $ | 4,983,963 | $ | 80,032 |
1.61%
|
||||||||
|
By
geographic region (2):
|
|||||||||||||||
|
Northwest
|
16 | % | $ | 793,433 | $ | 34,775 |
4.38%
|
||||||||
|
Southwest
|
39 | % | 1,928,669 | 5,715 |
0.30%
|
||||||||||
|
Mid-North
|
21 | % | 1,065,590 | 33,427 |
3.14%
|
||||||||||
|
Mid-South
|
12 | % | 609,378 | 1,953 |
0.32%
|
||||||||||
|
Northeast
|
8 | % | 377,079 | 1,337 |
0.35%
|
||||||||||
|
Southeast
|
4 | % | 209,814 | 2,825 |
1.35%
|
||||||||||
|
Total
|
100 | % | $ | 4,983,963 | $ | 80,032 |
1.61%
|
||||||||
|
By
commodity/collateral type:
|
|||||||||||||||
|
Crops
|
40 | % | $ | 2,011,475 | $ | 16,388 |
0.81%
|
||||||||
|
Permanent
plantings
|
19 | % | 959,636 | 7,539 |
0.79%
|
||||||||||
|
Livestock
|
27 | % | 1,336,004 | 4,862 |
0.36%
|
||||||||||
|
Part-time
farm/rural housing
|
7 | % | 347,629 | 2,004 |
0.58%
|
||||||||||
|
Ag
storage and processing (including ethanol facilities)
|
6 | % | 294,273 | 49,239 |
16.73%
|
||||||||||
|
Other
|
1 | % | 34,946 | - |
0.00%
|
||||||||||
|
Total
|
100 | % | $ | 4,983,963 | $ | 80,032 |
1.61%
|
||||||||
|
(1)
|
Excludes
loans underlying AgVantage
securities.
|
|
(2)
|
Geographic
regions - Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY); Southwest (AZ,
CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South
(KS, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA,
RI, TN, VA, VT, WV); and Southeast (AL, AR, FL, GA, LA, MS,
SC).
|
The
following table presents Farmer Mac’s cumulative net credit losses relative to
the cumulative original balance for all loans purchased and loans underlying
LTSPCs and Farmer Mac I Guaranteed Securities (excluding AgVantage securities)
as of December 31, 2008, by year of origination, geographic region and
commodity/collateral type. The purpose of this information is to
present information regarding losses relative to original guarantees and
commitments.
|
Farmer
Mac I Credit Losses Relative to all
|
|||||||||||
|
Cumulative
Original Loans, Guarantees and LTSPCs
|
|||||||||||
|
as
of December 31. 2008
|
|||||||||||
|
Cumulative
|
|||||||||||
|
Original
Loans,
|
Cumulative
|
Cumulative
|
|||||||||
|
Guarantees
|
Net
Credit
|
Loss
|
|||||||||
|
and
LTSPCs (1)
|
Losses
|
Rate
|
|||||||||
|
(dollars
in thousands)
|
|||||||||||
|
By
year of origination:
|
|||||||||||
|
Before
1997
|
$ | 3,319,660 | $ | 1,594 |
0.05%
|
||||||
|
1997
|
717,213 | 2,493 |
0.35%
|
||||||||
|
1998
|
1,088,184 | 3,885 |
0.36%
|
||||||||
|
1999
|
1,087,415 | 1,291 |
0.12%
|
||||||||
|
2000
|
695,329 | 2,285 |
0.33%
|
||||||||
|
2001
|
997,243 | 695 |
0.07%
|
||||||||
|
2002
|
1,025,428 | - |
0.00%
|
||||||||
|
2003
|
840,781 | - |
0.00%
|
||||||||
|
2004
|
612,907 | - |
0.00%
|
||||||||
|
2005
|
747,762 | 114 |
0.02%
|
||||||||
|
2006
|
744,634 | 4,000 |
0.54%
|
||||||||
|
2007
|
541,408 | - |
0.00%
|
||||||||
|
2008
|
484,691 | 1,200 |
0.25%
|
||||||||
|
Total
|
$ | 12,902,655 | $ | 17,557 |
0.14%
|
||||||
|
By
geographic region (2):
|
|||||||||||
|
Northwest
|
$ | 2,424,918 | $ | 6,891 |
0.28%
|
||||||
|
Southwest
|
5,115,484 | 5,978 |
0.12%
|
||||||||
|
Mid-North
|
2,256,471 | 4,057 |
0.18%
|
||||||||
|
Mid-South
|
1,249,411 | 336 |
0.03%
|
||||||||
|
Northeast
|
969,765 | 66 |
0.01%
|
||||||||
|
Southeast
|
886,606 | 229 |
0.03%
|
||||||||
|
Total
|
$ | 12,902,655 | $ | 17,557 |
0.14%
|
||||||
|
By
commodity/collateral type:
|
|||||||||||
|
Crops
|
$ | 5,303,647 | $ | 1,209 |
0.02%
|
||||||
|
Permanent
plantings
|
2,904,787 | 9,349 |
0.32%
|
||||||||
|
Livestock
|
3,289,656 | 2,676 |
0.08%
|
||||||||
|
Part-time
farm/rural housing
|
868,377 | 323 |
0.04%
|
||||||||
|
Ag
storage and processing (including ethanol facilities)
|
397,524 | (3) | 4,000 |
1.01%
|
|||||||
|
Other
|
138,664 | - |
0.00%
|
||||||||
|
Total
|
$ | 12,902,655 | $ | 17,557 |
0.14%
|
||||||
|
(1)
|
Excludes
loans underlying AgVantage securities.
|
|
(2)
|
Geographic
regions - Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY); Southwest (AZ,
CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, NH, NJ, NY, OH,
PA, RI, TN, VA, VT, WV); and Southeast (AL, AR, FL, GA, LA, MS,
SC)
|
|
(3)
|
Several of
the loans underlying agricultural storage and processing LTSPCs are for
facilities under construction, and as of December 31, 2008, approximately
$41.5 million of the loans were not yet disbursed by the
lender.
|
Analysis
of portfolio performance by commodity distribution indicates that losses and
collateral deficiencies have been and are expected to remain less prevalent in
the loans secured by real estate producing agricultural commodities that receive
significant government support (such as cotton, soybeans, wheat and corn) and
more prevalent in those that do not receive such support (such as the protein
sector, permanent plantings and vegetables). This analysis is
consistent with corresponding commodity analyses, which indicates that Farmer
Mac has experienced higher loss and collateral deficiency rates in its loans
classified as permanent plantings. 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. Further, as adverse economic conditions persist for a
particular commodity that requires a long-term improvement on the land, such as
permanent plantings, the prospective sale value of the land is likely to
decrease and the related loans may become
under-collateralized. Farmer Mac anticipates that one or more
particular commodity groups will be under economic pressure at any one time and
actively manages its portfolio to mitigate concentration risks while preserving
Farmer Mac’s ability to meet the financing needs of all commodity
groups. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Results of Operations—Outlook for
2009.”
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.
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 and the
collateralization level for the securities, as well as because delinquent loans
are required to be removed from the pool of pledged loans and replaced with
current eligible loans. As of December 31, 2008, Farmer Mac had not
experienced any credit losses on any AgVantage securities and does not expect to
incur any such losses in the future.
Credit
Risk – Institutional. Farmer Mac is also exposed to credit
risk arising from its business relationships with other institutions
including:
|
|
·
|
issuers
of AgVantage securities and other investments held or guaranteed by Farmer
Mac;
|
|
|
·
|
sellers
and servicers; and
|
|
|
·
|
interest
rate swap contract counterparties.
|
AgVantage
securities are general obligations of the AgVantage issuers and are secured by
eligible loans in an amount at least equal to the outstanding principal amount
of the security, with some level of overcollaterization also required for Farmer
Mac I AgVantage securities. Outstanding AgVantage on-balance sheet
Farmer Mac I Guaranteed Securities totaled $53.3 million as of December 31, 2008
and $30.8 million as of December 31, 2007. Farmer Mac Guaranteed
Securities – Rural Utilities structured as AgVantage transactions issued by
National Rural and held by Farmer Mac totaled $630 million as of December 31,
2008. In addition, outstanding off-balance sheet AgVantage Farmer Mac
I Guaranteed Securities totaled $2.9 billion as of December 31, 2008 and
$2.5 billion as of December 31, 2007. The following table provides
information about the issuers of AgVantage securities, as well as the required
and actual collateralization levels for those transactions as of December 31,
2008 and 2007.
|
As
of December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||
|
S&P
|
|
S&P
|
|
|||||||||||||||||||||
|
Counterparty
|
Balance
|
Rating
|
Required
|
Balance
|
Rating
|
Required
|
||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
MetLife
1
|
$ | 2,500,000 |
AA
|
103 | % | $ | 2,500,000 |
AA
|
103 | % | ||||||||||||||
|
National
Rural
|
630,000 |
A
|
100 | % | 500,000 |
A
|
100 | % | ||||||||||||||||
|
M&I
Bank 2
|
475,000 |
A
|
106 | % | - |
A+
|
106 | % | ||||||||||||||||
|
Others
3
|
23,300 |
N/A
|
(4 | ) | 30,800 |
N/A
|
(4 | ) | ||||||||||||||||
|
Total
outstanding
|
$ | 3,628,300 | $ | 2,530,800 | ||||||||||||||||||||
1 Met Life
was downgraded to AA- in February 2009.
2 M&I
Bank was downgraded to A- in January 2009.
3
Consists of Agvantage securities issued by 7 different
issuers as of December 31, 2008 and 9 different issuers as of December 31,
2007.
(4)
Ranges from 111% to 120%
Farmer
Mac manages institutional credit risk related to sellers and servicers by
requiring those institutions to meet Farmer Mac’s standards for
creditworthiness. Farmer Mac monitors the financial condition of
those institutions by evaluating financial statements and bank credit rating
agency reports. For more information on Farmer Mac’s approval of
sellers, see “Business—Farmer Mac Programs—Farmer Mac
I—Sellers.” Credit risk related to interest rate swap contracts is
discussed in “—Risk Management—Interest Rate Risk” and Note 6 to the
consolidated financial statements.
Credit
Risk –
Other
Investments. As of December 31, 2008, Farmer Mac had
$278.4 million of cash and cash equivalents and $1.2 billion of investment
securities. The management of the credit risk inherent in these
investments is governed by FCA’s Investment Regulations and Farmer Mac’s own
policies. In general, these regulations and policies require each
investment or issuer of an investment to be highly rated by an
NRSRO. Investments in mortgage securities and asset-backed securities
are required to have a rating in the highest NRSRO
category. Corporate debt securities with maturities of no more than
five years but more than three years are required to be rated in one of the two
highest categories; corporate debt securities with maturities of three years or
less are required to be rated in one of the three highest
categories. There are limited exceptions where a rating is not
required, such as obligations of the United States or diversified investment
funds regulated under the Investment Company Act of 1940. Investments
in money market funds are further limited to those funds that are holding only
instruments approved for direct purchase by Farmer Mac.
FCA’s
Investment Regulations and Farmer Mac’s policies also establish concentration
limits, which are intended to reduce exposure to any one
counterparty. Farmer Mac’s total credit exposure to any single issuer
of securities or uncollateralized financial derivatives is limited to the
greater of 25 percent of the Corporation’s regulatory capital or $25.0 million
(as of December 31, 2008, 25 percent of Farmer Mac’s regulatory capital was
$55.9 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 light
of the severe impact that the historic turmoil in the nation’s capital markets
has had on Farmer Mac’s investments, which is further described in “—Results of
Operations—Overview,” Farmer Mac conducted an extensive review of its investment
policies and operations with a view to strengthening policies, procedures and
oversight of its investment portfolio and related funding
strategies. This review was concluded during first quarter 2009 and
its findings are currently being implemented, with the goals of minimizing the
Corporation’s exposure to financial market volatility, preserving capital and
supporting the Corporation’s access to the debt markets.
Interest
Rate Risk. Farmer Mac is subject to interest rate risk on
interest-earning assets and related interest-bearing liabilities because of
possible timing differences in the associated cash flows. This risk
is primarily related to loans held and on-balance sheet Farmer Mac Guaranteed
Securities because of the ability of borrowers to prepay their mortgages before
the scheduled maturities, thereby increasing the risk of asset and liability
cash flow mismatches. Cash flow mismatches in a changing interest
rate environment can reduce the earnings of the Corporation if assets repay
sooner than expected and the resulting cash flows must be reinvested in
lower-yielding investments when Farmer Mac’s funding costs cannot be
correspondingly reduced, or if assets repay more slowly than expected and the
associated debt must be replaced by higher-cost debt.
Yield
maintenance provisions and other prepayment penalties contained in many
agricultural mortgage loans reduce, but do not eliminate, prepayment risk,
particularly in the case of a defaulted loan where yield maintenance may not be
collected. Those provisions require borrowers to make an additional
payment when they prepay their loans so that, when reinvested with the prepaid
principal, yield maintenance payments generate substantially the same cash flows
that would have been generated had the loan not prepaid. Those
provisions create a disincentive to prepayment and compensate the Corporation
for some of its interest rate risks. As of December 31, 2008, 37
percent of the total outstanding balance of retained Farmer Mac I loans and
Guaranteed Securities had yield maintenance provisions and 5 percent had other
forms of prepayment protection (together covering 70 percent of all loans with
fixed interest rates). Of the Farmer Mac I new and current loans
purchased in 2008, 2 percent had yield maintenance or another form of prepayment
protection (including 8 percent of all loans with fixed interest
rates). As of December 31, 2008, none of the USDA-guaranteed portions
underlying Farmer Mac II Guaranteed Securities had yield maintenance provisions;
however, 5 percent contained prepayment penalties. Of the
USDA-guaranteed portions purchased in 2008, 8 percent contained various forms of
prepayment penalties.
Taking
into consideration the prepayment provisions and the default probabilities
associated with its mortgage assets, Farmer Mac uses prepayment models to
project and value cash flows associated with these assets. Because
borrowers’ behavior in various interest rate environments may change over time,
Farmer Mac periodically evaluates the effectiveness of these models compared to
actual prepayment experience and adjusts and refines the models as necessary to
improve the precision of subsequent prepayment forecasts.
The
following table presents Farmer Mac’s on-balance sheet program assets based on
their interest rate characteristics.
|
Outstanding
Balance of Loans Held and Loans Underlying
|
||||||||
|
On-Balance
Sheet Farmer Mac Guaranteed Securities
|
||||||||
|
As
of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Fixed
rate (10-yr. wtd. avg. term)
|
$ | 1,659,983 | $ | 962,320 | ||||
|
5-
to 10-year ARMs and resets
|
746,623 | 750,472 | ||||||
|
1-Month
to 3-Year ARMs
|
819,234 | 352,250 | ||||||
|
Total
held in portfolio
|
$ | 3,225,840 | $ | 2,065,042 | ||||
The goal
of interest rate risk management at Farmer Mac is to create and maintain a
portfolio that generates stable earnings and value across a variety of interest
rate environments. Farmer Mac’s primary strategy for managing
interest rate risk is to fund asset purchases with liabilities that have similar
durations and cash flows so that they will perform similarly as interest rates
change. To achieve this match, Farmer Mac issues discount notes and
both callable and non-callable medium-term notes across a spectrum of
maturities. Farmer Mac issues callable debt to offset the prepayment
risk associated with some mortgage assets. By using a blend of
liabilities that includes callable debt, the interest rate sensitivities of the
liabilities tend to increase or decrease as interest rates change in a manner
similar to changes in the interest rate sensitivities of the
assets. Farmer Mac also uses financial derivatives to alter the
duration of its assets and liabilities to better match their durations, thereby
reducing overall interest rate sensitivity.
Farmer
Mac’s $278.4 million of cash and cash equivalents as of December 31, 2008
matures within three months and is match-funded with discount notes having
similar maturities. As of December 31, 2008, $1.1 billion of the
$1.2 billion of investment securities (86.3 percent) were floating rate
securities with rates that adjust within one year or fixed rate securities with
original maturities between three months and one year. See
Note 4 to the consolidated financial statements for more information on
investment securities. These investments are funded
using:
|
|
·
|
a
series of discount note issuances in which each successive discount note
is issued and matures on or about the corresponding interest rate reset
date of the related investment;
|
|
|
·
|
floating
rate notes having similar interest rate reset provisions as the related
investment; or
|
|
|
·
|
fixed
rate notes swapped to floating rates having similar interest rate reset
provisions as the related
investment.
|
Farmer
Mac is also subject to interest rate risk on loans, including loans that Farmer
Mac has committed to acquire (other than through LTSPCs) but has not yet
purchased. When Farmer Mac commits to purchase such loans, it is
exposed to interest rate risk between the time it commits to purchase the loans
and the time it either:
|
|
·
|
sells
Farmer Mac Guaranteed Securities backed by the loans;
or
|
|
|
·
|
issues
debt to retain the loans in its portfolio (although issuing debt to fund
the loans as investments does not fully eliminate interest rate risk due
to the possible timing differences in the cash flows of the assets and
related liabilities, as discussed
above).
|
Farmer
Mac manages the interest rate risk related to such loans, and any related Farmer
Mac Guaranteed Securities or debt issuance, through the use of forward sale
contracts on the debt and mortgage-backed securities of other GSEs and futures
contracts involving U.S. Treasury securities. Farmer Mac uses forward
sale contracts on GSE securities to reduce its interest rate exposure to changes
in both Treasury rates and spreads on Farmer Mac debt and Farmer Mac I
Guaranteed Securities.
Recognizing
that interest rate sensitivity may change with the passage of time and as
interest rates change, Farmer Mac assesses this exposure on a regular basis and,
if necessary, readjusts its portfolio of assets and liabilities by:
|
|
·
|
purchasing
mortgage assets in the ordinary course of
business;
|
|
|
·
|
refunding
existing liabilities; or
|
|
|
·
|
using
financial derivatives to alter the characteristics of existing assets or
liabilities.
|
An
important “stress test” of Farmer Mac’s exposure to long-term interest rate risk
is the measurement of the sensitivity of its Market Value of Equity (“MVE”) to
yield curve shocks. MVE represents management’s estimate of the
present value of all future cash flows from on- and off-balance sheet assets,
liabilities and financial derivatives. The following schedule
summarizes the results of Farmer Mac’s MVE sensitivity analysis as of December
31, 2008 and December 31, 2007 to an immediate and instantaneous uniform or
“parallel” shift in the yield curve.
|
Percentage
Change in MVE from Base Case
|
||||||||
|
Interest
Rate
|
As
of December 31,
|
|||||||
|
Scenario
|
2008
|
2007
|
||||||
|
+
300 bp
|
-10.4% | -10.6% | ||||||
|
+
200 bp
|
-2.1% | -6.3% | ||||||
|
+
100 bp
|
3.7% | -2.5% | ||||||
|
-
100 bp
|
* | -0.1% | ||||||
|
-
200 bp
|
* | -1.4% | ||||||
|
-
300 bp
|
* | -3.4% | ||||||
|
* As
of the date indicated, a parallel shift of the U.S. Treasury yield curve
by the number of basis points indicated produced negative interest rates
for portions or all of this curve.
|
||||||||
As
measured by this MVE analysis, Farmer Mac’s long-term interest rate sensitivity
remained at relatively low levels despite the significant change in the yield
curve that occurred during the year. As of December 31, 2008, Farmer
Mac’s effective duration gap, another standard measure of interest rate risk
that measures the difference between the sensitivities of assets compared to
that of liabilities, was minus 2.4 months, compared to plus 0.7 months
as of December 31, 2007. Duration matching helps to maintain the
correlation of cash flows and stabilize portfolio earnings even when interest
rates are not stable.
As of
December 31, 2008, a uniform or 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 2.2 percent, while a parallel decrease of 25 basis
points would have decreased NII by 3.5 percent. Farmer Mac also
measures the sensitivity of both MVE and NII to a variety of non-parallel
interest rate shocks, including flattening and steepening yield curve
scenarios. As of December 31, 2008, both MVE and NII showed similar
or less sensitivity to non-parallel shocks than to the parallel
shocks. Farmer Mac believes that the relative insensitivity of its
MVE and NII to both parallel and non-parallel interest rate shocks, and its
duration gap, indicate that Farmer Mac’s approach to managing its interest rate
risk exposures is effective.
The
economic effects of financial derivatives are included in the Corporation’s MVE,
NII and duration gap analyses. Farmer Mac enters into the following
financial derivative transactions principally to protect against risk from the
effects of market price or interest rate movements on the value of assets,
future cash flows and debt issuance, not for trading or speculative
purposes:
|
|
·
|
“pay-fixed”
interest rate swaps, in which it pays fixed rates of interest to, and
receives floating rates of interest from,
counterparties;
|
|
|
·
|
“receive-fixed”
interest rate swaps, in which it receives fixed rates of interest from,
and pays floating rates of interest to, counterparties;
and
|
|
|
·
|
“basis
swaps,” in which it pays variable rates of interest based on one index to,
and receives variable rates of interest based on another index from,
counterparties.
|
As of
December 31, 2008, Farmer Mac had $3.7 billion combined notional
amount of interest rate swaps, with terms ranging from one to fifteen
years, of which $1.5 billion were pay-fixed interest rate swaps,
$2.0 billion were receive-fixed interest rate swaps, and $0.2 billion
were basis swaps.
Farmer
Mac enters into interest rate swap contracts to adjust the characteristics of
its short-term debt to match more closely the cash flow and duration
characteristics of its longer-term mortgage and other assets, and also to adjust
the characteristics of its long-term debt to match more closely the cash flow
and duration characteristics of its short-term assets, thereby reducing interest
rate risk and also to derive an overall lower effective cost of borrowing than
would otherwise be available to Farmer Mac in the conventional debt
market. Specifically, interest rate swaps convert the variable cash
flows related to the forecasted issuance of short-term debt into effectively
fixed rate medium-term notes that match the anticipated duration and interest
rate characteristics of the corresponding assets. Farmer Mac
historically evaluated the overall cost of using the swap market as an
alternative to issuing medium-term notes in the capital markets, which in most
instances resulted in the use of the swap market. Due to volatile
capital markets conditions, beginning in October 2008 Farmer Mac discontinued
its practice of synthetically creating long-term fixed rate debt through the use
of pay-fixed interest rate swaps and a planned series of discount note
issuances, and instead issued medium-term notes as its source of longer-term
fixed rate funding.
Farmer
Mac uses callable interest rate swaps (in conjunction with the issuance of
short-term debt) as an alternative to callable medium-term notes with
equivalently structured maturities and call options. The call options
on the swaps are designed to match the implicit prepayment options on those
mortgage assets without prepayment protection. The blended durations
of the swaps are also designed to match the duration of the related mortgages
over their estimated lives. If the mortgages prepay, the swaps can be
called and the short-term debt repaid; if the mortgages do not prepay, the swaps
remain outstanding and the short-term debt is rolled over, effectively providing
fixed rate callable funding over the lives of the related mortgages. Thus, the
economics of the assets are closely matched to the economics of the interest
rate swap and funding combination.
As
discussed in Note 6 to the consolidated financial statements, Farmer Mac
accounts for its financial derivatives as undesignated financial
derivatives. All of Farmer Mac’s financial derivative transactions
are conducted under standard collateralized agreements that limit Farmer Mac’s
potential credit exposure to any counterparty. As of December 31,
2008, Farmer Mac had uncollateralized net exposures of $8.0 million to two
counterparties.
Liquidity and Capital Resources
Farmer
Mac depends on regular access to the capital markets for liquidity, and Farmer
Mac maintained access to the capital markets at favorable rates throughout
2008. Assuming continuation of current market conditions, Farmer Mac
believes it has sufficient liquidity and capital resources to support its
operations for the next 12 months and for the foreseeable
future. Farmer Mac also has a liquidity contingency plan to manage
unanticipated disruptions in its access to the capital markets. That
plan involves borrowing through repurchase agreement arrangements and the sale
of liquid assets. Consistent with FCA regulations, Farmer Mac
maintains a minimum of 60 days of liquidity and a target of 90 days of
liquidity. In accordance with the methodology prescribed by those
regulations, Farmer Mac maintained an average of 92 days of liquidity
during 2008 and had 90 days of liquidity as of December 31, 2008.
Debt
Issuance. Farmer Mac funds its purchases of program and
non-program assets primarily by issuing debt obligations of various maturities
in the public capital markets. Debt obligations issued by Farmer Mac
include discount notes and fixed and floating rate medium-term notes, including
callable notes. Farmer Mac also issues discount notes and medium-term
notes to obtain funds to finance its investments, transaction costs, guarantee
payments and LTSPC purchase obligations. See “Business—Financing—Debt
Issuance” for more information regarding Farmer Mac’ debt issuance.
Liquidity. The
funding and liquidity needs of Farmer Mac’s business programs are driven by the
purchase and retention of eligible loans, USDA-guaranteed portions and Farmer
Mac Guaranteed Securities; the maturities of Farmer Mac’s discount notes and
medium-term notes; and payment of principal and interest on Farmer Mac
Guaranteed Securities. Farmer Mac’s primary sources of funds to meet
these needs are:
|
|
·
|
principal
and interest payments and ongoing guarantee and commitment fees received
on loans, Farmer Mac Guaranteed Securities, and
LTSPCs;
|
|
|
·
|
principal
and interest payments received from investment securities;
and
|
|
|
·
|
the
issuance of new discount notes and medium-term
notes.
|
Farmer
Mac’s short-term borrowing costs have remained at historically low levels
despite recent market volatility. Historically, Farmer Mac has used
pay-fixed interest rate swaps, combined with a planned series of discount note
issuances, as an alternative source of effectively fixed rate
funding. While the swap market may provide favorable fixed rates,
interest rate swap transactions expose Farmer Mac to the risk of future
increases of its own issuance rates versus corresponding LIBOR
rates. If the rates on the Farmer Mac discount notes were to increase
relative to LIBOR, Farmer Mac would be exposed to a commensurate reduction on
its net interest yield on the notional amount of its pay-fixed interest rate
swaps and other LIBOR-based floating rate assets. Conversely, if the
rates on the Farmer Mac discount notes were to decrease relative to LIBOR,
Farmer Mac would be exposed to a commensurate increase on its net interest yield
on the notional amount of its pay-fixed interest rate swaps and other
LIBOR-based floating rate assets.
Farmer
Mac maintains cash, cash equivalents (including commercial paper and other
short-term money market instruments) and other investment securities that can be
drawn upon for liquidity needs. As of December 31, 2008, these assets
consisted of: $278.4 million of cash and cash equivalents;
$554.8 million of securities issued or guaranteed by GSEs or the U.S.
Government and its agencies; $419.1 million of corporate debt securities
issued primarily by financial institutions; and $262.0 million of
asset-backed securities principally backed by Government guaranteed student
loans. None of Farmer Mac’s asset-backed securities were backed by
sub-prime or Alt-A residential or commercial mortgages or home-equity
loans.
As
described above in “—Balance Sheet Review,” due to the current market turmoil
and general widening of corporate debt spreads, many of the corporate debt
securities owned by Farmer Mac are in unrealized loss positions. If
Farmer Mac needed to sell those securities as a source of liquidity, Farmer Mac
would realize losses in earnings and reductions to its core capital equal to
amounts currently accounted for as unrealized losses in accumulated other
comprehensive income, which is not a component of Farmer Mac’s core capital for
statutory and regulatory compliance purposes. Currently, Farmer Mac
does not foresee the need to sell those securities as a source of
liquidity.
Farmer
Mac’s asset-backed investment securities include callable, AAA-rated
auction-rate certificates (“ARCs”), the interest rates on which are reset
through an auction process, most commonly at intervals of 28 days, or at
formula-based floating rates in the event of a failed auction. All
ARCs held by Farmer Mac are collateralized entirely by pools of Federal Family
Education Loan Program (“FFELP”) guaranteed student loans that are backed by the
full faith and credit of the United States. Farmer Mac held $178.6
million of ARCs (including related put rights) as of December 31, 2008, compared
to $131.5 million as of December 31, 2007. 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. Farmer Mac believes that the credit quality of these securities
is high, based on that guarantee and the securities’ continued AAA
ratings. To date, Farmer Mac has received all interest due on ARCs it
holds and expects to continue to do so. Farmer Mac does not believe
that the auction failures will affect the Corporation’s liquidity or its ability
to fund its operations or make dividend payments. On October 31,
2008, Farmer Mac accepted an offer of Auction Rate Securities Rights, Series B 2
from UBS AG related to $119.9 million (par value) of the ARCs in Farmer Mac’s
investment portfolio, which granted Farmer Mac put rights related to these
securities. Under the terms of the rights, UBS has the discretion to
purchase or sell the $119.9 million (par value) of ARCs at any time without
prior notice so long as Farmer Mac receives par value, while Farmer Mac has the
right to require UBS to purchase the securities at par value at any time between
January 2, 2009 and January 4, 2011. Farmer Mac elected the fair
value option for these put rights and recorded them at their fair value as of
December 31, 2008. Farmer Mac exercised its rights and sold the ARCs
to UBS on January 7, 2009, thus reducing the remaining par value of the ARC
portfolio to $74.1 million. As of December 31, 2008, Farmer Mac
recorded $119.9 million of ARC holdings and put rights at an amount equal to the
par amount of these securities and $74.1 million at fair values of approximately
79 percent of par. Farmer Mac believes it is likely the remaining
$74.1 million of ARCs will be called or repurchased during the next two
years.
As of
September 30, 2008, Farmer Mac had an investment of $81.7 million in The Reserve
Primary Fund (the “Fund”), a money market fund that has suspended redemptions
and is being liquidated. On September 15, 2008, Farmer Mac delivered
a timely redemption request to redeem its entire investment in the Fund, but its
confirmed redemption request was not honored. The Fund announced on
September 16, 2008 that the net asset value of the Fund decreased below $1.00
per share as a result of the valuing at zero the Fund’s holdings of debt
securities issued by Lehman Brothers, but that all redemption requests received
before 3:00 p.m. that day would be redeemed at $1.00 per share. On
September 22, 2008, the Fund announced that redemptions of shares in the Fund
were being suspended for the protection of the Fund’s investors pursuant to an
SEC order until the financial markets allow an orderly liquidation to be
effected. Investments in money market funds are generally recorded in
“Cash and cash equivalents” on the Corporation’s balance sheet; however, based
on the foregoing information, as of September 30, 2008 the Corporation presented
$39.2 million of its investment in the Fund as “Cash and cash equivalents”
and $42.5 million of its unsettled trades with the Fund separately on the
balance sheet as “Prepaid expenses and other assets,” both at net asset values
of $1.00 per share.
On
December 3, 2008, the Fund announced that it had adopted a Plan of
Liquidation (the “Plan”) for the orderly liquidation of the assets of the Fund,
to be implemented subject to the supervision of the SEC. Under the
terms of the Plan, interim distributions are to be made to shareholders pro rata
out of Fund assets, up to the amount of a special reserve. On
February 26, 2009, the Fund announced its decision to initially set aside $3.5
billion in a special reserve to cover potential liabilities for damages and
associated expenses related to lawsuits and regulatory actions against the
Fund. The special reserve was estimated based upon a range of costs
and expenses that might be included in the special reserve and may be increased
or decreased as further information becomes available. Interim
distributions will continue to be made up to $0.9172 per share unless the Fund
determines the need to increase the special reserve. Amounts in the
special reserve will be distributed to shareholders once claims, if any are
successful, have been paid or set aside for payment.
The Fund
distributed cash to Farmer Mac of $64.4 million during fourth quarter 2008 and
an additional $5.4 million on February 20, 2009. As of December 31,
2008, Farmer Mac had $17.3 million of unsettled trades with the Fund presented
as “Prepaid expenses and other assets” on the balance sheet. Farmer Mac believes
that it will receive its remaining investment upon final distribution of the
Fund; however it may take an extended period of time. Farmer Mac will
continue to monitor further developments with respect to the expected recovery
of its remaining investment in the Fund.
The
following table presents Farmer Mac’s five largest investments as of December
31, 2008:
|
S&P
Credit
|
||||||||||
|
Investment
|
Issuer
|
Rating
|
Amount2
|
|||||||
|
(in
thousands)
|
||||||||||
|
GSE
Preferred Stock
|
CoBank,
ACB 1
|
A
|
$ | 88,500 | ||||||
|
GSE
Preferred Stock
|
AgFirst
Farm Credit Bank 1
|
A
|
88,035 | |||||||
|
Corporate
Debt
|
CoBank,
ACB 1
|
A
|
70,000 | |||||||
|
Corporate
Debt
|
Goldman
Sachs Group, Inc.
|
A
|
61,850 | |||||||
|
Corporate
Debt
|
Merrill
Lynch & Co., Inc. 3
|
A
|
50,000 | |||||||
|
1
|
CoBank,
ACB and AgFirst Farm Credit Bank are institutions of the Farm Credit
System, a government- sponsored enterprise.
|
|
2
|
Investment
balance does not include premiums paid or unrealized gains or losses on
the securities.
|
|
3
|
Merrill
Lynch & Co., Inc. was acquired by Bank of America in January
2009.
|
Capital
Requirements. The Act establishes three capital standards for
Farmer Mac—minimum, critical and risk-based. The minimum capital
requirement is expressed as a percentage of on-balance sheet assets and
off-balance sheet obligations, with the critical capital requirement equal to
one-half of the minimum capital amount. The Act does not specify the
required level of risk-based capital but directs FCA to establish a risk-based
capital stress test for Farmer Mac, using specified stress-test
parameters. For a discussion of the risk-based capital stress test,
see “Business—Government Regulation of Farmer Mac—Regulation—Capital
Standards—General.” Certain enforcement powers are given to FCA
depending upon Farmer Mac’s compliance with the capital
standards. See “Business—Government Regulation of Farmer
Mac—Regulation—Capital Standards—Enforcement Levels.”
As of
December 31, 2008 and 2007, Farmer Mac was classified as within “level I” (the
highest compliance level). The following table sets forth Farmer
Mac’s minimum capital requirement as of December 31, 2008 and
2007.
|
December
31, 2008
|
December
31, 2007
|
|||||||||||||||||||||||
|
Amount
|
Ratio
|
Capital
Required
|
Amount
|
Ratio
|
Capital
Required
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
On-balance
sheet assets as defined for determining statutory minimum
capital
|
$ | 5,145,139 | 2.75 | % | $ | 141,491 | $ | 4,979,147 | 2.75 | % | $ | 136,927 | ||||||||||||
|
Outstanding
balance of Farmer Mac
|
||||||||||||||||||||||||
|
Guaranteed
Securities held by others and LTSPCs
|
6,897,259 | 0.75 | % | 51,730 | 6,492,056 | 0.75 | % | 48,690 | ||||||||||||||||
|
Financial
Derivatives
|
34,032 | 0.75 | % | 255 | 55,273 | 0.75 | % | 415 | ||||||||||||||||
|
Minimum
capital level
|
193,476 | 186,032 | ||||||||||||||||||||||
|
Actual
core capital
|
206,976 | 226,386 | ||||||||||||||||||||||
|
Capital
surplus
|
$ | 13,500 | $ | 40,354 | ||||||||||||||||||||
Based on
the risk-based capital stress test, Farmer Mac’s risk-based capital requirement
as of December 31, 2008 was $57.3 million and Farmer Mac’s regulatory capital of
$223.4 million exceeded that amount by approximately
$166.1 million.
Contractual
Obligations. The following table presents the amount and
timing of Farmer Mac’s known fixed and determinable contractual obligations by
payment date as of December 31, 2008. The payment amounts represent
those amounts contractually due to the recipient (including return of discount
and interest on debt) and do not include unamortized premiums or discounts or
other similar carrying value adjustments.
|
One
Year
|
One
to
|
Three
to
|
Over
Five
|
|||||||||||||||||
|
or
Less
|
Three
Years
|
Five
Years
|
Years
|
Total
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Discount
notes (1)
|
$ | 2,129,584 | $ | - | $ | - | $ | - | $ | 2,129,584 | ||||||||||
|
Medium-term
notes (1)
|
1,633,500 | 272,865 | 438,000 | 178,500 | 2,522,865 | |||||||||||||||
|
Interest
payments on fixed-rate medium-term notes
|
72,920 | 69,252 | 50,750 | 12,682 | 205,604 | |||||||||||||||
|
Interest
payments on floating-rate medium-term notes (2)
|
595 | 1,622 | 1,622 | 2,838 | 6,677 | |||||||||||||||
|
Operating
lease obligations (3)
|
728 | 1,288 | 10 | - | 2,026 | |||||||||||||||
|
Purchase
obligations (4)
|
808 | 458 | 230 | - | 1,496 | |||||||||||||||
|
(1)
|
Future
events, including additional issuance of discount notes and medium-term
notes and refinancing of those notes, could cause actual payments to
differ significantly from these amounts. For more information
regarding discount notes and medium-term notes, see Note 7 to the
consolidated financial statements.
|
|
(2)
|
Calculated
using the effective interest rates as of December 31, 2008. As
a result, these amounts do not reflect the effects of changes in the
contractual interest rates effective on future interest rate reset
dates.
|
|
(3)
|
Includes
amounts due under non-cancelable operating leases for office space and
office equipment. See Note 12 to the consolidated financial statements for
more information regarding Farmer Mac’s minimum lease payments for office
space.
|
|
(4)
|
Includes
minimum amounts due under non-cancelable agreements to purchase goods or
services that are enforceable and legally binding and specify all
significant terms. These agreements include agreements for the
provision of consulting services, information technology support,
equipment maintenance, and financial analysis software and
services. The amounts actually paid under these agreements will
likely be higher due to the variable components of some of these
agreements under which the ultimate obligation owed is determined by
reference to actual usage or hours worked. The table does not
include amounts due under agreements that are cancelable without penalty
or further payment as of December 31, 2008 and therefore do not represent
enforceable and legally binding obligations. The table also
does not include amounts due under the terms of employment agreements with
members of senior management; nor does it include payments that are based
on a varying outstanding loan volume (such as servicing and bond
administration fees), as those payments are not known, fixed and
determinable contractual
obligations.
|
Farmer
Mac enters into financial derivative contracts under which it either receives
cash from counterparties, or is required to pay cash to them, depending on
changes in interest rates. Financial derivatives are carried on the
consolidated balance sheet at fair value, representing the net present value of
expected future cash payments or receipts based on market interest rates as of
the balance sheet date. The fair values of the contracts change daily
as market interest rates change. Because the financial derivative
liabilities recorded on the consolidated balance sheet as of December 31, 2008
do not represent the amounts that may ultimately be paid under the financial
derivative contracts, those liabilities are not included in the table of
contractual obligations presented above. Further information
regarding financial derivatives is included in Note 2(h) and Note 6 to the
consolidated financial statements.
Contingent
Liabilities. In conducting its loan purchase activities,
Farmer Mac enters into mandatory and optional delivery commitments to purchase
agricultural real estate mortgage loans and corresponding optional commitments
to deliver Farmer Mac Guaranteed Securities. As of December 31, 2008
and 2007, Farmer Mac had no optional delivery commitments to purchase loans or
deliver Farmer Mac Guaranteed Securities outstanding. In conducting
its LTSPC activities, Farmer Mac enters into arrangements whereby it commits to
buy agricultural real estate mortgage loans at an undetermined future
date. The following table presents these significant
commitments.
|
As
of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
LTSPCs
|
$ | 2,224,181 | $ | 1,948,941 | ||||
|
Mandatory
commitments to purchase loans and USDA-guaranteed portions
|
26,735 | 16,994 | ||||||
Further
information regarding commitments to purchase and sell loans is included in Note
12 to the consolidated financial statements.
Off-Balance
Sheet Arrangements. Farmer Mac offers approved lenders two
credit enhancement alternatives to increase their liquidity or lending capacity
while retaining the cash flow benefits of their loans: (1) LTSPCs,
and (2) Farmer Mac Guaranteed Securities. Both of these alternatives
result in the creation of off-balance sheet obligations for Farmer Mac in the
ordinary course of its business. In performing its obligations
related to LTSPCs and Farmer Mac Guaranteed Securities, Farmer Mac would have
the right to enforce the underlying loans, and in the event of the default under
the terms of those loans, would have access to the underlying
collateral.
As of
December 31, 2008 and 2007, outstanding off-balance sheet LTSPCs and Farmer Mac
Guaranteed Securities totaled $6.9 billion and $6.5 billion,
respectively. The following table presents the balance of outstanding
LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities as of
December 31, 2008 and 2007:
|
Outstanding
Balance of LTSPCs and
|
||||||||
|
Off-Balance
Sheet Farmer Mac Guaranteed Securities
|
||||||||
|
As
of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Farmer
Mac I obligations:
|
||||||||
|
Farmer
Mac I Guaranteed Securities
|
$ | 4,642,983 | $ | 4,518,300 | ||||
|
LTSPCs
|
2,224,181 | 1,948,941 | ||||||
|
Total
Farmer Mac I obligations
|
6,867,164 | 6,467,241 | ||||||
|
Farmer
Mac II Guaranteed Securities
|
30,095 | 24,815 | ||||||
|
Total
off-balance sheet Farmer Mac I and II
|
$ | 6,897,259 | $ | 6,492,056 | ||||
See
“—Risk Management—Credit Risk – Loans” and Note 2(c), Note 2(e), Note 5 and Note
12 to the consolidated financial statements for more information on Farmer Mac
Guaranteed Securities and Note 2(o) and Note 12 to the consolidated financial
statements for more information on LTSPCs.
Other Matters
The
expected effects of recently issued accounting pronouncements on the
consolidated financial statements are presented in Note 2(q) to the consolidated
financial statements.
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
Farmer
Mac is exposed to market risk from changes in interest rates. Farmer
Mac manages this market risk by entering into various financial transactions,
including financial derivatives, and by monitoring and measuring its exposure to
changes in interest rates. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Risk Management—Interest Rate
Risk” for more information about Farmer Mac’s exposure to interest rate risk and
its strategies to manage such risk. For information regarding Farmer
Mac’s use of financial derivatives and related accounting policies, see Note
2(h) and Note 6 to the consolidated financial statements.
Item
8. Financial
Statements
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of Farmer Mac is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in Exchange Act
Rule 13a-15(f). Internal control over financial reporting is a
process designed under the supervision of Farmer Mac’s Chief Executive Officer
and Chief Financial Officer to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Corporation’s
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America.
Farmer
Mac’s internal control over financial reporting includes those policies and
procedures that: (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Corporation; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the Corporation are being made only in accordance with
authorizations of management and directors of the Corporation; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Corporation’s assets that could have a
material effect on the consolidated financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. All control systems have inherent
limitations so that no evaluation of controls can provide absolute assurance
that all control issues are detected. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
Under the
supervision and with the participation of the Corporation’s Chief Executive
Officer and Chief Financial Officer, Farmer Mac’s management assessed the
effectiveness of the Corporation’s internal control over financial reporting as
of December 31, 2008. In making this assessment, the Corporation’s
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control¾Integrated
Framework. Based on its evaluation under the COSO criteria,
management concluded that the Corporation’s internal control over financial
reporting as of December 31, 2008 was effective.
Farmer
Mac’s independent registered public accounting firm, Deloitte & Touche LLP,
has audited the effectiveness of the Corporation’s internal control over
financial reporting as of December 31, 2008, as stated in their report
appearing below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders of
Federal
Agricultural Mortgage Corporation
Washington,
DC
We have
audited the internal control over financial reporting of Federal Agricultural
Mortgage Corporation and subsidiary (“Farmer Mac”) as of December 31, 2008,
based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Farmer Mac's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on Farmer Mac's internal
control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, Farmer Mac maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and
for the year ended December 31, 2008 of Farmer Mac and our report dated March
16, 2009 expressed an unqualified opinion on those consolidated financial
statements and included an explanatory paragraph related to Farmer Mac’s
adoption of Financial Accounting
Standards Board (“FASB”) Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value
Measurements and FASB SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115 on January 1, 2008.
/s/
Deloitte & Touche LLP
McLean,
Virginia
March 16,
2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders of
Federal
Agricultural Mortgage Corporation
Washington,
DC
We have
audited the accompanying consolidated balance sheets of Federal Agricultural
Mortgage Corporation and subsidiary (“Farmer Mac”) as of December 31, 2008 and
2007, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2008. These financial statements are the responsibility of
Farmer Mac's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Federal Agricultural Mortgage Corporation
and subsidiary at December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally accepted
in the United States of America.
As
discussed in Note 2 to the consolidated financial statements, Farmer Mac adopted
Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting
Standards (“SFAS”) No. 157, Fair Value Measurements and
FASB SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities—Including an
amendment of FASB Statement No. 115 on January 1, 2008.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Farmer Mac's internal control over financial
reporting as of December 31, 2008, based on the criteria established in Internal Control−Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 16, 2009 expressed an
unqualified opinion on Farmer Mac's internal control over financial
reporting.
/s/
Deloitte & Touche LLP
McLean,
Virginia
March 16,
2009
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND
SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
As
of
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 278,412 | $ | 101,445 | ||||
|
Investment
securities:
|
||||||||
|
Available-for-sale,
at fair value (includes securities pledged to counterparties of $7.2
million as of December 31, 2007)
|
1,072,096 | 2,616,187 | ||||||
|
Trading,
at fair value
|
163,763 | 8,179 | ||||||
|
Total
investment securities
|
1,235,859 | 2,624,366 | ||||||
|
Farmer
Mac Guaranteed Securities:
|
||||||||
|
Held-to-maturity,
at amortized cost
|
- | 959,865 | ||||||
|
Available-for-sale,
at fair value
|
1,511,694 | 338,958 | ||||||
|
Trading,
at fair value
|
939,550 | - | ||||||
|
Total
Farmer Mac Guaranteed Securities
|
2,451,244 | 1,298,823 | ||||||
|
Loans:
|
||||||||
|
Loans
held for sale, at lower of cost or fair value
|
66,680 | 118,629 | ||||||
|
Loans
held for investment, at amortized cost
|
718,845 | 649,280 | ||||||
|
Allowance
for loan losses
|
(10,929 | ) | (1,690 | ) | ||||
|
Total
loans, net of allowance
|
774,596 | 766,219 | ||||||
|
Real
estate owned, at lower of cost or fair value
|
606 | 590 | ||||||
|
Financial
derivatives, at fair value
|
27,069 | 2,288 | ||||||
|
Interest
receivable
|
73,058 | 91,939 | ||||||
|
Guarantee
and commitment fees receivable
|
61,109 | 57,804 | ||||||
|
Deferred
tax asset, net
|
87,793 | 30,239 | ||||||
|
Prepaid
expenses and other assets
|
117,561 | 3,900 | ||||||
|
Total
Assets
|
$ | 5,107,307 | $ | 4,977,613 | ||||
|
Liabilities,
Mezzanine Equity and Stockholders' Equity:
|
||||||||
|
Liabilities:
|
||||||||
|
Notes
payable:
|
||||||||
|
Due
within one year
|
$ | 3,757,099 | $ | 3,829,698 | ||||
|
Due
after one year
|
887,999 | 744,649 | ||||||
|
Total
notes payable
|
4,645,098 | 4,574,347 | ||||||
|
Financial
derivatives, at fair value
|
181,183 | 55,273 | ||||||
|
Accrued
interest payable
|
40,470 | 50,004 | ||||||
|
Guarantee
and commitment obligation
|
54,954 | 52,130 | ||||||
|
Accounts
payable and accrued expenses
|
20,532 | 20,069 | ||||||
|
Reserve
for losses
|
5,506 | 2,197 | ||||||
|
Total
Liabilities
|
4,947,743 | 4,754,020 | ||||||
|
Commitments
and Contingencies (Note 12)
|
||||||||
|
Mezzanine
Equity:
|
||||||||
|
Series
B redeemable preferred stock, par value $1,000,150,000 shares authorized,
issued and outstanding
|
144,216 | - | ||||||
|
Stockholders'
Equity:
|
||||||||
|
Preferred
stock:
|
||||||||
|
Series
A, stated at redemption/liquidation value, $50 per share, 700,000 shares
authorized
|
- | 35,000 | ||||||
|
Series
C, stated at redemption/liquidation value, $1,000 per share, 75,000 shares
authorized, 9,200 issued and outstanding
|
9,200 | - | ||||||
|
Common
stock:
|
||||||||
|
Class
A Voting, $1 par value, no maximum authorization
|
1,031 | 1,031 | ||||||
|
Class
B Voting, $1 par value, no maximum authorization
|
500 | 500 | ||||||
|
Class
C Non-Voting, $1 par value, no maximum authorization
|
8,601 | 8,364 | ||||||
|
Additional
paid-in capital
|
95,572 | 87,134 | ||||||
|
Accumulated
other comprehensive loss
|
(47,412 | ) | (2,793 | ) | ||||
|
Retained
earnings/(accumulated deficit)
|
(52,144 | ) | 94,357 | |||||
|
Total
Stockholders' Equity
|
15,348 | 223,593 | ||||||
|
Total
Liabilities, Mezzanine Equity and Stockholders' Equity
|
$ | 5,107,307 | $ | 4,977,613 | ||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND
SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For
the Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||
|
Interest
income:
|
||||||||||||
|
Investments
and cash equivalents
|
$ | 113,722 | $ | 174,196 | $ | 128,199 | ||||||
|
Farmer
Mac Guaranteed Securities
|
96,417 | 77,797 | 75,437 | |||||||||
|
Loans
|
45,556 | 45,765 | 46,286 | |||||||||
|
Total
interest income
|
255,695 | 297,758 | 249,922 | |||||||||
|
Total
interest expense
|
166,980 | 253,305 | 211,632 | |||||||||
|
Net
interest income
|
88,715 | 44,453 | 38,290 | |||||||||
|
(Provision)/recovery
for loan losses
|
(14,531 | ) | 215 | 2,396 | ||||||||
|
Net
interest income after (provision)/recovery for loan
losses
|
74,184 | 44,668 | 40,686 | |||||||||
|
Non-interest
(loss)/income:
|
||||||||||||
|
Guarantee
and commitment fees
|
28,381 | 25,232 | 21,815 | |||||||||
|
(Losses)/gains
on financial derivatives
|
(130,403 | ) | (39,947 | ) | 1,607 | |||||||
|
(Losses)/gains
on trading assets
|
(10,639 | ) | (327 | ) | 10 | |||||||
|
Impairment
losses on available-for-sale investment securities
|
(106,240 | ) | - | - | ||||||||
|
Gains
on sale of available-for-sale investment securities
|
316 | 288 | 1,150 | |||||||||
|
Gains
on sale of Farmer Mac Guaranteed Securities
|
1,509 | - | - | |||||||||
|
Gains
on the repurchase of debt
|
864 | - | - | |||||||||
|
Gains
on the sale of real estate owned
|
- | 130 | 809 | |||||||||
|
Representation
and warranty claims income
|
- | - | 718 | |||||||||
|
Other
income
|
1,413 | 1,411 | 1,001 | |||||||||
|
Non-interest
(loss)/income
|
(214,799 | ) | (13,213 | ) | 27,110 | |||||||
|
Non-interest
expense:
|
||||||||||||
|
Compensation
and employee benefits
|
15,266 | 14,161 | 11,901 | |||||||||
|
General
and administrative
|
11,871 | 8,508 | 9,769 | |||||||||
|
Regulatory
fees
|
2,050 | 2,163 | 2,313 | |||||||||
|
Real
estate owned operating costs/(income), net
|
116 | (28 | ) | 123 | ||||||||
|
Provision/(recovery)
for losses
|
3,309 | 73 | (1,012 | ) | ||||||||
|
Non-interest
expense
|
32,612 | 24,877 | 23,094 | |||||||||
|
(Loss)/income
before income taxes
|
(173,227 | ) | 6,578 | 44,702 | ||||||||
|
Income
tax (benefit)/expense
|
(22,864 | ) | (83 | ) | 12,689 | |||||||
|
Net
(loss)/income
|
(150,363 | ) | 6,661 | 32,013 | ||||||||
|
Preferred
stock dividends
|
(3,717 | ) | (2,240 | ) | (2,240 | ) | ||||||
|
Net
(loss)/income available to common stockholders
|
$ | (154,080 | ) | $ | 4,421 | $ | 29,773 | |||||
|
Earnings
per common share and dividends:
|
||||||||||||
|
Basic
(loss)/earnings per common share
|
$ | (15.40 | ) | $ | 0.43 | $ | 2.74 | |||||
|
Diluted
(loss)/earnings per common share
|
$ | (15.40 | ) | $ | 0.42 | $ | 2.68 | |||||
|
Common
stock dividends per common share
|
$ | 0.40 | $ | 0.40 | $ | 0.40 | ||||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||||||
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND
SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
For
the Year Ended December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Preferred
stock:
|
||||||||||||||||||||||||
|
Balance,
beginning of year
|
700 | $ | 35,000 | 700 | $ | 35,000 | 700 | $ | 35,000 | |||||||||||||||
|
Issuance
of Series C preferred stock
|
9 | 9,200 | - | - | - | - | ||||||||||||||||||
|
Redemption
of Series A preferred stock
|
(700 | ) | (35,000 | ) | - | - | - | - | ||||||||||||||||
|
Balance,
end of year
|
9 | $ | 9,200 | 700 | $ | 35,000 | 700 | $ | 35,000 | |||||||||||||||
|
Common
stock:
|
||||||||||||||||||||||||
|
Balance,
beginning of year
|
9,895 | $ | 9,895 | 10,607 | $ | 10,607 | 11,091 | $ | 11,091 | |||||||||||||||
|
Issuance
of Class C common stock
|
5 | 5 | 2 | 2 | 3 | 3 | ||||||||||||||||||
|
Repurchase
and retirement of Class C common stock
|
(32 | ) | (32 | ) | (1,087 | ) | (1,087 | ) | (815 | ) | (815 | ) | ||||||||||||
|
Exercise
of stock options
|
264 | 264 | 373 | 373 | 328 | 328 | ||||||||||||||||||
|
Balance,
end of year
|
10,132 | $ | 10,132 | 9,895 | $ | 9,895 | 10,607 | $ | 10,607 | |||||||||||||||
|
Additional
paid-in capital:
|
||||||||||||||||||||||||
|
Balance,
beginning of year
|
$ | 87,134 | $ | 85,349 | $ | 83,058 | ||||||||||||||||||
|
Stock-based
compensation expense
|
2,759 | 3,681 | 2,436 | |||||||||||||||||||||
|
Issuance
of Class C common stock
|
65 | 50 | 70 | |||||||||||||||||||||
|
Repurchase
and retirement of Class C common stock
|
(285 | ) | (9,357 | ) | (6,625 | ) | ||||||||||||||||||
|
Exercise
of stock options
|
5,899 | 7,411 | 6,410 | |||||||||||||||||||||
|
Balance,
end of year
|
$ | 95,572 | $ | 87,134 | $ | 85,349 | ||||||||||||||||||
|
Retained
earnings/(accumulated deficit):
|
||||||||||||||||||||||||
|
Balance,
beginning of year
|
$ | 94,357 | $ | 112,577 | $ | 101,633 | ||||||||||||||||||
|
Cumulative
effect from the adoption of SFAS 159, net of tax
|
12,108 | - | - | |||||||||||||||||||||
|
Balance
as of January 1
|
106,465 | 112,577 | 101,633 | |||||||||||||||||||||
|
Net
(loss)/income
|
(150,363 | ) | 6,661 | 32,013 | ||||||||||||||||||||
|
Preferred
stock dividends
|
(3,717 | ) | (2,240 | ) | (2,240 | ) | ||||||||||||||||||
|
Common
stock dividends
|
(4,015 | ) | (4,119 | ) | (4,334 | ) | ||||||||||||||||||
|
Repurchase
and retirement of Class C common stock
|
(514 | ) | (18,522 | ) | (14,495 | ) | ||||||||||||||||||
|
Balance,
end of year
|
$ | (52,144 | ) | $ | 94,357 | $ | 112,577 | |||||||||||||||||
|
Accumulated
other comprehensive (loss)/income:
|
||||||||||||||||||||||||
|
Balance,
beginning of year
|
$ | (2,793 | ) | $ | 4,956 | $ | 15,247 | |||||||||||||||||
|
Cumulative
effect from the adoption of SFAS 159, net of tax
|
(11,237 | ) | - | - | ||||||||||||||||||||
|
Balance
as of January 1
|
(14,030 | ) | 4,956 | 15,247 | ||||||||||||||||||||
|
Change
in unrealized gain/(loss) on available-for-sale securities, net of tax and
reclassification adjustments
|
(33,657 | ) | (8,122 | ) | (10,835 | ) | ||||||||||||||||||
|
Change
in unrealized gain/(loss) on financial derivatives, net of tax and
reclassification adjustments
|
275 | 373 | 544 | |||||||||||||||||||||
|
Balance,
end of year
|
$ | (47,412 | ) | $ | (2,793 | ) | $ | 4,956 | ||||||||||||||||
|
Total
Stockholders' Equity
|
$ | 15,348 | $ | 223,593 | $ | 248,489 | ||||||||||||||||||
|
Comprehensive
(loss)/income:
|
||||||||||||||||||||||||
|
Net
(loss)/income
|
$ | (150,363 | ) | $ | 6,661 | $ | 32,013 | |||||||||||||||||
|
Changes
in accumulated other comprehensive (loss), net of tax
|
(33,382 | ) | (7,749 | ) | (10,291 | ) | ||||||||||||||||||
|
Comprehensive
(loss)/income
|
$ | (183,745 | ) | $ | (1,088 | ) | $ | 21,722 | ||||||||||||||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||||||||||||||||||
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND
SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
For
the Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
(loss)/income
|
$ | (150,363 | ) | $ | 6,661 | $ | 32,013 | |||||
|
Adjustments
to reconcile net income to net cash (used in)/provided by operating
activities:
|
||||||||||||
|
Net
amortization/(accretion) of premiums and discounts on loans and
investments
|
2,001 | (2,435 | ) | (2,459 | ) | |||||||
|
Amortization
of debt premiums, discounts and issuance costs
|
79,404 | 130,810 | 129,390 | |||||||||
|
Purchases
of trading investment securities
|
- | (9,090 | ) | - | ||||||||
|
Proceeds
from repayment and sale of trading investment securities
|
6,675 | 5,749 | 1,776 | |||||||||
|
Purchases
of loans held for sale
|
(61,525 | ) | (55,059 | ) | (53,108 | ) | ||||||
|
Proceeds
from repayment of loans held for sale
|
15,235 | 6,819 | 8,963 | |||||||||
|
Net
change in fair value of trading securities and financial
derivatives
|
111,768 | 39,045 | (6,197 | ) | ||||||||
|
Gain
on repurchase of debt
|
(864 | ) | - | - | ||||||||
|
Amortization
of SFAS 133 transition adjustment on financial derivatives
|
275 | 373 | 544 | |||||||||
|
Impairment
losses on available-for-sale investment securities
|
106,240 | - | - | |||||||||
|
Gains
on sale of Farmer Mac Guaranteed Securities
|
(1,509 | ) | - | - | ||||||||
|
Gains
on the sale of available-for-sale securities
|
(316 | ) | (288 | ) | (1,150 | ) | ||||||
|
Gains
on the sale of real estate owned
|
- | (130 | ) | (809 | ) | |||||||
|
Total
(recovery)/provision for losses
|
17,840 | (142 | ) | (3,408 | ) | |||||||
|
Deferred
income taxes
|
(40,378 | ) | (17,090 | ) | 2,171 | |||||||
|
Stock-based
compensation expense
|
2,759 | 3,680 | 2,436 | |||||||||
|
Decrease/
(increase) in interest receivable
|
18,881 | (18,437 | ) | (6,036 | ) | |||||||
|
Increase
in guarantee and commitment fees receivable
|
(3,305 | ) | (17,061 | ) | (18,573 | ) | ||||||
|
(Decrease)/increase
in other assets
|
(113,247 | ) | (652 | ) | 15,418 | |||||||
|
(Decrease)/increase
in accrued interest payable
|
(9,534 | ) | 13,879 | 6,875 | ||||||||
|
Increase
in other liabilities
|
940 | 21,052 | 8,237 | |||||||||
|
Net
cash (used in)/provided by operating activities
|
(19,023 | ) | 107,684 | 116,083 | ||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases
of available-for-sale investment securities (1)
|
(1,185,437 | ) | (4,201,668 | ) | (3,983,479 | ) | ||||||
|
Purchases
of Farmer Mac Guaranteed Securities
|
(623,179 | ) | (227,229 | ) | (241,323 | ) | ||||||
|
Purchases
of loans held for investment
|
(135,097 | ) | (72,650 | ) | (45,565 | ) | ||||||
|
Purchases
of defaulted loans
|
(58,279 | ) | (3,911 | ) | (9,623 | ) | ||||||
|
Proceeds
from repayment of investment securities (2)
|
581,098 | 3,320,077 | 3,470,455 | |||||||||
|
Proceeds
from repayment of Farmer Mac Guaranteed Securities
|
263,858 | 246,683 | 227,008 | |||||||||
|
Proceeds
from repayment of loans held for investment
|
118,178 | 136,296 | 120,039 | |||||||||
|
Proceeds
from sale of available-for-sale investment securities
|
456,506 | 88,563 | 308,578 | |||||||||
|
Proceeds
from sale of Farmer Mac Guaranteed Securities
|
669,406 | 6,434 | 3,994 | |||||||||
|
Proceeds
from sale of real estate owned
|
- | 1,537 | 3,440 | |||||||||
|
Net
cash provided by/(used in) investing activities
|
87,054 | (705,868 | ) | (146,476 | ) | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from issuance of discount notes
|
126,824,163 | 119,707,961 | 90,259,882 | |||||||||
|
Proceeds
from issuance of medium-term notes
|
2,228,953 | 1,579,000 | 772,667 | |||||||||
|
Payments
to redeem discount notes
|
(126,990,012 | ) | (120,064,662 | ) | (90,278,381 | ) | ||||||
|
Payments
to redeem medium-term notes
|
(2,070,136 | ) | (1,373,550 | ) | (283,000 | ) | ||||||
|
Tax
benefit from tax deductions in excess of compensation cost
recognized
|
381 | 616 | 1,220 | |||||||||
|
Proceeds
from common stock issuance
|
5,734 | 7,875 | 5,376 | |||||||||
|
Purchases
of common stock
|
(831 | ) | (28,966 | ) | (21,935 | ) | ||||||
|
Proceeds
from preferred stock issuance
|
9,200 | - | - | |||||||||
|
Repurchase
of preferred stock
|
(35,000 | ) | - | - | ||||||||
|
Proceeds
from mezzanine equity issuance
|
144,216 | - | - | |||||||||
|
Dividends
paid on common and preferred stock
|
(7,732 | ) | (6,359 | ) | (6,574 | ) | ||||||
|
Net
cash provided by/(used in) financing activities
|
108,936 | (178,085 | ) | 449,255 | ||||||||
|
Net
increase/(decrease) in cash and cash equivalents
|
176,967 | (776,269 | ) | 418,862 | ||||||||
|
Cash
and cash equivalents at beginning of period
|
101,445 | 877,714 | 458,852 | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 278,412 | $ | 101,445 | $ | 877,714 | ||||||
|
(1)
|
Includes
purchases of $349 million, $2.5 billion and $3.1 billion of auction rate
certificates for 2008, 2007 and 2006,
respectively. See Note 15.
|
|
(2)
|
Includes
proceeds, through the normal auction process, of $286 million, $2.7
billion and $3.0 billion from auction rate certificates for 2008, 2007 and
2006,
respectively. See Note 15.
|
See
accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2008, 2007 and 2006
|
1.
|
ORGANIZATION
|
The
Federal Agricultural Mortgage Corporation (“Farmer Mac” or the “Corporation”) is
a stockholder-owned, federally chartered instrumentality of the United States
organized and existing under Title VIII of the Farm Credit Act of 1971, as
amended (12 U.S.C. §§ 2279aa et seq.) (the “Act”). Farmer Mac was
originally created by the United States Congress to establish a secondary market
for agricultural real estate and rural housing mortgage loans. This
secondary market was designed to increase the availability of long-term credit
at stable interest rates to America’s rural communities, farmers, ranchers and
rural homeowners and to provide those borrowers with the benefits of capital
markets pricing and product innovation. In May 2008, Congress
expanded Farmer Mac’s charter to authorize the Corporation to purchase, and
to guarantee securities backed by, loans made by cooperative lenders to
finance electrification and telecommunications systems in rural
areas.
Farmer
Mac accomplishes its congressional mission of providing liquidity and lending
capacity to agricultural and rural utilities lenders by:
|
|
·
|
purchasing
eligible loans directly from
lenders;
|
|
|
·
|
guaranteeing
securities representing interests in, or secured by, pools of eligible
loans; and
|
|
|
·
|
issuing
long-term standby purchase commitments (“LTSPCs”) for eligible
loans.
|
Farmer
Mac conducts these activities through three programs—Farmer Mac I,
Farmer Mac II and Rural Utilities. As of December 31, 2008,
the total volume in all of Farmer Mac’s programs was
$10.1 billion.
Under the
Farmer Mac I program, Farmer Mac purchases or commits to purchase mortgage loans
secured by first liens on agricultural real estate. Farmer Mac also
guarantees securities representing interests in or obligations backed by pools
of eligible mortgage loans. The securities guaranteed by Farmer Mac
under the Farmer Mac I program are referred to as “Farmer Mac I Guaranteed
Securities.” To be eligible for the Farmer Mac I program, loans must
meet Farmer Mac’s credit underwriting, collateral valuation, documentation and
other specified standards that are discussed in “Business—Farmer Mac
Programs—Farmer Mac I.” As of December 31, 2008, outstanding
loans held by Farmer Mac and loans that either back Farmer Mac I Guaranteed
Securities or are subject to LTSPCs in the Farmer Mac I program totaled
$8.0 billion.
Under the
Farmer Mac II program, Farmer Mac purchases the portions of loans guaranteed by
the United States Department of Agriculture (the “USDA-guaranteed portions”)
pursuant to the Consolidated Farm and Rural Development Act (7 U.S.C. §§ 1921 et
seq.) and guarantees securities backed by those USDA-guaranteed portions
(“Farmer Mac II Guaranteed Securities”). As of December 31, 2008,
outstanding Farmer Mac II Guaranteed Securities totaled $1.0
billion.
Farmer
Mac’s Rural Utilities program, which is separate from the Farmer Mac I and
Farmer Mac II programs, was initiated during second quarter 2008 after
Congress expanded Farmer Mac’s authorized secondary market activities to include
rural utilities loans. Farmer Mac’s activities under this program
will be similar to those conducted under the Farmer Mac I program—loan
purchases, guarantees of securities (“Farmer Mac Guaranteed Securities – Rural
Utilities”) and issuance of LTSPCs—with respect to eligible rural utilities
loans. To be eligible for the Rural Utilities program, loans must
meet Farmer Mac’s credit underwriting and other specified standards that are
discussed in “Business—Farmer Mac Programs—Rural Utilities.” To date,
Farmer Mac has retained in its portfolio all of the Farmer Mac Guaranteed
Securities – Rural Utilities under this program and has not issued any LTSPCs
with respect to rural utilities loans. As of December 31, 2008,
outstanding Farmer Mac Guaranteed Securities – Rural Utilities totaled $1.1
billion.
Farmer
Mac I Guaranteed Securities, Farmer Mac II Guaranteed Securities and
Farmer Mac Guaranteed Securities – Rural Utilities are sometimes collectively
referred to as “Farmer Mac Guaranteed Securities.” Farmer Mac
securitizes both (1) loans eligible under its three programs and (2) general
obligations of lenders secured by pools of eligible loans, and then guarantees
the timely payment of principal and interest on the resulting Farmer Mac
Guaranteed Securities. AgVantage® is a
registered trademark of Farmer Mac that is used to designate Farmer Mac’s
guarantees of securities that are related to general obligations of issuers that
are secured by pools of eligible loans. Farmer Mac may retain Farmer
Mac Guaranteed Securities in its portfolio or sell them to third
parties.
Farmer
Mac’s two principal sources of revenue are:
|
|
·
|
guarantee
and commitment fees received in connection with outstanding Farmer Mac
Guaranteed Securities and LTSPCs;
and
|
|
|
·
|
net
interest income earned on its portfolio of Farmer Mac Guaranteed
Securities, loans and investments, net of interest expense incurred on
related debt instruments issued by Farmer
Mac.
|
Farmer
Mac funds its “program” purchases of Farmer Mac Guaranteed Securities and
eligible loans primarily by issuing debt obligations of various maturities in
the public capital markets. As of December 31, 2008, Farmer Mac had
$2.1 billion of discount notes and $2.5 billion of medium-term notes
outstanding. To the extent the proceeds of debt issuance exceed
Farmer Mac’s need to fund program assets, those proceeds are invested in
“non-program” investments that must comply with regulations promulgated by the
Farm Credit Administration (“FCA”), including dollar amount, issuer
concentration, and credit quality limitations. Those regulations can
be found at 12 C.F.R. §§ 652.1-652.45 (the “Investment
Regulations”).
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
The
accounting and reporting policies of Farmer Mac conform with accounting
principles generally accepted in the United States of America (“generally
accepted accounting principles” or “GAAP”). The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities (including, but not limited to,
the allowance for loan losses, reserve for losses, other-than temporary
impairment of investment securities and fair value measurements) as of the date
of the consolidated financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ
from those estimates. The following are the significant accounting
policies that Farmer Mac follows in preparing and presenting its
consolidated financial statements:
The
consolidated financial statements include the accounts of Farmer Mac and its
wholly-owned subsidiary, Farmer Mac Mortgage Securities Corporation, whose
principal activities are to facilitate the purchase and issuance of Farmer Mac
Guaranteed Securities and to act as a registrant under registration statements
filed with the Securities and Exchange Commission. All inter-company
balances and transactions have been eliminated in consolidation.
|
(b)
|
Cash
and Cash Equivalents and Statements of Cash
Flows
|
Farmer
Mac considers highly liquid investment securities with original maturities of
three months or less to be cash equivalents. Changes in the balance
of cash and cash equivalents are reported in the consolidated statements of cash
flows. The following table sets forth information regarding certain
cash and non-cash transactions for the years ended December 31, 2008, 2007
and 2006.
|
For
the Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cash
paid during the year for:
|
||||||||||||
|
Interest
|
$ | 103,517 | $ | 119,700 | $ | 80,211 | ||||||
|
Income
taxes
|
30,069 | 7,809 | 10,500 | |||||||||
|
Non-cash
activity:
|
||||||||||||
|
Real
estate owned acquired through foreclosure
|
16 | - | 1,384 | |||||||||
|
Loans
acquired and securitized as Farmer Mac Guaranteed
Securities
|
98,843 | 1,324 | 3,994 | |||||||||
|
Loans
previously under LTSPCs exchanged for Farmer Mac Guaranteed
Securities
|
- | 681,732 | 1,034,860 | |||||||||
|
Reclassification
of unsettled trades with The Reserve Primary Fund from Cash and cash
equivalents to Prepaid expenses and other assets
|
42,489 | - | - | |||||||||
|
Transfers
of investment securities from available-for-sale to trading from the
effect of adopting SFAS 159
|
600,468 | - | - | |||||||||
|
Transfers
of Farmer Mac II Guaranteed Securities from held-to-maturity to trading
from the effect of adopting SFAS 159
|
428,670 | - | - | |||||||||
|
Transfers
of Farmer Mac II Guaranteed Securities from held-to-maturity to
available-for-sale
|
493,997 | - | - | |||||||||
|
Transfers
of Farmer Mac I Guaranteed Securities from held-to-maturity to
available-for-sale
|
25,458 | - | - | |||||||||
|
Transfers
of available-for-sale investment securities to available-for-sale Farmer
Mac Guaranteed Securities - Rural Utilities
|
902,420 | - | - | |||||||||
|
Transfers
of trading investment securities to trading
|
||||||||||||
|
Farmer
Mac Guaranteed Securities - Rural Utilities
|
459,026 | - | - | |||||||||
|
(c)
|
Investments
and Farmer Mac Guaranteed
Securities
|
Farmer
Mac classifies investments and Farmer Mac Guaranteed Securities that Farmer Mac
has the positive intent and ability to hold to maturity as
held-to-maturity. Such securities are carried at cost, adjusted for
unamortized premiums and unearned discounts. Securities for which
Farmer Mac does not have the positive intent to hold to maturity are classified
as available-for-sale and are carried at estimated fair
value. Unrealized gains and losses on available-for-sale securities
are reported as a component of accumulated other comprehensive (loss)/income in
stockholders’ equity. Securities classified as trading securities are
reported at their fair value, with unrealized gains and losses included in
earnings. Gains and losses on the sale of available-for-sale and
trading securities are determined using the specific identification cost
method.
Farmer
Mac determines the fair value of investment securities using quoted market
prices, when available, and evaluates the securities for other-than-temporary
impairment. Farmer Mac determines the fair value of investment
securities for which quoted market prices are not available and Farmer Mac
Guaranteed Securities based on the present value of the associated expected
future cash flows. In estimating the present value of the expected
future cash flows, management is required to make estimates and
assumptions. The key estimates and assumptions include future
discount rates and collateral repayment rates. Premiums, discounts
and other deferred costs are amortized to interest income over the estimated
life of the security using the effective interest method. Interest
income on investments and Farmer Mac Guaranteed Securities is recorded on an
accrual basis unless the collection of interest is considered
doubtful.
Farmer
Mac generally receives compensation when loans with yield maintenance provisions
underlying Farmer Mac Guaranteed Securities prepay. These yield
maintenance payments mitigate Farmer Mac’s exposure to reinvestment risk and are
calculated such that, when reinvested with the prepaid principal, they should
generate substantially the same cash flows that would have been generated had
the loans not prepaid. Yield maintenance payments are recognized as
interest income in the consolidated statements of operations upon
receipt.
|
(d)
|
Loans
|
Loans for
which Farmer Mac has the positive intent and ability to hold for the foreseeable
future are classified as held for investment and reported at their unpaid
principal balance net of unamortized purchase discounts or
premiums. Loans that Farmer Mac does not intend to hold for the
foreseeable future are classified as held for sale and reported at the lower of
cost or market. The net unamortized purchase premiums for loans held
for investment and loans held for sale as of December 31, 2008 and 2007 were
$3.1 million and $4.4 million, respectively.
|
(e)
|
Securitization
of Loans
|
Asset
securitization involves the transfer of financial assets to another entity in
exchange for cash and/or beneficial interests in the assets
transferred. Farmer Mac or third parties transfer agricultural real
estate mortgage loans or rural utilities loans into trusts that are used as
vehicles for the securitization of the transferred loans. The trusts
issue Farmer Mac Guaranteed Securities that are beneficial interests in the
assets of the trusts, to either Farmer Mac or third party
investors. Farmer Mac guarantees the timely payment of principal and
interest on the securities issued by the trusts and receives guarantee fees as
compensation for its guarantee. Farmer Mac recognizes guarantee fees
on an accrual basis over the terms of the Farmer Mac Guaranteed Securities,
which coincide with the terms of the underlying loans. As such, no
guarantee fees are unearned at the end of any reporting
period. Farmer Mac accounts for its Farmer Mac Guaranteed Securities
in accordance with provisions of Financial Accounting Standards
Board Interpretation No. 45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (“FIN 45”). In accordance with
FIN 45, guarantee fees represent a reduction of the obligation under the
guarantee based on amortization using the actual prepayment experience on the
underlying loans. If Farmer Mac purchases a delinquent loan
underlying a Farmer Mac Guaranteed Security, Farmer Mac stops accruing the
guarantee fee upon the loan purchase.
Statement
of Financial Accounting Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS
140”), which became effective for transfers of financial assets after
March 31, 2001, expanded the requirements for “qualifying special purposes
entities.” The trust vehicles used in loan securitization
transactions after March 31, 2001, in which Farmer Mac retains all the
Farmer Mac Guaranteed Securities issued by the trust, do not meet the
“qualifying special purpose entity” requirements of SFAS
140. Accordingly, Farmer Mac accounts for the Farmer Mac Guaranteed
Securities it retains in these transactions as loans in its consolidated balance
sheets and the guarantee fees earned on those assets are recorded as interest
income in the consolidated statements of operations. The Farmer Mac
Guaranteed Securities securitized prior to April 1, 2001 that Farmer Mac has
retained, have been recorded in Farmer Mac’s consolidated financial statements
as Farmer Mac Guaranteed Securities and are classified and accounted for in
accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities (“SFAS 115”).
Transfers
of loans into trusts in which Farmer Mac surrenders control over the financial
assets and receives compensation other than beneficial interests in the
underlying loans are recorded as sales under SFAS 140. The carrying
amount of the assets that are transferred in these transactions is allocated
between the assets sold and the interests retained, if any, based on the
relative fair values of each at the date of the transfer. A gain
or loss is included in income for the difference between the allocated carrying
amount of the asset sold and the net cash proceeds received.
When
particular criteria are met, such as the default of the borrower, Farmer Mac
becomes entitled to purchase the defaulted loans underlying Farmer Mac
Guaranteed Securities (commonly referred to as “removal-of-account”
provisions). Farmer Mac records these loans at their fair values in
the consolidated financial statements during the period in which Farmer Mac
becomes entitled to purchase the loans and therefore regains effective control
over the transferred loans.
|
(f)
|
Nonaccrual
Loans
|
Nonaccrual
loans are loans for which it is probable that Farmer Mac will be unable to
collect all amounts due according to the contractual terms of the loan agreement
and include all loans 90 days or more past due. When a loan
becomes 90 days past due, interest accrual on the loan is discontinued and
interest previously accrued is reversed against interest income in the current
period. The interest on such loans is accounted for on the cash basis
until a loan qualifies for return to accrual status. Loans are
returned to accrual status when all the principal and interest payments
contractually due are collected and certain performance criteria are
met.
Real
estate owned consists of real estate acquired through foreclosure and is
recorded at the lower of acquisition cost or fair value, less estimated selling
costs at acquisition. Fair value is determined by appraisal or other
appropriate valuation method. Losses estimated at the time of
acquisition are charged to the allowance for loan losses. Subsequent
to the acquisition, management continues to perform periodic valuations and
establishes a valuation allowance for real estate owned through a charge to
income in the provision for losses if the carrying value of a property exceeds
its estimated fair value less estimated selling costs.
Farmer
Mac contracts with third parties to operate or preserve real estate owned and
offered for sale when appropriate to maintain property
value. Non-recoverable costs are expensed as incurred and those
related to the production of saleable goods or crops are capitalized to the
extent they are realizable. As revenues from the sale of goods or
crops are received, they are applied first to any capitalized costs and any
remaining revenues offset non-recoverable expenses incurred.
|
(h)
|
Financial
Derivatives
|
Farmer
Mac enters into financial derivative transactions principally to protect against
risk from the effects of market price or interest rate movements on the value of
certain assets, future cash flows or debt issuance, not for trading or
speculative purposes. Farmer Mac enters into interest rate swap
contracts principally to adjust the characteristics of its short-term debt to
match more closely the cash flow and duration characteristics of its longer-term
mortgage and other assets, and also to adjust the characteristics of its
long-term debt to match more closely the cash flow and duration characteristics
of its short-term assets, thereby reducing interest rate risk and also to derive
an overall lower effective cost of borrowing than would otherwise be available
to Farmer Mac in the conventional debt market. Farmer Mac is required
also to recognize certain contracts and commitments as derivatives when the
characteristics of those contracts and commitments meet the definition of a
derivative as promulgated by Statement of Financial Accounting Standards
No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended
(“SFAS 133”).
All
financial derivatives are recorded on the balance sheet at fair value as a
freestanding asset or liability in accordance with SFAS 133. As
discussed in Note 6, Farmer Mac does not designate its financial derivatives as
fair value hedges or cash flow hedges; therefore, the changes in the fair values
of financial derivatives are reported as gains or losses on financial
derivatives in the consolidated statements of operations.
|
(i)
|
Notes
Payable
|
Notes
payable are classified as due within one year or due after one year based on
their contractual maturities. Debt issuance costs and premiums and
discounts are deferred and amortized to net interest income or expense using the
effective interest method over the contractual life of the related
debt.
|
(j)
|
Allowance
for Losses
|
Farmer
Mac maintains an allowance for losses to cover estimated probable losses on
loans held, real estate owned and loans underlying LTSPCs, Farmer Mac I
Guaranteed Securities and Farmer Mac Guaranteed Securities – Rural Utilities in
accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies
(“SFAS 5”) and Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for
Impairment of a Loan, as amended (“SFAS 114”).
The
allowance for losses is increased through periodic provisions for loan losses
that are charged against net interest income and provisions for losses that are
charged to non-interest expense and is reduced by charge-offs for actual losses,
net of recoveries. Negative provisions for loan losses or negative
provisions for losses are recorded in the event that the estimate of probable
losses as of the end of a period is lower than the estimate at the beginning of
the period.
Farmer
Mac’s methodology for determining its allowance for losses incorporates the
Corporation’s automated loan classification system. That system
scores loans based on criteria such as historical repayment performance,
indicators of current financial condition, loan seasoning, loan size and
loan-to-value ratio. For the purposes of the loss allowance
methodology, the loans in Farmer Mac’s portfolio of loans and loans underlying
Farmer Mac I Guaranteed Securities and LTSPCs have been scored and classified
for each calendar quarter since first quarter 2000. The allowance
methodology captures the migration of loan scores across concurrent and
overlapping three-year time horizons and calculates loss rates separately within
each loan classification for (1) loans underlying LTSPCs and (2) loans
held and loans underlying Farmer Mac I Guaranteed
Securities. The calculated loss rates are applied to the current
classification distribution of unimpaired loans in Farmer Mac’s portfolio to
estimate inherent losses, on the assumption that the historical credit losses
and trends used to calculate loss rates will continue in the
future. Management evaluates this assumption by taking into
consideration factors, including:
|
|
·
|
economic
conditions;
|
|
|
·
|
geographic
and agricultural commodity/product concentrations in the
portfolio;
|
|
|
·
|
the
credit profile of the portfolio;
|
|
|
·
|
delinquency
trends of the portfolio;
|
|
|
·
|
historical
charge-off and recovery activities of the portfolio;
and
|
|
|
·
|
other
factors to capture current portfolio trends and characteristics that
differ from historical experience.
|
Farmer
Mac separately evaluates the cooperative lender obligations and loans underlying
its Farmer Mac Guaranteed Securities – Rural Utilities to determine if there are
probable losses inherent in the securities or the underlying rural utilities
loans.
Farmer
Mac also analyzes impaired assets in its portfolio for impairment under SFAS
114. 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);
|
|
|
·
|
loans
for which Farmer Mac had adjusted the timing of borrowers’ payment
schedules, but still expects to collect all amounts due and has not made
economic concessions; and
|
|
|
·
|
additional
performing loans that have previously been delinquent or are secured by
real estate that produces agricultural commodities or products currently
under stress.
|
For loans
with an updated appraised value, other updated collateral valuation or
management’s estimate of discounted collateral value, this analysis includes the
measurement of the fair value of the underlying collateral for individual loans
relative to the total recorded investment, including principal, interest and
advances. In the event that the collateral value does not support the
total recorded investment, Farmer Mac specifically provides an allowance for the
loan for the difference between the recorded investment and its fair value, less
estimated costs to liquidate the collateral. For the remaining
impaired assets without updated valuations, this analysis is performed in the
aggregate in consideration of the similar risk characteristics of the assets and
historical statistics.
Management
believes that its use of this methodology produces a reliable estimate of
probable losses, as of the balance sheet date, for all loans held, real estate
owned and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs, in
accordance with SFAS 5 and SFAS 114.
No
allowance for losses has been provided for loans underlying AgVantage securities
or securities issued under the Farmer Mac II program (“Farmer Mac II Guaranteed
Securities”). Each AgVantage security is a general obligation of an
issuing institution approved by Farmer Mac and is collateralized by eligible
loans in an amount at least equal to the outstanding principal amount of the
security. As of December 31, 2008, there were no probable losses
inherent in Farmer Mac’s AgVantage securities due to the credit quality of the
obligors, as well as the underlying collateral. As of December 31,
2008, Farmer Mac had not experienced any credit losses on any AgVantage
securities. The guaranteed portions collateralizing Farmer Mac II
Guaranteed Securities are guaranteed by the United States Department of
Agriculture (“USDA”). Each USDA guarantee is an obligation backed by
the full faith and credit of the United States. As of December 31,
2008, Farmer Mac had not experienced any credit losses on any Farmer Mac II
Guaranteed Securities.
|
(k)
|
(Loss)/Earnings
Per Common Share
|
Basic
(loss)/earnings per common share are based on the weighted-average number of
shares of common stock outstanding. Diluted (loss)/earnings per
common share are based on the weighted-average number of shares of common stock
outstanding adjusted to include all potentially dilutive common stock options
and stock appreciation rights (“SARs”). The following schedule
reconciles basic and diluted (loss)/earnings per share of common stock (“EPS”)
for the years ended December 31, 2008, 2007 and 2006.
|
For
the Year Ended December 31,
|
||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||||||||
|
Net
Loss
|
Shares
|
$
per Share
|
Net
Income
|
Shares
|
$
per Share
|
Net
Income
|
Shares
|
$
per Share
|
||||||||||||||||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||||||||||||||||||
|
Basic
EPS
|
||||||||||||||||||||||||||||||||||||
|
Net
(loss)/income available to common stockholders
|
$ | (154,080 | ) | 10,007 | $ | (15.40 | ) | $ | 4,421 | 10,369 | $ | 0.43 | $ | 29,773 | 10,868 | $ | 2.74 | |||||||||||||||||||
|
Effect
of dilutive securities:
|
||||||||||||||||||||||||||||||||||||
|
Stock
options and SARs (1)
|
- | - | - | - | 222 | (0.01 | ) | - | 253 | (0.06 | ) | |||||||||||||||||||||||||
|
Diluted
EPS
|
$ | (154,080 | ) | 10,007 | $ | (15.40 | ) | $ | 4,421 | 10,591 | $ | 0.42 | $ | 29,773 | 11,121 | $ | 2.68 | |||||||||||||||||||
(1) For
the years ended December 31, 2008, 2007 and 2006, stock options and SARs of
2,377,544, 380,506 and 452,506 respectively, were outstanding but not included
in the computation of diluted (loss)/earnings per share of common stock because
they were anti-dilutive.
|
(l)
|
Income
Taxes
|
Deferred
federal income tax assets and liabilities are established for temporary
differences between financial and taxable income and are measured using the
current enacted statutory tax rate. Income tax expense is equal to
the income taxes payable in the current year plus the net change in the deferred
tax asset or liability balance.
Prior to
2007, income tax uncertainty was accounted for in accordance with the guidance
of SFAS 5. Effective January 1, 2007, Farmer Mac adopted
FIN No. 48,
Accounting for Uncertainty in Income Taxes, and related FASB Staff
Positions (“FIN 48”) to account for income tax
uncertainty. FIN 48 uses a two-step approach in which income tax
benefits are recognized if, based on the technical merits of a tax position, it
is more likely than not (a probability of greater than 50 percent) that the tax
position would be sustained upon examination by the taxing authority, which
includes all related appeals and litigation process. The amount of
tax benefit recognized is then measured at the largest amount of tax benefit
that is greater than 50 percent likely to be realized upon settlement with
the taxing authority, considering all information available at the reporting
date.
|
(m)
|
Stock-Based
Compensation
|
Effective
January 1, 2006, Farmer Mac adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payments (“SFAS
123(R)”) using the modified prospective method of transition, which requires (1)
the recognition of compensation expense for the non-vested portion of previously
issued awards that remain outstanding as of the initial date of adoption and (2)
the recognition of compensation expense for any awards issued or modified after
December 31, 2005. Accordingly, prior period amounts have not been
retrospectively adjusted for this change. The adoption resulted in
the recognition of $0.9 million, $1.4 million, and
$1.7 million of compensation expense during 2008, 2007 and 2006, respectively,
related to the non-vested portion of previously issued stock option awards that
were outstanding as of December 31, 2005. Additionally, Farmer
Mac recognized $1.9 million, $2.2 million and $0.7 million of
compensation expense related to stock options and SARs awarded subsequent to
December 31, 2005, for 2008, 2007 and 2006, respectively. As of
December 31, 2008, all stock options granted prior to 2006 were fully
vested.
|
(n)
|
Comprehensive
(Loss)/Income
|
Comprehensive
(loss)/income represents all changes in stockholders’ equity except those
resulting from investments by or distributions to stockholders, and is comprised
primarily of net income and unrealized gains and losses on securities
available-for-sale, net of related taxes. The following table sets
forth Farmer Mac’s comprehensive (loss)/income for the years ended December 31,
2008, 2007 and 2006:
|
For
the Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Net
(loss)/income
|
$ | (150,363 | ) | $ | 6,661 | $ | 32,013 | |||||
|
Available-for-sale
securities, net of tax:
|
||||||||||||
|
Net
unrealized holding losses
|
(70,067 | ) | (7,935 | ) | (10,087 | ) | ||||||
|
Reclassification
adjustment for realized losses/(gains)
|
36,410 | (187 | ) | (748 | ) | |||||||
|
Net
change from available-for-sale securities (1)
|
(33,657 | ) | (8,122 | ) | (10,835 | ) | ||||||
|
Financial
derivatives, net of tax:
|
||||||||||||
|
Reclassification
for amortization of SFAS 133 transition adjustment (2)
|
275 | 373 | 544 | |||||||||
|
Other
comprehensive loss, net of tax
|
(33,382 | ) | (7,749 | ) | (10,291 | ) | ||||||
|
Comprehensive
(loss)/income
|
$ | (183,745 | ) | $ | (1,088 | ) | $ | 21,722 | ||||
|
(1)
|
Unrealized
losses on available for sale securities is shown net of income tax benefit
of $18.1 million, $4.4 million and $5.8 million in 2008, 2007 and 2006,
respectively.
|
|
(2)
|
Amortization
of SFAS 133 transition adjustment is shown net of income tax expense of
$0.1 million, $0.2 million and $0.3 million in 2008, 2007 and 2006,
respectively.
|
The following table presents
Farmer Mac’s accumulated other comprehensive (loss)/income as of December 31,
2008, 2007 and 2006 and changes in the components of accumulated other
comprehensive (loss)/income for the years ended December 31, 2008, 2007 and
2006.
|
As of December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Available-for-sale
securities:
|
||||||||||||
|
Beginning
balance
|
$ | (2,320 | ) | $ | 5,802 | $ | 16,637 | |||||
|
Reclassification
adjustment to retained earnings for SFAS 159 adoption, net of
tax
|
(11,237 | ) | - | - | ||||||||
|
Adjusted
beginning balance
|
(13,557 | ) | 5,802 | 16,637 | ||||||||
|
Net
unrealized losses, net of tax
|
(33,657 | ) | (8,122 | ) | (10,835 | ) | ||||||
|
Ending
balance
|
$ | (47,214 | ) | $ | (2,320 | ) | $ | 5,802 | ||||
|
Financial
derivatives:
|
||||||||||||
|
Beginning
balance
|
$ | (473 | ) | $ | (846 | ) | $ | (1,390 | ) | |||
|
Amortization
of SFAS 133 transition adjustment on financial derivatives, net of
tax
|
275 | 373 | 544 | |||||||||
|
Ending
balance
|
$ | (198 | ) | $ | (473 | ) | $ | (846 | ) | |||
|
Accumulated
other comprehensive (loss)/income, net of tax
|
$ | (47,412 | ) | $ | (2,793 | ) | $ | 4,956 | ||||
|
(o)
|
Long-Term
Standby Purchase Commitments
|
Farmer
Mac accounts for its LTSPCs in accordance with provisions of FIN
45. Commitment fee income represents a reduction of the commitment
obligation based on amortization using the actual prepayment experience on the
underlying loans. See Note 2(j) for Farmer Mac’s policy for
estimating probable losses for LTSPCs.
|
(p)
|
Fair
Value
|
Effective
January 1, 2008, Farmer Mac adopted Statement of Financial Accounting
Standards No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157 defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date and establishes
a fair value hierarchy that ranks the quality and reliability of the inputs to
valuation techniques used to measure fair value. The hierarchy gives
highest rank to unadjusted quoted prices in active markets for identical assets
or liabilities (Level 1 measurements) and the lowest rank to unobservable inputs
(Level 3 measurements).
Farmer
Mac’s assessment of the significance of the input to the fair value measurement
requires judgment, and considers factors specific to the financial
instrument. Both observable and unobservable inputs may be used to
determine the fair value of positions that Farmer Mac has classified within the
Level 3 category. As a result, the unrealized gains and losses for
assets and liabilities within the Level 3 category may include changes in fair
value that were attributable to both observable (e.g., changes in market
interest rates) and unobservable (e.g., changes in long-dated volatilities)
inputs.
Effective
January 1, 2008, Farmer Mac adopted Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115 (“SFAS 159”). SFAS 159 provides companies an
irrevocable option to report financial instruments at fair value with changes in
fair value recorded in earnings as they occur. On January 1, 2008
Farmer Mac recorded a cumulative effect of adoption adjustment of
$12.1 million, net of tax, as an increase to the beginning balance of
retained earnings. The fair value option election was made for
certain available-for-sale investment securities and certain Farmer Mac II
Guaranteed Securities that were classified as held-to-maturity on January 1,
2008.
See Note
13 for more information regarding fair value measurement.
|
(q)
|
New
Accounting Standards
|
Farmer
Mac adopted SFAS 157 and SFAS 159 on January 1, 2008. Refer to Note
2(p) and Note 13 for further information on the adoption of these
accounting standards.
In
November 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at
Fair Value Through Earnings (“SAB 109”), which expressed the SEC’s views
regarding written loan commitments that are accounted for at fair value through
earnings. SAB 109 revises and rescinds portions of Staff Accounting
Bulletin No. 105, Application
of Accounting Principles to Loan Commitments. SAB 109 revises the
SEC’s views on incorporating expected net future cash flows related to loan
servicing activities in the fair value measurement of a written loan
commitment. SAB 109 retains the SEC’s views on incorporating net
future cash flows related to internally-developed intangible assets in the fair
value measurement of a written loan commitment. SAB 109 is effective on a
prospective basis to derivative loan commitments issued or modified in fiscal
quarters beginning after December 15, 2007. Farmer Mac adopted this
statement on January 1, 2008 and the impact of adoption was not material to its
financial condition, results of operations or cash flows.
In April
2007, the FASB issued FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation No.
39 (“FSP FIN 39-1”). This FSP amends FIN 39 to allow
an entity to offset cash collateral receivables and payables reported at fair
value against derivative instruments (as defined by SFAS 133) for
contracts executed with the same counterparty under master netting
arrangements. The decision to offset cash collateral under this FSP
must be applied consistently to all derivatives counterparties where the entity
has master netting arrangements. If an entity nets derivative
positions as permitted under FIN 39, this FSP requires the entity to also
offset the cash collateral receivables and payables with the same counterparty
under a master netting arrangement. FSP FIN 39-1 is effective
for fiscal years beginning after November 15, 2007. Farmer
Mac adopted this statement on January 1, 2008 and the impact of adoption was not
material to its financial condition, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. This statement applies to
all entities that prepare consolidated financial statements, except
not-for-profit organizations, but will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. This statement will be applied prospectively as of
the beginning of the fiscal year in which this statement is initially adopted,
or January 1, 2009 for Farmer Mac. Farmer Mac does not expect
the adoption of this statement to have a material impact to its financial
condition, results of operations or cash flows in future
periods.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133 (“SFAS 161”). This standard applies to derivative
instruments, non-derivative instruments that are designated and qualify as
hedging instruments and related hedged items accounted for under SFAS
133. SFAS 161 does not change the accounting for derivatives and
hedging activities, but requires enhanced disclosures concerning the effect on
the financial statements from their use. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. Since SFAS 161 only requires additional
disclosures, it will not have an impact on Farmer Mac’s financial condition,
results of operations or cash flows.
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This statement identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements that are presented in conformity
with GAAP. This statement will be effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning
of Present Fairly in Conformity With
Generally Accepted Accounting Principles. Farmer Mac does not
expect the adoption of this statement to have a material impact on its financial
condition, results of operations or cash flows in future periods.
In
September 2008, the FASB issued three separate but related Exposure Drafts for
public comment. The proposed FASB Statements, Accounting for Transfers of
Financial Assets and
Amendments to FASB Interpretation No. 46(R), address amendments to SFAS
140 and to FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest
Entities. The two proposed FASB statements would be effective
for fiscal years beginning after November 15, 2009. The proposed
statements, amending SFAS 140 and FIN 46(R), would remove the concept of a
qualifying special-purpose entity (“QSPE”) from SFAS 140 and remove the
exception from applying FIN 46(R) to QSPEs. While the proposed
standards have not been finalized, these changes may result in the consolidation
of assets and liabilities onto Farmer Mac’s consolidated balance sheet in
connection with trusts that currently qualify for the QSPE
exception.
In
October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, which clarifies the
application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not
active. The example emphasizes the principles of SFAS 157,
including the objective of fair value, the necessary considerations pertaining
to distressed transactions, the relevance of observable data, management’s
assumptions about nonperformance and liquidity risks, third-party pricing quotes
and disclosure requirements. The FSP became effective on October 10,
2008 and applies to prior periods for which financial statements have not yet
been issued. Entities must account for revisions to fair value
estimates resulting from the adoption of the FSP as a change in accounting
estimate under SFAS 154, Accounting Changes and Error
Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3,
but do not need to provide the disclosures required by that
Statement. Farmer Mac adopted the provisions of FSP 157-3 on
September 30, 2008 due to the lack of an active market for its investments in
GSE preferred stock issued by CoBank, ACB and AgFirst Farm Credit
Bank.
In
December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46R-8, Disclosures by Public Entities
(Enterprises) About Transfers of Financial Assets and Interests in Variable
Interest Entities (“FSP No. FAS 140-4 and FIN 46R-8”). FSP No.
FAS 140-4 and FIN 46R-8 amends the disclosure requirements of SFAS 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, and FIN 46R and is effective for the first reporting period
ending after December 15, 2008, or December 31, 2008 for Farmer
Mac. The adoption of FSP No. FAS 140-4 and FIN 46R-8 did not have a
material impact on Farmer Mac’s financial condition, results of operations or
cash flows.
In
January 2009, the FASB issued FSP EITF 99-20-1, Amendments to the Impairment
Guidance of EITF Issue No. 99-20 (“FSP 99-20-1”).
FSP 99-20-1 amends the impairment guidance in EITF Issue
No. 99-20, Recognition of
Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests That Continue to Be Held by a Transferor in Securitized Financial
Assets. The objective of FSP 99-20-1 was to achieve more
consistent determination of whether an other-than-temporary impairment has
occurred. An entity with beneficial interests within the scope of
FSP 99-20-1 is no longer required to solely consider market participant
assumptions when evaluating cash flows for an adverse change that would be
indicative of other-than-temporary impairment. FSP 99-20-1 also
retains and emphasizes the objective of an other-than-temporary impairment
assessment and the related disclosure requirements of SFAS 115 and other
related guidance. FSP 99-20-1 is effective for interim and annual
reporting periods ending after December 15, 2008. Retrospective
application to a prior interim or annual reporting period is not
permitted. Farmer Mac does not expect the adoption of this guidance
to have a material impact on its financial condition, results of operations
or cash flows in future periods.
|
(r)
|
Reclassifications
|
Certain
reclassifications of prior year information were made to conform to the 2008
presentation.
|
3.
|
RELATED
PARTY TRANSACTIONS
|
As
provided by Farmer Mac’s statutory charter, only banks, insurance companies and
other financial institutions or similar entities may hold Farmer Mac’s Class A
voting common stock and only institutions of the Farm Credit System may hold
Farmer Mac’s Class B voting common stock. Farmer Mac’s statutory
charter also provides that Class A stockholders elect five members of Farmer
Mac’s 15-member board of directors and that Class B stockholders elect five
members of the board of directors. Additionally, in order to
participate in the Farmer Mac I program, a financial institution must own a
requisite amount of Farmer Mac Class A or Class B voting common stock,
based on the size and type of institution. As a result of these
requirements, Farmer Mac conducts business with related parties in the normal
course of Farmer Mac’s business.
Although
Farmer Mac conducted business during 2006 with Farm Credit of Western New
York, ACA, information about those transactions is not included below
because that institution was not a related party during that year. Likewise,
Farmer Mac conducted business during 2007 and 2006 with Farm Credit West, ACA;
however, information about those transactions is not included below because that
institution was not a related party during those years. Farm Credit
West became a related party in 2008 as a result of a merger in April 2008
between that institution and Sacramento Valley Farm Credit, ACA, which was a
related party in 2006 and 2007. All transactions with Sacramento
Valley Farm Credit during 2008 that occurred prior to the merger are included in
the transactions reported for Farm Credit West in 2008.
During
2008, Farmer Mac purchased newly originated and current seasoned eligible loans
from 74 entities (the top ten institutions generated 76.9 percent of the
purchase volume), placed loans under LTSPCs with 23 entities and conducted
Farmer Mac II transactions with 187 entities operating throughout the
United States. During 2007, Farmer Mac purchased newly originated and
current seasoned eligible loans from 75 entities (the top ten institutions
generated 68.8 percent of the purchase volume), placed loans under LTSPCs
with 21 entities and conducted Farmer Mac II transactions with 151 entities
operating throughout the United States. All related party
transactions were conducted in the ordinary course of business, with terms and
conditions comparable to those available to any other third party.
Long-Term Standby Purchase
Commitments with Related Parties:
For all
of the LTSPC transactions discussed below, Farmer Mac has a related party
relationship with each entity resulting from a member of Farmer Mac’s board of
directors being affiliated with the entity in some capacity. Farmer Mac’s LTSPC
activity with related parties in 2008, 2007 and 2006 is presented
below:
|
For the Year Ended December
31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Number of Loans
|
Aggregate Principal Balance
|
Number of Loans
|
Aggregate Principal Balance
|
Number of Loans
|
Aggregate Principal Balance
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
New
extensions:
|
||||||||||||||||||||||||
|
AgFirst
Farm Credit Bank
|
297 | $ | 69,202 | 709 | $ | 124,605 | 53 | $ | 26,467 | |||||||||||||||
|
AgStar
Financial Services, ACA
|
180 | 74,555 | 1,837 | 369,347 | 1,437 | 232,317 | ||||||||||||||||||
|
Farm
Credit Bank of Texas
|
375 | 185,378 | 742 | 284,198 | 354 | 179,880 | ||||||||||||||||||
|
Farm
Credit of Western New York, ACA
|
- | - | 1 | 545 | - | - | ||||||||||||||||||
|
Farm
Credit West, ACA
|
5 | 13,262 | - | - | - | - | ||||||||||||||||||
|
Sacramento
Valley Farm Credit, ACA
|
- | - | 6 | 8,457 | 2 | 7,151 | ||||||||||||||||||
|
As of December 31,
|
||||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
Number of Loans
|
Aggregate Principal Balance
|
Number of Loans
|
Aggregate Principal Balance
|
|||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Aggregate
LTSPCs outstanding:
|
||||||||||||||||
|
AgFirst
Farm Credit Bank
|
2,700 | $ | 397,454 | 2,898 | $ | 421,333 | ||||||||||
|
AgStar
Financial Services, ACA *
|
405 | 191,359 | 258 | 152,056 | ||||||||||||
|
Farm
Credit Bank of Texas
|
1,545 | 533,495 | 1,408 | 466,734 | ||||||||||||
|
Farm
Credit of Western New York, ACA
|
118 | 40,234 | 128 | 44,836 | ||||||||||||
|
Farm
Credit West, ACA
|
81 | 101,828 | - | - | ||||||||||||
|
Sacramento
Valley Farm Credit, ACA **
|
- | - | 11 | 13,582 | ||||||||||||
|
*
|
During
2007 and 2006, AgStar Financial Services, ACA converted $400.2 million and
$341.2 million, respectively, of existing LTSPCs to Farmer Mac I
Guaranteed Securities. The outstanding principal balance of the
converted securities as of December 31, 2008 and 2007 was $533.5 million
and $639.1 million,
respectively.
|
|
**
|
During
2006, Sacramento Valley Farm Credit, ACA converted $129.0 million of
existing LTSPCs to Farmer Mac I Guaranteed Securities. As of
December 31, 2008 and 2007, the outstanding principal balance of the
converted securities was $99.6 million and $113.1 million,
respectively.
|
For the years ended December 31,
2008, 2007 and 2006, Farmer Mac earned the following commitment fees from
related parties:
|
For the Year Ended December
31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Commitment
fees earned by Farmer Mac:
|
||||||||||||
|
AgFirst
Farm Credit Bank
|
$ | 1,768 | $ | 1,586 | $ | 1,836 | ||||||
|
AgStar
Financial Services, ACA
|
1,402 | 865 | 964 | |||||||||
|
Farm
Credit Bank of Texas
|
1,780 | 1,349 | 698 | |||||||||
|
Farm
Credit of Western New York, ACA
|
219 | 244 | - | |||||||||
|
Farm
Credit West, ACA
|
301 | - | - | |||||||||
|
Sacramento
Valley Farm Credit, ACA
|
- | 27 | 631 | |||||||||
As of
December 31, 2008 and 2007, Farmer Mac had the following commitment fees
receivable from related parties:
|
As of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
AgFirst
Farm Credit Bank
|
$ | 247 | $ | 271 | ||||
|
AgStar
Financial Services, ACA
|
93 | 85 | ||||||
|
Farm
Credit Bank of Texas
|
167 | 149 | ||||||
|
Farm
Credit of Western New York, ACA
|
17 | 19 | ||||||
|
Farm
Credit West, ACA
|
25 | - | ||||||
|
Sacramento
Valley Farm Credit, ACA
|
- | 3 | ||||||
Zions First National
Bank:
The
following transactions occurred between Farmer Mac and Zions First National Bank
or its affiliates (“Zions”), which is the largest holder of Farmer Mac Class A
voting common stock and a major holder of Class C non-voting common stock,
during 2008, 2007 and 2006:
|
For the Year Ended December
31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Number of Loans
|
Aggregate Principal Balance
|
Number of Loans
|
Aggregate Principal Balance
|
Number of Loans
|
Aggregate Principal Balance
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Purchases:
|
||||||||||||||||||||||||
|
Loans
|
148 | $ | 71,673 | 80 | $ | 45,723 | 65 | $ | 26,195 | |||||||||||||||
|
USDA-guaranteed
portions
|
5 | 636 | 11 | 2,333 | 25 | 6,143 | ||||||||||||||||||
|
Sales
of Farmer Mac
|
||||||||||||||||||||||||
|
Guaranteed
Securities
|
96,143 | - | - | |||||||||||||||||||||
The
purchases of loans from Zions under the Farmer Mac I program represented
approximately 36.5 percent,
35.8 percent and 26.6 percent of Farmer Mac I loan purchase volume for the
years ended December 31, 2008, 2007 and 2006, respectively. Those
purchases represented 6.0 percent,
2.0 percent, and 0.9 percent of total program volume,
respectively. The purchases of USDA-guaranteed portions under the
Farmer Mac II program from Zions represented approximately 0.2 percent,
1.1 percent and 2.6 percent of that program’s volume for the years ended
December 31, 2008, 2007 and 2006, respectively.
Farmer
Mac or Zions received the applicable amounts shown below with respect to
transactions between the two parties in 2008, 2007 and 2006:
|
For the Year Ended December
31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Guarantee
fees received by Farmer Mac
|
$ | 1,821 | $ | 2,016 | $ | 2,260 | ||||||
|
Servicing
fees received by Zions
|
1,533 | 1,558 | 1,594 | |||||||||
|
Underwriting
and loan file review fees received by Zions
|
13 | 15 | 16 | |||||||||
|
Litigation
expenses reimbursed to Zions
|
- | - | 5 | |||||||||
|
Discount
note commissions received by Zions
|
39 | 17 | 19 | |||||||||
|
Commercial
paper interest earned by Farmer Mac
|
- | 245 | - | |||||||||
Zions
received commissions for acting as dealer with respect to approximately $823.2 million,
$730.0 million and $737.5 million par value of Farmer Mac discount notes during
2008, 2007 and 2006, respectively.
Farmer Mac and Zions were
parties to interest rate swap contracts having an aggregate outstanding notional
principal amount of approximately $131.9 million and $162.0 million
as of December 31, 2008 and 2007, respectively. As of
December 31, 2008 and 2007, Farmer Mac had net interest payable to Zions under
those contracts of approximately $1.8 million and $1.5 million,
respectively. As of December 31, 2007, Zions pledged
$3.3 million of securities as collateral under those
contracts.
In May
2005, Farmer Mac entered into a 3-year lease agreement with Zions for office
space in Ames, Iowa, under which the annual rental expense will be
$20,620. In 2008, 2007 and 2006, Farmer Mac paid Zions $8,591,
$22,338 and $18,901, respectively, under that lease agreement, which expired
according to its terms during 2008.
AgFirst Farm Credit
Bank:
Farmer
Mac has a related party relationship with AgFirst Farm Credit Bank (“AgFirst”),
resulting from a member of Farmer Mac’s board of directors also being a member
of AgFirst’s board of directors and AgFirst being a holder of approximately
17 percent of Farmer Mac Class B voting common stock. In
addition to the LTSPC transactions set forth above under “Long-Term Standby
Purchase Commitments with Related Parties” in this Note 3, the additional
transactions set forth below occurred between Farmer Mac and
AgFirst.
In 2008,
2007 and 2006, AgFirst received $26,000, $32,000 and $39,000, respectively, in
servicing fees for its work as a Farmer Mac central servicer.
AgFirst
owns Farmer Mac I Guaranteed Securities backed by rural housing loans for which
Farmer Mac is the second-loss guarantor for the last 10 percent. As
of December 31, 2008 and 2007, the outstanding balance of those securities owned
by AgFirst was $464.7 million
and $532.2 million, respectively. Farmer Mac received guarantee fees
of $0.3 million for each of 2008 and 2007, with respect to those
securities.
In 2008,
2007 and 2006, Farmer Mac paid AgFirst $2,000, $2,000 and $1,000, respectively,
for marketing expenses related to Farmer Mac programs.
In 2008,
2007 and 2006, Farmer Mac received guarantee fees of $59,000, $70,000 and
$87,000, respectively, on the Farmer Mac I Guaranteed Securities held by
AgFirst.
Farmer
Mac also owned $88.0 million of AgFirst preferred stock as of December 31, 2008,
2007 and 2006.
AgStar Financial Services,
ACA:
Farmer
Mac has a related party relationship with AgStar Financial Services, ACA
(“AgStar”), resulting from a member of Farmer Mac’s board of directors being the
President and Chief Executive Officer of AgStar. In addition to the
LTSPC transactions set forth above under “Long-Term Standby Purchase Commitments
with Related Parties” in this Note 3, the additional transactions set forth
below occurred between Farmer Mac and AgStar.
In November 2004, Farmer
Mac and AgStar entered into a strategic alliance agreement as part of
Farmer Mac’s efforts to capture a greater share of the market and to serve a
cross-section of agricultural lenders in many areas of the
nation. Under the terms of that agreement, Farmer Mac paid AgStar
$100,000 in 2005 for joint marketing expenses. In 2008, 2007 and
2006, Farmer Mac paid AgStar $4,000, $5,000 and $3,000, respectively, for
marketing expenses related to Farmer Mac programs.
In 2008,
2007 and 2006, AgStar received $1.9 million, $1.9 million and
$0.8 million, respectively in servicing fees for its work as a Farmer Mac
central servicer.
In 2008,
2007 and 2006, Farmer Mac purchased $0.3 million, $0.7 million
and $3.6
million principal amount of current loans, respectively, from AgStar under
the Farmer Mac I program. In
addition, during 2008 Farmer Mac purchased from AgStar $53.2 million of
defaulted loans related to five ethanol plants pursuant to the terms of an LTSPC
agreement.
During
2008, 2007 and 2006, Farmer Mac sold Farmer Mac I Guaranteed Securities to
AgStar in the amount of $2.7 million, $1.3 million and $4.0 million,
respectively. Those sales did not result in a gain or loss to Farmer
Mac.
During
2008, no existing LTSPCs were converted to Farmer Mac I Guaranteed Securities;
however, during 2007 and 2006, $400.2 million and $341.2 million, respectively,
of existing LTSPCs were converted to Farmer Mac I Guaranteed
Securities. The outstanding principal balance of the converted
securities as of December 31, 2008 and 2007 was $533.5 million and
$639.1 million, respectively. Farmer Mac received $2.4 million
and $2.3 million in guarantee fees on those securities during 2008 and 2007,
respectively.
Other Related Party
Transactions:
For all
of the transactions discussed below, Farmer Mac has a related party relationship
with each entity resulting from (1) a member of Farmer Mac’s board of directors
being affiliated with the entity in some capacity or (2) the entity being a
large holder of Farmer Mac voting common stock.
The
following is a summary of purchases of loans and USDA-guaranteed portions from
other related parties during 2008, 2007 and 2006:
|
For the Year Ended December
31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Number of Loans
|
Aggregate Principal Balance
|
Number of Loans
|
Aggregate Principal Balance
|
Number of Loans
|
Aggregate Principal Balance
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Purchases:
|
||||||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
First
Dakota National Bank
|
15 | $ | 4,849 | 14 | $ | 5,943 | 4 | $ | 918 | |||||||||||||||
|
USDA-guaranteed
portions:
|
||||||||||||||||||||||||
|
Bath
State Bank
|
26 | 7,232 | 22 | 5,405 | 28 | 5,535 | ||||||||||||||||||
|
First
Dakota National Bank
|
- | - | 8 | 2,364 | 24 | 4,613 | ||||||||||||||||||
Farmer
Mac received the following guarantee fees with respect to transactions with
other related parties:
|
For the Year Ended December
31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Bath
State Bank
|
$ | 73 | $ | 65 | $ | 71 | ||||||
|
First
Dakota National Bank
|
228 | 271 | 276 | |||||||||
During
2006, Sacramento Valley Farm Credit, ACA converted $129.0 million of existing
LTSPCs to Farmer Mac I Guaranteed Securities. The outstanding
principal balance of the converted securities as of December 31, 2008 and 2007
was $99.6 million and $113.1 million, respectively. Farmer Mac
received $0.2 million, $0.6 million and $53,000 in guarantee fees on those
securities during 2008, 2007 and 2006, respectively. In 2008, 2007
and 2006, Sacramento Valley Farm Credit, ACA received $0.1 million,
$0.4 million and $32,000, respectively, in servicing fees for its work as a
Farmer Mac central servicer.
During
2003, Farm Credit West, ACA converted a $722.3 million LTSPC into Farmer Mac I
Guaranteed Securities. As of December 31, 2008, the aggregate
outstanding balance of those Farmer Mac Guaranteed Securities was $657.0
million. Farmer Mac understands that the current owner of those
Farmer Mac Guaranteed Securities is U.S. AgBank, FCB, which is a major holder of
Farmer Mac Class B voting common stock. In 2008, Farmer Mac received
$3.3 million in guarantee fees on those securities. In 2008, Farm Credit West,
ACA received $2.4 million in servicing fees for its work as a Farmer Mac
central servicer. During 2008, Sacramento Valley Farm Credit, ACA
merged with Farm Credit West, ACA.
As of
December 31, 2008, 2007 and 2006, Farmer Mac owned $88.5 million of preferred
stock and, as of December 31, 2008 and 2007, $70 million of subordinated debt
issued by CoBank, ACB (“CoBank”). CoBank is a major holder of Farmer
Mac Class B voting common stock.
On
September 30, 2008, Farmer Mac sold 60,000 shares of Series B-1 Preferred Stock
(as defined in Note 9) to AgFirst; AgriBank, FCB; CoBank; Farm Credit Bank of
Texas; and U.S. AgBank, FCB (collectively, the “Series B-1
Investors”). Each of the Series B-1 Investors is a member of the Farm
Credit System and, as of December 31, 2008, together owned in the aggregate
approximately 97.42% of the shares of Farmer Mac’s Class B Voting Common
Stock. Also on September 30, 2008, Farmer Mac sold 5,000 shares of
Series B-2 Preferred Stock (as defined in Note 9) to Zions Bancorporation, an
affiliate of Zions.
|
4.
|
INVESTMENT
SECURITIES
|
The
following tables present the amortized cost and estimated fair values of Farmer
Mac’s investments as of December 31, 2008 and 2007.
|
As
of December 31, 2008
|
||||||||||||||||
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans (1)
|
$ | 193,950 | $ | - | $ | (15,373 | ) | $ | 178,577 | |||||||
|
Floating
rate asset-backed securities
|
85,005 | 1 | (3,750 | ) | 81,256 | |||||||||||
|
Floating
rate corporate debt securities
|
458,428 | - | (39,363 | ) | 419,065 | |||||||||||
|
Floating
rate Governemnt/GSE guaranteed mortgage-backed securities
|
338,907 | 270 | (3,512 | ) | 335,665 | |||||||||||
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
7,375 | 188 | - | 7,563 | ||||||||||||
|
Floating
rate GSE subordinated debt
|
70,000 | - | (20,811 | ) | 49,189 | |||||||||||
|
Floating
rate GSE preferred stock
|
781 | - | - | 781 | ||||||||||||
|
Total
available-for-sale
|
1,154,446 | 459 | (82,809 | ) | 1,072,096 | |||||||||||
|
Trading:
|
||||||||||||||||
|
Floating
rate asset-backed securities
|
7,494 | - | (5,283 | ) | 2,211 | |||||||||||
|
Fixed
rate GSE preferred stock
|
180,579 | - | (19,027 | ) | 161,552 | |||||||||||
|
Total
trading
|
188,073 | - | (24,310 | ) | 163,763 | |||||||||||
|
Total
investment securities
|
$ | 1,342,519 | $ | 459 | $ | (107,119 | ) | $ | 1,235,859 | |||||||
|
(1)
|
AAA-rated
callable auction-rate certificates collateralized by pools of Federal
Family Education Loan Program ("FFELP") guaranteed student loans that are
backed by the full faith and credit of the United States, the interest
rates of which are reset through an auction process, most commonly at
intervals of 28 days. See Note 15 to the consolidated financial
statements for more information on these auction-rate
certificates.
|
|
As
of December 31, 2007
|
||||||||||||||||
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||
|
Fixed
rate certificates of deposit
|
$ | 181,864 | $ | - | $ | - | $ | 181,864 | ||||||||
|
Fixed
rate commercial paper
|
66,339 | - | - | 66,339 | ||||||||||||
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans (1)
|
131,544 | - | - | 131,544 | ||||||||||||
|
Floating
rate asset-backed securities
|
30,000 | 13 | - | 30,013 | ||||||||||||
|
Floating
rate corporate debt securities
|
561,193 | 1 | (19,345 | ) | 541,849 | |||||||||||
|
Fixed
rate corporate debt securities (2)
|
501,490 | 138 | (3 | ) | 501,625 | |||||||||||
|
Fixed
rate mortgage-backed securities (3)
|
401,309 | 14,504 | - | 415,813 | ||||||||||||
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
(4)
|
437,680 | 5,016 | (192 | ) | 442,504 | |||||||||||
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
8,330 | 1 | (47 | ) | 8,284 | |||||||||||
|
Floating
rate GSE subordinated debt
|
70,000 | - | (4,397 | ) | 65,603 | |||||||||||
|
Floating
rate GSE preferred stock
|
52,500 | - | (6,406 | ) | 46,094 | |||||||||||
|
Fixed
rate GSE preferred stock
|
181,873 | 4,206 | (1,424 | ) | 184,655 | |||||||||||
|
Total
available-for-sale
|
2,624,122 | 23,879 | (31,814 | ) | 2,616,187 | |||||||||||
|
Trading:
|
||||||||||||||||
|
Floating
rate asset-backed securities
|
8,432 | - | (253 | ) | 8,179 | |||||||||||
|
Total
trading
|
8,432 | - | (253 | ) | 8,179 | |||||||||||
|
Total
investment securities
|
$ | 2,632,554 | $ | 23,879 | $ | (32,067 | ) | $ | 2,624,366 | |||||||
|
(1)
|
AAA-rated
callable auction-rate certificates collateralized by pools of Federal
Family Education Loan Program ("FFELP") guaranteed student loans that are
backed by the full faith and credit of the United States, the interest
rates of which are reset through an auction process, most commonly at
intervals of 28 days. See Note 15 for more information on these
auction-rate certificates.
|
|
(2)
|
Corporate
debt securities include $500 million of mission-related
investments.
|
|
(3)
|
Fixed
rate mortgage-backed securities is comprised of mission-related
investments. These investments became Farmer Mac Guaranteed Securities on
June 20, 2008.
|
|
(4)
|
Includes
$7.2 million fair value of floating rate GSE mortgage-backed securities
that Farmer Mac has pledged as collateral and for which the counterparty
has the right to sell or repledge. See Note 6 for further
information.
|
During
2008, Farmer Mac recorded other-than-temporary impairment losses of
$51.7 million related to its investment in Fannie Mae floating rate
preferred stock. The carrying value of this investment was written
down to its fair value of $0.8 million as of December 31, 2008 and the
impairment loss was recognized as “Impairment losses on available-for-sale
investment securities” in the consolidated statements of
operations.
During
2008, Farmer Mac recorded other-than-temporary impairment losses of
$54.5 million related to its investment in Lehman Brothers Holdings Inc.
senior debt securities. The amortized cost of this investment was
written down to its fair value of $5.4 million as of December 31, 2008 and the
impairment loss was recognized as “Impairment losses on available-for-sale
investment securities” in the consolidated statements of
operations. There were no other-than-temporary impairment losses
recognized during 2007 and 2006.
During
2008, Farmer Mac realized gross gains of $0.6 million and gross losses of $0.3
million from the sale of securities from its available-for-sale investment
portfolio. During 2007 and 2006, Farmer Mac realized gross gains from
the sale of securities from its available-for-sale investment portfolio of $0.3
million and $1.2 million, respectively.
As of
December 31, 2008, Farmer Mac’s trading securities had a fair value of $163.8
million, which reflects an unrealized loss of $24.3 million. As of
December 31, 2007, Farmer Mac’s trading securities had a fair value of $8.2
million, which reflects an unrealized loss of $0.3 million. As
of December 31, 2008 and 2007, unrealized losses on available-for-sale
securities were as follows:
|
As of December 31, 2008
|
||||||||||||||||
|
Available-for-Sale
Securities
|
||||||||||||||||
|
Unrealized loss position for less than
12 months
|
Unrealized loss position for more than
12 months
|
|||||||||||||||
|
Fair Value
|
Unrealized Loss
|
Fair Value
|
Unrealized Loss
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Floating
rate corporate debt securities
|
$ | 19,858 | $ | (142 | ) | $ | 393,808 | $ | (39,221 | ) | ||||||
|
Floating
rate asset-backed securities
|
80,605 | (3,750 | ) | - | - | |||||||||||
|
Floating
rate Government guaranteed auction-rate certificates
|
58,727 | (15,373 | ) | - | - | |||||||||||
|
Floating
rate Government/GSE guaranteed mortgage-backed
securities
|
263,516 | (3,138 | ) | 10,751 | (374 | ) | ||||||||||
|
Floating
rate GSE subordinated debt
|
- | - | 49,189 | (20,811 | ) | |||||||||||
|
Total
|
$ | 422,706 | $ | (22,403 | ) | $ | 453,748 | $ | (60,406 | ) | ||||||
|
As of December 31, 2007
|
||||||||||||||||
|
Available-for-Sale
Securities
|
||||||||||||||||
|
Unrealized loss position for less than 12
months
|
Unrealized loss position for more than 12
months
|
|||||||||||||||
|
Fair Value
|
Unrealized Loss
|
Fair Value
|
Unrealized Loss
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Floating
rate corporate debt securities
|
$ | 493,458 | $ | (16,732 | ) | $ | 47,369 | $ | (2,613 | ) | ||||||
|
Fixed
rate corporate debt securities
|
1,488 | (3 | ) | - | - | |||||||||||
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
35,610 | (185 | ) | 499 | (7 | ) | ||||||||||
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
- | - | 7,748 | (47 | ) | |||||||||||
|
Floating
rate GSE subordinated debt
|
65,603 | (4,397 | ) | - | - | |||||||||||
|
Floating
rate GSE preferred stock
|
- | - | 46,094 | (6,406 | ) | |||||||||||
|
Fixed
rate GSE preferred stock
|
89,385 | (1,424 | ) | - | - | |||||||||||
|
Total
|
$ | 685,544 | $ | (22,741 | ) | $ | 101,710 | $ | (9,073 | ) | ||||||
The
temporary unrealized losses presented above are principally due to a general
widening of credit spreads from the dates of acquisition to December 31,
2008 and 2007, as applicable. The resulting decreases in fair values
reflect an increase in the perceived risk by the financial markets related to
those securities, even though there has not been significant deterioration in
the credit ratings of the securities. As of December 31, 2008 and
December 31, 2007, all of the investment securities in an unrealized loss
position were rated at least “A” by Standard & Poor’s, except two that were
rated “BBB+” and “BBB-” as of December 31, 2008. The unrealized
losses were on 116 and 65 individual investment securities as of
December 31, 2008 and 2007, respectively.
As of
December 31, 2008, 34 of the securities in loss positions had been in
loss positions for more than 12 months and had a total unrealized loss of
$60.4 million. As of December 31, 2007, 11 of the
securities in loss positions had been in loss positions for more than 12 months
and had a total unrealized loss of $9.1 million. The unrealized
losses on those securities are principally due to a general widening of credit
spreads from the dates of acquisition. Securities with unrealized
losses aged 12 months or more have a fair value as of December 31, 2008 that is
at least 70 percent of their amortized cost basis and, on average, approximately
88 percent of their amortized cost basis. Farmer Mac believes that all aged
unrealized losses are recoverable within a reasonable period of time by way of
changes in credit spreads or maturity. Accordingly, Farmer Mac has
concluded that none of the unrealized losses on its available-for-sale
investment securities represent other-than-temporary impairment as of December
31, 2008. Farmer Mac has the intent and ability to hold its
investment securities in loss positions until either the market value recovers
or the securities mature.
Farmer
Mac did not own any held-to-maturity investments as of December 31, 2008 and
2007. As of December 31, 2008, Farmer Mac owned trading investment
securities with an amortized cost of $188.1 million, a fair value of $163.8
million and a weighted average yield of 7.99 percent. As of
December 31, 2007, Farmer Mac owned trading investment securities with an
amortized cost of $8.4 million, a fair value of $8.2 million, and a
weighted average yield of 8.74 percent. The amortized cost, fair
value and yield of investments by remaining contractual maturity for
available-for-sale investment securities as of December 31, 2008 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.
|
As of December 31, 2008
|
||||||||||||
|
Available-for-Sale
Securities
|
||||||||||||
|
Amortized Cost
|
Fair Value
|
Yield
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Due
within one year
|
$ | 164,114 | $ | 159,341 | 1.32 | % | ||||||
|
Due
after one year through five years
|
334,044 | 297,906 | 3.14 | % | ||||||||
|
Due
after five years through ten years
|
119,814 | 118,102 | 3.42 | % | ||||||||
|
Due
after ten years
|
536,474 | 496,747 | 3.45 | % | ||||||||
|
Total
|
$ | 1,154,446 | $ | 1,072,096 | 3.05 | % | ||||||
5. FARMER
MAC GUARANTEED SECURITIES
As of
December 31, 2008 and 2007, Farmer Mac on-balance sheet Guaranteed Securities
included the following:
|
December
31, 2008
|
||||||||||||||||
|
Held-to-
|
Available-
|
|||||||||||||||
|
Maturity
|
for-Sale
|
Trading
|
Total
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Farmer
Mac I
|
$ | - | $ | 349,292 | $ | - | $ | 349,292 | ||||||||
|
Farmer
Mac II
|
- | 522,565 | 496,863 | 1,019,428 | ||||||||||||
|
Farmer
Mac Guaranteed Securities - Rural Utilities
|
- | 639,837 | 442,687 | 1,082,524 | ||||||||||||
|
Total
|
$ | - | $ | 1,511,694 | $ | 939,550 | $ | 2,451,244 | ||||||||
|
December
31, 2007
|
||||||||||||||||
|
Held-to-
|
Available-
|
|||||||||||||||
|
Maturity
|
for-Sale
|
Trading
|
Total
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Farmer
Mac I
|
$ | 33,961 | $ | 338,958 | $ | - | $ | 372,919 | ||||||||
|
Farmer
Mac II
|
925,904 | - | - | 925,904 | ||||||||||||
|
Farmer
Mac Guaranteed Securities - Rural Utilities
|
- | - | - | - | ||||||||||||
|
Total
|
$ | 959,865 | $ | 338,958 | $ | - | $ | 1,298,823 | ||||||||
The
following table sets forth the amortized cost, unrealized gains and losses and
estimated fair values of on-balance sheet Farmer Mac Guaranteed Securities as of
December 31, 2008 and 2007.
|
December
31, 2008
|
||||||||||||||||
|
Held-to-
|
Available-
|
|||||||||||||||
|
Maturity
|
for-Sale
|
Trading
|
Total
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Amortized
cost
|
$ | - | $ | 1,501,980 | $ | 907,506 | $ | 2,409,486 | ||||||||
|
Unrealized
gains
|
- | 23,727 | 32,044 | 55,771 | ||||||||||||
|
Unrealized
losses
|
- | (14,013 | ) | - | (14,013 | ) | ||||||||||
|
Fair
value
|
$ | - | $ | 1,511,694 | $ | 939,550 | $ | 2,451,244 | ||||||||
|
December
31, 2007
|
||||||||||||||||
|
Held-to-
|
Available-
|
|||||||||||||||
|
Maturity
|
for-Sale
|
Trading
|
Total
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Amortized
cost
|
$ | 959,865 | $ | 334,592 | $ | - | $ | 1,294,457 | ||||||||
|
Unrealized
gains
|
628 | 5,412 | - | 6,040 | ||||||||||||
|
Unrealized
losses
|
(1,562 | ) | (1,046 | ) | - | (2,608 | ) | |||||||||
|
Fair
value
|
$ | 958,931 | $ | 338,958 | $ | - | $ | 1,297,889 | ||||||||
Effective
September 30, 2008, Farmer Mac transferred $518.6 million of its Farmer Mac
Guaranteed Securities classified as held-to-maturity to
available-for-sale. This transfer resulted in the recognition of
unrealized gains of $2.3 million and unrealized losses of $1.4
million. This change in classification and the resulting recognition
of unrealized gains and losses do not affect Farmer Mac’s regulatory core
capital or Farmer Mac’s intent to hold such securities in loss positions until
the earlier of recovery or maturity. Farmer Mac transferred these
assets since the Corporation is evaluating strategies to further strengthen its
capital position, including for example, additional asset sales as well as
offerings of common and preferred equity. Farmer Mac does not
currently classify any Farmer Mac Guaranteed Securities or investment securities
as held-to-maturity.
The
temporary unrealized losses presented above are principally due to changes in
interest rates from the date of acquisition to December 31, 2008 and December
31, 2007, as applicable. The available-for-sale unrealized losses
were on 9 individual securities as of both dates.
As of
December 31, 2008, one of the available-for-sale Farmer Mac Guaranteed
Securities in a loss position had been in a loss position for more than 12
months and had a total unrealized loss of less than one thousand
dollars. As of December 31, 2007, four of the available-for-sale
Farmer Mac Guaranteed Securities in loss positions had been in loss positions
for more than 12 months and had a total unrealized loss of $1.0
million. The unrealized losses on those securities are due to overall
increases in market interest rates. As of December 31, 2008, the
available-for-sale security with an unrealized loss aged greater than
12 months has a loss that is less than one percent of the amortized
security cost. All aged unrealized losses are recoverable within a
reasonable period of time by way of changes in market interest rates or
maturity. Accordingly, Farmer Mac has concluded that none of the
unrealized losses on its available-for-sale Farmer Mac Guaranteed Securities
represent other-than-temporary impairment as of December 31,
2008. Farmer Mac has the intent and ability to hold its on-balance
sheet Farmer Mac Guaranteed Securities until either the market value recovers or
the securities mature.
During
2008, Farmer Mac realized gross gains from the sale of securities from its
available-for-sale Farmer Mac Guaranteed Securities portfolio of $1.5
million. There were no sales of Farmer Mac Guaranteed Securities
during 2007 and 2006.
As of
December 31, 2008, of the total on-balance sheet Farmer Mac Guaranteed
Securities, $1.7 billion are fixed rate or have floating rates that reset
after one year.
The table
below presents a sensitivity analysis of the Corporation’s on-balance sheet
Farmer Mac Guaranteed Securities as of December 31, 2008 and 2007.
|
As
of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(dollars
in thousands)
|
||||||||
|
Fair
value of beneficial interests retained in Farmer Mac Guaranteed
Securities
|
$ | 2,451,244 | $ | 1,297,889 | ||||
|
Weighted-average
remaining life (in years)
|
3.7 | 4.5 | ||||||
|
Weighted-average
prepayment speed (annual rate)
|
6.9 | % | 11.1 | % | ||||
|
Effect
on fair value of a 10% adverse change
|
$ | (620 | ) | $ | (103 | ) | ||
|
Effect
on fair value of a 20% adverse change
|
$ | (1,314 | ) | $ | (186 | ) | ||
|
Weighted-average
discount rate
|
4.6 | % | 5.7 | % | ||||
|
Effect
on fair value of a 10% adverse change
|
$ | (28,463 | ) | $ | (20,254 | ) | ||
|
Effect
on fair value of a 20% adverse change
|
$ | (58,385 | ) | $ | (41,387 | ) | ||
These
sensitivities are hypothetical. Changes in fair value based on
10 percent or 20 percent variations in assumptions generally cannot be
extrapolated because the relationship of the change in assumptions to the change
in fair value may not be linear. Also, the effect of a variation in a
particular assumption on the fair value of the retained interest is calculated
without changing any other assumption. In fact, changes in one factor
may result in changes in another (for example, increases in market interest
rates may result in lower prepayments), which might amplify or counteract the
sensitivities.
Farmer
Mac securitizes three types of assets: agricultural real estate mortgage loans,
USDA-guaranteed portions and rural utilities loans. Farmer Mac
manages the credit risk of its securitized loans, both on- and off-balance
sheet, together with its on-balance sheet loans and the loans underlying its
off-balance sheet LTSPCs. See Note 8 for more information regarding
this credit risk.
On-balance
sheet asset classes pose both interest rate risk and funding risk to Farmer Mac,
while off-balance sheet asset classes pose no such
risks. Accordingly, Farmer Mac manages its on-balance sheet loans and
USDA-guaranteed portions differently from its off-balance sheet securitized
loans and USDA-guaranteed portions and off-balance sheet loans underlying
LTSPCs.
As part
of fulfilling its guarantee obligations for Farmer Mac Guaranteed
Securities and commitments to purchase eligible loans underlying LTSPCs, Farmer
Mac purchases defaulted loans, all of which are at least 90 days delinquent
at the time of purchase, out of the loan pools underlying those securities and
LTSPCs, and records the purchased loans as such on its balance
sheet.
The table
below presents the outstanding principal balances as of the periods indicated
for Farmer Mac’s on- and off-balance sheet program assets.
|
Outstanding
Balance of Farmer Mac Loans and Loans Underlying
|
||||||||
|
Farmer
Mac Guaranteed Securities and LTSPCs
|
||||||||
|
As
of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
On-balance
sheet assets:
|
||||||||
|
Farmer
Mac I:
|
||||||||
|
Loans
|
$ | 781,305 | $ | 762,319 | ||||
|
Guaranteed
Securities
|
282,185 | 336,778 | ||||||
|
AgVantage
|
53,300 | 30,800 | ||||||
|
Farmer
Mac II:
|
||||||||
|
Guaranteed
Securities
|
1,013,330 | 921,802 | ||||||
|
Farmer
Mac Guaranteed
|
||||||||
|
Securities
- Rural Utilities
|
1,054,941 | - | ||||||
|
Total
on-balance sheet
|
$ | 3,185,061 | $ | 2,051,699 | ||||
|
Off-balance
sheet assets:
|
||||||||
|
Farmer
Mac I:
|
||||||||
|
Guaranteed
Securities
|
$ | 1,697,983 | $ | 2,018,300 | ||||
|
AgVantage
|
2,945,000 | 2,500,000 | ||||||
|
LTSPCs
|
2,224,181 | 1,948,941 | ||||||
|
Farmer
Mac II:
|
||||||||
|
Guaranteed
Securities
|
30,095 | 24,815 | ||||||
|
Total
off-balance sheet
|
$ | 6,897,259 | $ | 6,492,056 | ||||
|
Total
|
$ | 10,082,320 | $ | 8,543,755 | ||||
When
particular criteria are met, such as the default of the borrower, Farmer Mac
becomes entitled to purchase the defaulted loans underlying Farmer Mac
Guaranteed Securities (commonly referred to as “removal-of-account”
provisions). Farmer Mac records these loans at their fair values in
the consolidated financial statements during the period in which Farmer Mac
becomes entitled to purchase the loans and therefore regains effective control
over the transferred loans. Fair values are determined by current
collateral valuations or management’s estimate of discounted collateral values,
and represent the cash flows expected to be collected. Farmer Mac
records, at acquisition, the difference between each loan’s acquisition cost and
its fair value, if any, as a charge-off to the reserve for
losses. Subsequent to the purchase, such defaulted loans are treated
as nonaccrual loans and, therefore, interest is accounted for on the cash
basis. Any decreases in expected cash flows are recognized as
impairment. The following tables present information related to
Farmer Mac’s acquisition of defaulted loans for the years ended
December 31, 2008, 2007 and 2006 and the outstanding balances and carrying
amounts of all such loans as of December 31, 2008 and 2007,
respectively.
|
For
the Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Fair
value at acquistion date
|
$ | 58,279 | $ | 3,911 | $ | 9,623 | ||||||
|
Contractually
required payments receivable
|
63,673 | 4,065 | 9,729 | |||||||||
|
Impairment
recognized subsequent to acquisition
|
5,200 | - | - | |||||||||
|
As
of December 31,
|
||||||||||
|
2008
|
2007
|
|||||||||
|
(in
thousands)
|
||||||||||
|
Outstanding
balance
|
$ | 91,942 | $ | 38,621 | ||||||
|
Carrying
amount
|
69,308 | 34,541 | ||||||||
Net
credit losses and 90-day delinquencies as of and for the periods indicated for
Farmer Mac Guaranteed Securities, loans and LTSPCs are presented in the table
below. Information is not presented for loans underlying AgVantage
securities or Farmer Mac II Guaranteed Securities. Each AgVantage
security is a general obligation of an issuing institution approved by Farmer
Mac and is secured by eligible loans in an amount at least equal to the
outstanding principal amount of the security. As of December 31,
2008, there were no probable losses inherent in Farmer Mac’s AgVantage
securities due to the credit quality of the obligors, as well as the underlying
collateral. As of December 31, 2008, Farmer Mac had not experienced
any credit losses on any AgVantage securities. The guaranteed
portions collateralizing Farmer Mac II Guaranteed Securities are guaranteed by
the USDA. Each USDA guarantee is an obligation backed by the full
faith and credit of the United States. As of December 31, 2008,
Farmer Mac has not experienced any credit losses on any Farmer Mac II Guaranteed
Securities.
|
90-Day
|
||||||||||||||||||||
|
Delinquencies
(1)
|
Net
Credit Losses (2)
|
|||||||||||||||||||
|
As
of December 31,
|
For
the Year Ended December 31,
|
|||||||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
2006
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
On-balance
sheet assets:
|
||||||||||||||||||||
|
Farmer
Mac I:
|
||||||||||||||||||||
|
Loans
|
$ | 65,060 | $ | 10,024 | $ | 5,292 | $ | 39 | $ | 535 | ||||||||||
|
Guaranteed
Securities
|
- | - | - | - | - | |||||||||||||||
|
Total
on-balance sheet
|
$ | 65,060 | $ | 10,024 | $ | 5,292 | $ | 39 | $ | 535 | ||||||||||
|
Off-balance
sheet assets:
|
||||||||||||||||||||
|
Farmer
Mac I:
|
||||||||||||||||||||
|
LTSPCs
|
$ | 2,060 | $ | 560 | $ | - | $ | - | $ | - | ||||||||||
|
Guaranteed
Securities
|
- | - | - | - | - | |||||||||||||||
|
Total
off-balance sheet
|
$ | 2,060 | $ | 560 | $ | - | $ | - | $ | - | ||||||||||
|
Total
|
$ | 67,120 | $ | 10,584 | $ | 5,292 | $ | 39 | $ | 535 | ||||||||||
|
(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.
|
Because
Farmer Mac may, in its sole discretion, purchase loans in Farmer Mac Guaranteed
Securities that are 90 days delinquent, Farmer Mac records all such loans at
their fair values during the period in which Farmer Mac becomes entitled to
purchase the loans and therefore has effective control over the transferred
loans. As a result, of the $65.1 million and $10.0 million of loans
reported as 90 days delinquent as of December 31, 2008 and December 31, 2007,
respectively, $5.2 million and $3.4 million are loans subject to these
“removal-of-account” provisions.
|
6.
|
FINANCIAL
DERIVATIVES
|
Farmer
Mac enters into financial derivative transactions principally to protect against
risk from the effects of market price or interest rate movements on the value of
certain assets, future cash flows or debt issuance, not for trading or
speculative purposes. Principally, Farmer Mac enters into interest
rate swap contracts to adjust the characteristics of its short-term debt to
match more closely the cash flow and duration characteristics of its longer-term
mortgage and other assets, and also to adjust the characteristics of its
long-term debt to match more closely the cash flow and duration characteristics
of its short-term assets, thereby reducing interest rate risk and also to derive
an overall lower effective cost of borrowing than would otherwise be available
to Farmer Mac in the conventional debt market. During third quarter
2008, Farmer Mac, for the first time, purchased pay-fixed swaptions, which
provide the option of entering into pay-fixed interest rate swaps, as part of
its overall strategy in managing interest rate risk. Those swaptions
were either terminated or expired unexercised during the third and fourth
quarter of 2008. Farmer Mac is required to recognize certain
contracts and commitments as derivatives when the characteristics of those
contracts and commitments meet the definition of a derivative as promulgated by
SFAS 133.
Farmer
Mac manages the interest rate risk related to loans it has committed to acquire,
but has not yet purchased and permanently funded, through the use of forward
sale contracts on mortgage-backed securities and the debt of other GSEs, futures
contracts involving U.S. Treasury securities and interest rate
swaps. Farmer Mac uses forward sale contracts on GSE securities to
reduce its interest rate exposure to changes in both Treasury rates and spreads
on Farmer Mac debt and Farmer Mac Guaranteed Securities. The notional
amounts of these contracts are determined based on a duration-matched hedge
ratio between the hedged item and the hedge instrument. Gains or
losses generated by these hedge transactions should offset any changes in
funding costs or Farmer Mac Guaranteed Securities sale prices that occur during
the hedge period.
Market Risk:
Market
risk is the risk of an adverse effect resulting from changes in interest rates
or spreads on the value of a financial instrument. Farmer Mac manages
market risk associated with financial derivatives by establishing and monitoring
limits as to the degree of risk that may be undertaken. This risk is
periodically measured as part of Farmer Mac’s overall risk monitoring processes,
which include market value of equity measurements, net interest income modeling
and other measures.
Credit Risk:
Credit
risk is the risk that a counterparty will fail to perform according to the terms
of a financial contract in which Farmer Mac has an unrealized
gain. Credit losses could occur in the event of non-performance by
counterparties to the financial derivative contracts. Farmer Mac
mitigates this counterparty credit risk by contracting only with counterparties
that have investment grade credit ratings (i.e., at least BBB), establishing and
maintaining collateral requirements based upon credit ratings and entering into
netting agreements. Netting agreements provide for the calculation of
the net amount of all receivables and payables under all transactions covered by
the netting agreement between Farmer Mac and a single
counterparty. Farmer Mac’s exposure to credit risk related to its
financial derivatives is represented by those counterparties for which Farmer
Mac has a net receivable, including the effect of any netting
arrangements. As of December 31, 2008 and 2007, Farmer Mac’s credit
exposure to interest rate swap counterparties, excluding netting arrangements,
was $32.7 million and $12.7 million, respectively; however, including
netting arrangements, Farmer Mac’s credit exposure was $8.0 million and
$3.3 million as of December 31, 2008 and 2007, respectively. As
of December 31, 2008, there were no financial derivatives in a net payable
position where Farmer Mac was required to pledge collateral which the
counterparty had the right to sell or repledge. Conversely, financial
derivatives in a net payable position required Farmer Mac to pledge
approximately $7.2 million fair value of floating rate GSE mortgage-backed
securities as collateral as of December 31, 2007, which the counterparty had the
right to sell or repledge.
Interest Rate
Risk:
Farmer
Mac uses financial derivatives to manage its interest rate risk exposure by
modifying the interest rate reset or maturity characteristics of certain assets
and liabilities and by locking in the rates for certain forecasted issuances of
liabilities. The primary financial derivatives Farmer Mac uses
include interest rate swaps and forward sale contracts. Farmer Mac
uses interest-rate swaps to assume fixed rate interest payments in exchange for
floating rate interest payments and vice versa. Depending on the
hedging relationship, the effects of these agreements are (a) the conversion of
variable rate liabilities to longer-term fixed rate liabilities, (b) the
conversion of long-term fixed rate assets to shorter-term floating rate assets,
or (c) the reduction of the variability of future changes in interest rates on
forecasted issuances of liabilities. The net payments on these
agreements are recorded as (losses)/gains on financial derivatives in the
consolidated statements of operations.
Farmer
Mac accounts for its financial derivatives as undesignated financial
derivatives. As of December 31, 2008 and 2007, the net fair value of
financial derivatives totaled $(154.1) million and $(53.0) million,
respectively. The maximum term over which Farmer Mac is currently
managing its exposure for forecasted transactions is 15
years. (Losses)/gains on financial derivatives totaled $(130.4)
million, $(39.9) million and $1.6 million for the years ended December 31, 2008,
2007 and 2006, respectively.
The
following table summarizes information related to Farmer Mac’s financial
derivatives as of December 31, 2008:
|
Notional
|
Fair Value
|
Weighted-
|
Weighted-
Average Receive
|
Weighted-
Average Forward
|
Weighted-
Average Remaining Life
|
|||||||||||||||||||||||
|
Amount
|
Asset
|
(Liability)
|
Average Pay Rate
|
Rate
|
Price
|
(in Years)
|
||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||
|
Interest
rate swaps:
|
||||||||||||||||||||||||||||
|
Pay
fixed callable
|
$ | 208,958 | $ | - | $ | (6,646 | ) | 5.51 | % | 3.23 | % | 7.66 | ||||||||||||||||
|
Pay
fixed non-callable
|
1,311,218 | - | (169,040 | ) | 5.21 | % | 3.05 | % | 5.33 | |||||||||||||||||||
|
Receive
fixed callable
|
606,500 | 1,727 | (65 | ) | 2.91 | % | 3.20 | % | 1.28 | |||||||||||||||||||
|
Receive
fixed non-callable
|
1,347,069 | 25,269 | (94 | ) | 2.23 | % | 2.28 | % | 1.43 | |||||||||||||||||||
|
Basis
swaps
|
206,863 | 45 | (3,734 | ) | 3.84 | % | 3.28 | % | 4.31 | |||||||||||||||||||
|
Agency
forwards
|
74,998 | - | (1,604 | ) | 105.85 | |||||||||||||||||||||||
|
Treasury
futures
|
2,500 | 28 | - | 126.88 | ||||||||||||||||||||||||
|
Total
financial derivatives
|
$ | 3,758,106 | $ | 27,069 | $ | (181,183 | ) | 3.68 | % | 2.82 | % | |||||||||||||||||
As of
December 31, 2008 and 2007, Farmer Mac had approximately $0.2 million and
$0.5 million, respectively, of net after-tax unrealized losses on financial
derivatives included in accumulated other comprehensive (loss)/income related to
the SFAS 133 transition adjustment. These amounts will be
reclassified into earnings in the same period or periods during which the hedged
forecasted transactions (either the payment of interest or the issuance of
discount notes) affect earnings or immediately when it becomes probable that the
original hedged forecasted transaction will not occur within two months of the
originally specified date. Over the next 12 months, Farmer Mac
estimates that $0.2 million of the amount currently reported in accumulated
other comprehensive (loss)/income will be reclassified into
earnings.
As of
December 31, 2008, Farmer Mac had outstanding basis swaps with Zions First
National Bank, a related party, with a total notional amount of $131.9 million
and a fair value of $(3.7) million. As of December 31, 2007,
those basis swaps had a notional amount of $162.0 million and a fair value
of $(1.1) million. Under the terms of those basis swaps Farmer Mac
pays Constant Maturity Treasury-based rates and receives LIBOR. Those
swaps hedge most of the interest rate basis risk related to loans Farmer Mac
purchases that pay a Constant Maturity Treasury based-rate and the discount
notes Farmer Mac issues to fund the loan purchases. The pricing of
discount notes is closely correlated to LIBOR rates. Accordingly,
Farmer Mac recorded unrealized losses on those outstanding basis swaps of $2.6
million, $3.9 million and $0.9 million for 2008, 2007 and 2006,
respectively. See Note 3 for additional information on these related
party transactions.
|
7.
|
NOTES
PAYABLE
|
Farmer
Mac’s borrowings consist of discount notes and medium-term notes, both of which
are unsecured general obligations of the Corporation. Discount notes
generally have original maturities of one year or less, whereas medium-term
notes generally have maturities of one to 15 years.
The
following table sets forth information related to Farmer Mac’s borrowings as of
December 31, 2008 and 2007:
|
2008
|
||||||||||||||||
|
Outstanding
as of December 31,
|
Average
Outstanding During the Year
|
|||||||||||||||
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Due
within one year:
|
||||||||||||||||
|
Discount
notes
|
$ | 2,123,672 | 1.48 | % | $ | 3,113,791 | 2.49 | % | ||||||||
|
Medium-term
notes
|
963,498 | 2.14 | % | 617,260 | 3.33 | % | ||||||||||
|
Current
portion of long-term notes
|
669,929 | 3.66 | % | |||||||||||||
| $ | 3,757,099 | 2.04 | % | |||||||||||||
|
Due
after one year:
|
||||||||||||||||
|
Medium-term
notes due in:
|
||||||||||||||||
|
2010
|
$ | 185,569 | 3.34 | % | ||||||||||||
|
2011
|
87,166 | 4.87 | % | |||||||||||||
|
2012
|
135,965 | 4.45 | % | |||||||||||||
|
2013
|
301,396 | 3.99 | % | |||||||||||||
|
Thereafter
|
177,903 | 6.62 | % | |||||||||||||
| 887,999 | 4.54 | % | ||||||||||||||
|
Total
|
$ | 4,645,098 | 2.52 | % | ||||||||||||
|
2007
|
||||||||||||||||
|
Outstanding
as of December 31,
|
Average
Outstanding During the Year
|
|||||||||||||||
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Due
within one year:
|
||||||||||||||||
|
Discount
notes
|
$ | 2,212,030 | 4.28 | % | $ | 2,533,660 | 5.00 | % | ||||||||
|
Medium-term
notes
|
896,000 | 5.04 | % | 959,387 | 5.21 | % | ||||||||||
|
Current
portion of long-term notes
|
721,668 | 3.76 | % | |||||||||||||
| $ | 3,829,698 | 4.36 | % | |||||||||||||
|
Due
after one year:
|
||||||||||||||||
|
Medium-term
notes due in:
|
||||||||||||||||
|
2010
|
$ | 284,905 | 5.29 | % | ||||||||||||
|
2011
|
124,000 | 4.91 | % | |||||||||||||
|
2012
|
67,207 | 5.42 | % | |||||||||||||
|
2013
|
77,000 | 5.42 | % | |||||||||||||
|
Thereafter
|
191,537 | 6.65 | % | |||||||||||||
| 744,649 | 5.60 | % | ||||||||||||||
|
Total
|
$ | 4,574,347 | 4.56 | % | ||||||||||||
The
maximum amount of Farmer Mac’s discount notes outstanding at any month end
during each of the years ended December 31, 2008 and 2007 was $3.5 billion
and $2.9 billion, respectively.
Callable
medium-term notes give Farmer Mac the option to redeem the debt at par value on
a specified call date or at any time on or after a specified call
date. The following table summarizes by maturity date, the amounts
and costs for Farmer Mac debt callable in 2009 as of December 31,
2008.
|
Debt
Callable in 2009 as of
|
||||||||
|
December 31, 2008
|
||||||||
|
Maturity
|
Amount
|
Rate
|
||||||
|
(dollars
in thousands)
|
||||||||
|
2009
|
$ | 595,000 | 2.72 | % | ||||
|
2010
|
55,000 | 3.34 | % | |||||
|
2011
|
20,000 | 4.13 | % | |||||
|
2012
|
100,000 | 4.45 | % | |||||
|
2013
|
222,000 | 4.15 | % | |||||
|
Thereafter
|
11,500 | 7.05 | % | |||||
| $ | 1,003,500 | 3.32 | % | |||||
The
following schedule summarizes the earliest interest rate reset date of total
borrowings outstanding as of December 31, 2008, including callable and
non-callable medium-term notes, assuming callable notes are redeemed at the
initial call date.
|
Earliest
Interest Rate Reset Date of Borrowings Outstanding
|
||||||||
|
Amount
|
Weighted-Average
Rate
|
|||||||
|
(dollars
in thousands)
|
||||||||
|
Debt
with interest rate resets in:
|
||||||||
|
2009
|
$ | 4,165,194 | 2.25 | % | ||||
|
2010
|
142,540 | 3.53 | % | |||||
|
2011
|
67,166 | 5.10 | % | |||||
|
2012
|
35,965 | 4.46 | % | |||||
|
2013
|
79,801 | 3.55 | % | |||||
|
Thereafter
|
154,432 | 6.67 | % | |||||
|
Total
|
$ | 4,645,098 | 2.52 | % | ||||
During
2008 and 2007, Farmer Mac called $886.0 million and $677.4 million of
callable medium-term notes, respectively.
Authority
to Borrow from the U.S. Treasury
Farmer
Mac’s statutory charter authorizes it to borrow up to $1.5 billion from the
U.S. Treasury, if necessary, to fulfill its obligations under any
guarantee. The debt would bear interest at a rate determined by the
U.S. Treasury based on the then current cost of funds to the United
States. The charter requires the debt to be repaid within a
reasonable time. As of December 31, 2008, Farmer Mac had not utilized
this borrowing authority and does not expect to utilize this borrowing authority
in the near future.
Gains
and Losses on the Repurchase of Outstanding Debt
During
2008, Farmer Mac recognized $0.9 million of net gains on the repurchase of
$120.0 million of outstanding Farmer Mac debt. All of the
repurchases were from outstanding Farmer Mac fixed rate debt that had been
previously swapped to become floating rate debt. Upon the repurchase
of those debt securities, the interest rate swaps were cancelled and the debt
was replaced with new funding to match the duration of related floating rate
assets. Farmer Mac did not repurchase any of its outstanding debt in
2007 or 2006.
|
8.
|
ALLOWANCE
FOR LOSSES AND CONCENTRATIONS OF CREDIT RISK
|
Allowance
for Losses
Farmer
Mac maintains an allowance for losses to cover estimated probable losses on
loans held, real estate owned and loans underlying LTSPCs, Farmer Mac I
Guaranteed Securities and Farmer Mac Guaranteed Securities – Rural Utilities in
accordance with SFAS 5 and SFAS 114. As of December 31, 2008, Farmer
Mac recorded specific allowances for losses under SFAS 114 of $8.6
million. Farmer Mac had not recorded any specific allowances for
losses as of December 31, 2007. No allowance for losses has been
provided for AgVantage securities or for Farmer Mac II Guaranteed
Securities as of December 31, 2008 or 2007. See Note 2(c), Note
2(e), Note 2(j), Note 5 and Note 12 for more information about Farmer Mac
Guaranteed Securities. Farmer Mac’s allowance for losses is presented
in three components on its consolidated balance sheet:
|
|
·
|
an
“Allowance for loan losses” on loans
held;
|
|
|
·
|
a
valuation allowance on real estate owned, which is included in the balance
sheet under “Real estate owned”;
and
|
|
|
·
|
an
allowance for losses on loans underlying Farmer Mac I Guaranteed
Securities, LTSPCs and Farmer Mac Guaranteed Securities – Rural Utilities,
which is included in the balance sheet under “Reserve for
losses.”
|
The
allowance for losses is increased through periodic provisions for loan losses
that are charged against net interest income and provisions for losses that are
charged to non-interest expense and is reduced by charge-offs for actual losses,
net of recoveries. Negative provisions for loan losses or negative
provisions for losses are recorded in the event that the estimate of probable
losses as of the end of a period is lower than the estimate at the beginning of
the period.
The
following is a summary of the changes in the allowance for losses for each year
in the five-year period ended December 31, 2008:
|
Allowance for Loan Losses
|
REO Valuation Allowance
|
Reserve for Losses
|
Total Allowance for Losses
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Balance
as of January 1, 2004
|
$ | 5,967 | $ | 238 | $ | 15,848 | $ | 22,053 | ||||||||
|
Provision/(recovery)
for losses
|
1,589 | 1,137 | (3,138 | ) | (412 | ) | ||||||||||
|
Charge-offs
|
(3,326 | ) | (1,375 | ) | (4 | ) | (4,705 | ) | ||||||||
|
Recoveries
|
165 | - | - | 165 | ||||||||||||
|
Balance
as of December 31, 2004
|
$ | 4,395 | $ | - | $ | 12,706 | $ | 17,101 | ||||||||
|
Provision/(recovery)
for losses
|
(3,335 | ) | 206 | (859 | ) | (3,988 | ) | |||||||||
|
Charge-offs
|
(105 | ) | (206 | ) | - | (311 | ) | |||||||||
|
Recoveries
|
640 | - | - | 640 | ||||||||||||
|
Change
in accounting estimate
|
3,281 | - | (8,070 | ) | (4,789 | ) | ||||||||||
|
Balance
as of December 31, 2005
|
$ | 4,876 | $ | - | $ | 3,777 | $ | 8,653 | ||||||||
|
Provision/(recovery)
for losses
|
(2,396 | ) | 155 | (1,167 | ) | (3,408 | ) | |||||||||
|
Charge-offs
|
(900 | ) | (155 | ) | - | (1,055 | ) | |||||||||
|
Recoveries
|
365 | - | - | 365 | ||||||||||||
|
Balance
as of December 31, 2006
|
$ | 1,945 | $ | - | $ | 2,610 | $ | 4,555 | ||||||||
|
Provision/(recovery)
for losses
|
(215 | ) | 100 | (27 | ) | (142 | ) | |||||||||
|
Charge-offs
|
(60 | ) | (100 | ) | (386 | ) | (546 | ) | ||||||||
|
Recoveries
|
20 | - | - | 20 | ||||||||||||
|
Balance
as of December 31, 2007
|
$ | 1,690 | $ | - | $ | 2,197 | $ | 3,887 | ||||||||
|
Provision/(recovery)
for losses
|
14,531 | - | 3,309 | 17,840 | ||||||||||||
|
Charge-offs
|
(5,308 | ) | - | - | (5,308 | ) | ||||||||||
|
Recoveries
|
16 | - | - | 16 | ||||||||||||
|
Balance
as of December 31, 2008
|
$ | 10,929 | $ | - | $ | 5,506 | $ | 16,435 | ||||||||
All loans
that Farmer Mac purchases, issues guarantees with respect to, or commits to
purchase under an LTSPC in the Farmer Mac I or Rural Utilities programs are
underwritten in conformance with Farmer Mac’s credit underwriting and collateral
valuation standards.
The
following table presents Farmer Mac’s reserve for losses for Farmer Mac I
Guaranteed Securities and LTSPCs as of December 31, 2008 and 2007.
|
Reserve
for Losses on LTSPCs and
|
||||||||
|
Farmer
Mac Guaranteed Securities
|
||||||||
|
As
of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
On-balance
sheet Farmer Mac I Guaranteed Securities
|
$ | 869 | $ | 857 | ||||
|
Off-balance
sheet Farmer Mac I Guaranteed Securities
|
535 | 655 | ||||||
|
LTSPCs
|
4,102 | 685 | ||||||
|
Farmer
Mac Guaranteed Securities - Rural Utilities
|
- | - | ||||||
|
Total
reserve for losses
|
$ | 5,506 | $ | 2,197 | ||||
When
certain criteria are met, such as the default of the borrower, Farmer Mac may,
in its sole discretion, repurchase the defaulted loans underlying Farmer Mac
Guaranteed Securities and is obligated to purchase those underlying an
LTSPC. These acquisitions are recorded in the consolidated financial
statements at their fair value. Fair value is determined by appraisal
or other appropriate valuation method.
Farmer
Mac recognized interest income of approximately $3.5 million, $3.8 million and
$4.0 million on impaired loans during the years ended December 31,
2008, 2007 and 2006, respectively. During 2008, 2007 and 2006, Farmer
Mac’s average investment in impaired loans was $63.6 million, $45.2 million
and $63.6 million, respectively.
|
As
of December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||
|
Balance
|
Specific
Allowance
|
Net
Balance
|
Balance
|
Specific
Allowance
|
Net
Balance
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Impaired
loans:
|
||||||||||||||||||||||||
|
Specific
allowance for losses
|
$ | 41,239 | $ | (8,600 | ) | $ | 32,639 | $ | - | $ | - | $ | - | |||||||||||
|
No
specific allowance for losses
|
78,348 | - | 78,348 | 36,585 | - | 36,585 | ||||||||||||||||||
|
Total
|
$ | 119,587 | $ | (8,600 | ) | $ | 110,987 | $ | 36,585 | $ | - | $ | 36,585 | |||||||||||
In
accordance with the terms of all applicable trust agreements, Farmer Mac
generally acquires all loans that collateralize Farmer Mac Guarantee Securities
that become and remain either 90 or 120 days (depending on the provisions
of the applicable agreement) or more past due on the next subsequent loan
payment date. In accordance with the terms of all LTSPCs, Farmer Mac
acquires loans that are 120 days delinquent upon the request of the
counterparty. During 2008, Farmer Mac purchased 19 defaulted loans
having a principal balance of $58.3 million from pools underlying Farmer Mac
Guaranteed Securities and LTSPCs. During 2007, Farmer Mac purchased
12 defaulted loans having a principal balance of $3.9 million from pools
underlying Farmer Mac Guaranteed Securities and LTSPCs.
The
following table presents Farmer Mac’s purchases of defaulted loans underlying
Farmer Mac I Guaranteed Securities and LTSPCs.
|
For
the Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Defaulted
loans purchased underlying off-balance sheet Farmer Mac I Guaranteed
Securities
|
$ | 647 | $ | 1,562 | $ | 707 | ||||||
|
Defaulted
loans underlying on-balance sheet Farmer Mac I Guaranteed Securities
transferred to loans
|
1,072 | 1,316 | 1,467 | |||||||||
|
Defaulted
loans purchased underlying LTSPCs
|
56,560 | 1,033 | 7,449 | |||||||||
|
Total
|
$ | 58,279 | $ | 3,911 | $ | 9,623 | ||||||
Concentrations
of Credit Risk
The
following table sets forth the geographic and commodity/collateral
diversification, as well as the range of original loan-to-value ratios, for all
loans held and loans underlying Farmer Mac I Guaranteed Securities (excluding
AgVantage securities) and LTSPCs as of December 31, 2008 and 2007:
|
As
of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
By
geographic region (1):
|
||||||||
|
Northwest
|
$ | 793,433 | $ | 824,054 | ||||
|
Southwest
|
1,928,669 | 1,975,118 | ||||||
|
Mid-North
|
1,065,590 | 1,112,281 | ||||||
|
Mid-South
|
609,378 | 561,930 | ||||||
|
Northeast
|
377,079 | 398,335 | ||||||
|
Southeast
|
209,814 | 191,446 | ||||||
|
Total
|
$ | 4,983,963 | $ | 5,063,164 | ||||
|
By
commodity/collateral type:
|
||||||||
|
Crops
|
$ | 2,011,475 | $ | 2,084,819 | ||||
|
Permanent
plantings
|
959,636 | 993,893 | ||||||
|
Livestock
|
1,336,004 | 1,328,874 | ||||||
|
Part-time
farm/rural housing
|
347,629 | 368,585 | ||||||
|
Ag
storage and processing (including ethanol facilities)
|
294,273 | 245,753 | ||||||
|
Other
|
34,946 | 41,240 | ||||||
|
Total
|
$ | 4,983,963 | $ | 5,063,164 | ||||
|
By
original loan-to-value ratio:
|
||||||||
|
0.00%
to 40.00%
|
$ | 1,244,700 | $ | 1,295,670 | ||||
|
40.01%
to 50.00%
|
885,173 | 971,088 | ||||||
|
50.01%
to 60.00%
|
1,387,808 | 1,397,736 | ||||||
|
60.01%
to 70.00%
|
1,260,322 | 1,205,018 | ||||||
|
70.01%
to 80.00%
|
189,542 | 179,072 | ||||||
|
80.01%
to 90.00%
|
16,418 | 14,580 | ||||||
|
Total
|
$ | 4,983,963 | $ | 5,063,164 | ||||
|
(1)
|
Geographic
regions: Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY);
Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO,
WI); Mid-South (KS, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH,
NJ, NY, OH, PA, RI, TN, VA, VT, WV); Southeast (AL, AR, FL, GA, LA, MS,
SC).
|
The
original loan-to-value ratio is calculated by dividing the loan principal
balance at the time of guarantee, purchase or commitment by the appraised value
at the date of loan origination or, when available, the updated appraised value
at the time of guarantee, purchase or commitment. Current
loan-to-value ratios may be higher or lower than the original loan-to-value
ratios.
|
9.
|
STOCKHOLDERS’
EQUITY AND MEZZANINE EQUITY
|
Common
Stock
Farmer Mac
has three classes of common stock outstanding:
|
|
·
|
Class
A voting common stock, which may be held only by banks, insurance
companies and other financial institutions or similar entities that are
not institutions of the 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
Class A voting common stock;
|
|
|
·
|
Class
B voting common stock, which may be held only by institutions of the Farm
Credit System. There are no restrictions on the maximum
holdings of Class B voting common stock;
and
|
|
|
·
|
Class
C non-voting common stock, which has no ownership
restrictions.
|
From
fourth quarter 2004 through fourth quarter 2008, Farmer Mac paid a quarterly
dividend of $0.10 per share on all classes of the Corporation’s common
stock. On March 11, 2009, Farmer Mac’s board of directors declared a
quarterly dividend of $0.05 per share on the Corporation’s common stock payable
on April 3, 2009. Farmer Mac’s ability to declare and pay a dividend
could be restricted if it failed to comply with regulatory capital
requirements.
During
2008, 2007 and 2006, Farmer Mac repurchased 31,691 shares, 1,086,541 shares and
796,450 shares, respectively, of its Class C non-voting common stock at
average prices of $26.13, $26.61 and $26.82 per share,
respectively. These repurchases reduced the Corporation’s
stockholders’ equity by approximately $0.8 million, $29.0 million and
$22.0 million, respectively. The aggregate number of shares
purchased by Farmer Mac under its stock repurchase program reached the maximum
number of authorized shares during first quarter 2008, thereby terminating the
program according to its terms.
All of
the repurchased shares under Farmer Mac’s stock repurchase programs were
purchased in open market transactions and were retired to become authorized but
unissued shares available for future issuance.
Preferred
Stock
Farmer
Mac has had three series of preferred stock outstanding. The first,
Series A, was permanent equity, was a component of Stockholders’ Equity on the
consolidated balance sheets, and was repurchased and retired on December 15,
2008, such that none was outstanding on December 31, 2008. The
second, newly issued on September 30, 2008 and on December 15, 2008, Series B,
is temporary equity and is reported as Mezzanine Equity on the consolidated
balance sheets. This preferred stock is temporary equity because it
contains redemption features that, although remote, are not solely within the
control of Farmer Mac. The third, newly issued during fourth quarter
2008, Series C, is a component of Stockholders’ Equity on the consolidated
balance sheets. Farmer Mac’s ability to declare and pay dividends on
its outstanding preferred stock could be restricted if it failed to comply with
regulatory capital requirements. All series of Farmer Mac’s preferred
stock are included as components of core capital for regulatory and statutory
capital compliance measurements.
Series A Preferred
Stock
On
December 15, 2008, Farmer Mac repurchased and retired all of its outstanding
700,000 shares of 6.40 percent Cumulative Preferred Stock, Series A (the “Series
A Preferred Stock”) for $35.0 million.
Series B Preferred
Stock
On
September 30, 2008, Farmer Mac issued 60,000 shares of its newly issued Series
B-1 Senior Cumulative Perpetual Preferred Stock (“Initial Series B-1 Preferred
Stock”) and 5,000 shares of its newly issued Series B-2 Senior Cumulative
Perpetual Preferred Stock (“Series B-2 Preferred Stock”), each having a par
value of $1.00 per share and an initial liquidation preference of $1,000 per
share (collectively, the Initial Series B-1 Preferred Stock and Series B-2
Preferred Stock, the “Initial Series B Preferred Stock”) for an aggregate
purchase price of $65.0 million, or $1,000 per share. Farmer Mac
incurred $4.0 million of direct costs related to the issuance of the Initial
Series B Preferred Stock, which reduced the amount of mezzanine equity recorded
as of September 30, 2008.
On
December 15, 2008, Farmer Mac issued 70,000 shares of its newly issued Series
B-3 Senior Cumulative Perpetual Preferred Stock (“Series B-3 Preferred Stock”)
having a par value and initial liquidation preference of $1,000 per share for a
purchase price of $70 million and an additional 15,000 shares of Series B-1
Preferred Stock (the “Supplemental Series B-1 Preferred Stock”) for a purchase
price of $15.0 million. Farmer Mac incurred $1.8 million of direct
costs related to the issuance of the Series B-3 Preferred Stock and Supplemental
Series B 1 Preferred Stock, which reduced the amount of mezzanine equity
recorded as of December 31, 2008. The Initial Series B Preferred
Stock, the Supplemental Series B-1 Preferred Stock and the Series B-3 Preferred
Stock are together referred to as the “Series B Preferred Stock.”
The
Series B Preferred Stock ranks senior to Farmer Mac’s outstanding Class A voting
common stock, Class B voting common stock, Class C non-voting common stock,
Series C Preferred Stock and any other class of capital stock issuable in the
future with respect to dividends, distributions upon a change in control,
liquidation, and dissolution or winding up of Farmer Mac. Each series
of Series B Preferred Stock ranks pari passu with the others.
Dividends
on the Series B Preferred Stock compound quarterly at an annual rate of 10.0
percent of the then-applicable Liquidation Preference (as defined below) per
share. On approximately each of the first three anniversary dates
after the related issuance date, the annual rate on the Series B Preferred Stock
will increase to 12.0 percent, 14.0 percent, and 16.0 percent,
respectively. Dividends on the Series B Preferred Stock accrue and
cumulate from the date last paid, whether or not declared by Farmer Mac’s board
of directors, and are payable quarterly in arrears out of legally available
funds when and as declared by the board of directors on each dividend payment
date. Farmer Mac may pay dividends on the Series B Preferred Stock
without paying dividends on any outstanding class or series of stock that ranks
junior to the Series B Preferred Stock.
Farmer
Mac has the right, but not the obligation, to redeem all, but not less than all,
of the issued and outstanding shares of Series B Preferred Stock at a price
equal to the then-applicable Liquidation Preference amount beginning nine months
from issuance and on each subsequent dividend payment date. In
addition, Farmer Mac must redeem all, but not less than all, of the outstanding
shares of Series B Preferred Stock at a price equal to the then-applicable
Liquidation Preference amount under specified circumstances, including (1) in
the event that any indebtedness of Farmer Mac or its subsidiaries (“Farmer Mac
Debt”) becomes or is declared due and payable prior to the stated maturity
thereof or is not paid when it becomes due and payable, (2) an event of default
occurs with respect to any Farmer Mac Debt, or (3) Farmer Mac becomes bankrupt
or insolvent or a receiver or conservator is appointed for Farmer
Mac. The redemption price for any shares of Series B Preferred Stock
redeemed by Farmer Mac will be payable in cash equal to the par value of the
Series B Preferred Stock ($1,000 per share), plus all accrued but unpaid
dividends (the “Liquidation Preference”) or, at the election of Farmer Mac,
payable in Farmer Mac program assets or other assets acceptable to the holders
of the Series B Preferred Stock. Because of these mandatory
redemption features, the Series B Preferred Stock is classified as mezzanine
equity on Farmer Mac’s consolidated balance sheet. Although the
Series B Preferred Stock is classified as mezzanine equity, outside of the
equity section of the consolidated balance sheet, it is a component of Farmer
Mac’s core capital for statutory and regulatory capital compliance
purposes.
Upon a
change in control of Farmer Mac, holders of the Series B Preferred Stock will be
entitled to receive an amount in cash equal to the Liquidation
Preference. Except as required by applicable law, the holders of the
Series B Preferred Stock are not entitled to any voting rights.
Series C Preferred
Stock
To ensure
that Farmer Mac has adequate capital to support new business in fulfilling its
mission, in fourth quarter 2008 Farmer Mac initiated the requirement that
sellers who place pools of loans in excess of $20.0 million into a Farmer
Mac program purchase an equity interest in Farmer Mac in the form of shares of
Farmer Mac’s Series C Non-Voting Cumulative Preferred Stock (“Series C
Preferred Stock”). The amount of the required investment is currently
an amount equal to 1.25 percent greater than the Corporation’s required
statutory minimum capital for the pool of loans being accepted by Farmer
Mac.
Series C
Preferred Stock has a par value of $1,000 per share, an initial liquidation
preference of $1,000 per share and shall consist of up to 75,000 shares. Series
C Preferred Stock ranks senior to Farmer Mac’s outstanding Class A voting common
stock, Class B voting common stock, Class C non-voting common stock and any
other common stock of Farmer Mac issued in the future. Series C
Preferred Stock ranks junior to Farmer Mac’s outstanding Series B Preferred
Stock.
Dividends
on Series C Preferred Stock compound quarterly at an annual rate of
5.0 percent of the then-applicable Liquidation Preference per
share. The annual rate will increase to (1) 7.0 percent on
the January 1st
following the fifth anniversary of the applicable issue date and (2)
9.0 percent on the January 1st
following the tenth anniversary of the applicable issue
date. Dividends on Series C Preferred Stock will accrue and
cumulate from the applicable issue date whether or not declared by the board of
directors and will be payable quarterly in arrears out of legally available
funds when and as declared by the board of directors on each dividend payment
date—March 31, June 30, September 30 and December 31 of each year,
beginning March 31, 2009. Farmer Mac may pay dividends on
Series C Preferred Stock without paying dividends on any outstanding class
or series of stock that ranks junior to Series C Preferred Stock.
Farmer
Mac has the right, but not the obligation, to redeem some or all of the issued
and outstanding shares of Series C Preferred Stock at a price equal to the
then-applicable Liquidation Preference beginning on the first anniversary of the
applicable issue date and on each subsequent dividend payment
date. Farmer Mac’s redemption right with respect to Series C
Preferred Stock is subject to receipt of the prior written approval of FCA, if
required, and the consent of at least two-thirds of the then-outstanding shares
of Series B-1, if any.
On
December 24, 2008, Farmer Mac sold 9,200 shares of its newly issued Series C
Preferred Stock to National Rural. Farmer Mac sold those shares
without registration under the Securities Act of 1933, in reliance upon the
exemption provided by Section 3(a)(2), for an aggregate purchase price of $9.2
million, or $1,000 per share. Subsequent to year-end, Farmer Mac sold
an additional 10,800 shares of Series C Preferred Stock to National Rural,
resulting in 20,000 shares of Series C Preferred Stock outstanding as of March
2, 2009.
Equity-based
Incentive Compensation Plans
In 1997,
Farmer Mac adopted a stock option plan for directors, officers and other
employees to acquire shares of Class C non-voting common
stock. Upon stock option exercise, new shares are issued by the
Corporation. Under the plan, stock options awarded vest annually in
thirds, with the first third vesting one year after the date of
grant. If not exercised, any options granted under the 1997 plan
expire 10 years from the date of grant, except that options issued to directors
since June 1, 1998, if not exercised, expire five years from the date of
grant. For all stock options granted, the exercise price is equal to
the closing price of the Class C non-voting common stock on or immediately
preceding the date of grant. As of June 30, 2008, the plan had
terminated pursuant to its terms and no further grants will be made under
it.
At the
June 5, 2008 Annual Meeting of Stockholders, Farmer Mac’s stockholders approved
the 2008 Omnibus Incentive Compensation Plan that authorizes the grants of
restricted stock, stock options and SARs, among other alternative forms of
equity-based compensation, to directors, officers and other
employees. SARs awarded to officers and employees vest annually in
thirds and SARs awarded to directors vest fully after approximately one
year. If not exercised or terminated earlier due to the termination
of employment or service on the Board, SARs granted to officers or employees
expire after 10 years and those granted to directors expire after 7
years. For all SARs granted, the exercise price is equal to the
closing price of the Class C non-voting common stock on the date of
grant. SARs granted during 2008 have exercise prices ranging from
$7.35 to $28.94 per share.
The
following table summarizes stock option and SARs activity for the years ended
December 31, 2008, 2007 and 2006:
|
For the Year Ended December
31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Stock Options and SARs
|
Weighted-Average Exercise
Price
|
Stock Options and SARs
|
Weighted-Average Exercise
Price
|
Stock Options and SARs
|
Weighted-Average Exercise
Price
|
|||||||||||||||||||
|
Outstanding,
beginning of year
|
2,218,199 | $ | 25.48 | 2,145,705 | $ | 23.83 | 2,153,008 | $ | 22.41 | |||||||||||||||
|
Granted
|
429,770 | 24.41 | 486,427 | 29.48 | 407,678 | 26.25 | ||||||||||||||||||
|
Exercised
|
(264,297 | ) | 21.43 | (377,596 | ) | 21.14 | (327,972 | ) | 16.16 | |||||||||||||||
|
Canceled
|
(145,961 | ) | 28.86 | (36,337 | ) | 26.62 | (87,009 | ) | 28.60 | |||||||||||||||
|
Outstanding,
end of year
|
2,237,711 | $ | 25.54 | 2,218,199 | $ | 25.48 | 2,145,705 | $ | 23.83 | |||||||||||||||
|
Options
and SARs exercisable at end of year
|
1,490,150 | $ | 25.25 | 1,360,222 | $ | 24.46 | 1,343,374 | $ | 24.01 | |||||||||||||||
The
cancellations of stock options or SARs during 2008, 2007 and 2006 were due
either to unvested awards terminating in accordance with the provisions of the
applicable stock option plans upon directors’ or employees’ departures from
Farmer Mac, by voluntary forfeiture, or vested awards terminating unexercised on
their expiration date. Of the 145,961 awards canceled in 2008, 30,667
were a result of employee or directors departures from Farmer Mac, 31,294 were a
result of awards terminating unexercised on their expiration date and 84,000
were a result of voluntary forfeiture by corporate directors.
Farmer
Mac received $5.7 million, $8.0 million and $5.3 million from the exercise of
stock options during 2008, 2007 and 2006, respectively. During 2008,
2007 and 2006, the reduction of income tax payable as a result of the deduction
for the exercise of stock options was $0.9 million, $0.7 million and
$0.7 million, respectively. In total, the additional paid-in
capital received from the exercise of stock options was $5.9 million,
$7.4 million and $6.4 million for 2008, 2007 and 2006,
respectively.
During
the year ended December 31, 2008, pursuant to Farmer Mac’s policy that permits
directors of Farmer Mac to elect to receive shares of Class C non-voting common
stock in lieu of their cash retainers, Farmer Mac cash settled an aggregate of
5,166 of share-based payments for $70,000 to seven directors who elected to
receive such stock in lieu of their cash retainers. During the
similar period ended December 31, 2007, Farmer Mac settled 1,720 of share-based
payments for $52,000 to the nine directors who elected to receive such stock in
lieu of their cash retainers. During the similar period ended
December 31, 2006, Farmer Mac settled 2,046 of share-based payments for $59,000
to the eight directors who elected to receive such stock in lieu of their cash
retainers.
The
following table summarizes information regarding options and SARs outstanding as
of December 31, 2008:
|
Outstanding
|
Exercisable
|
Vested
or Expected to Vest
|
||||||||||||||||||||||||
|
Range
of Exercise Prices
|
Stock
Options and SARS
|
Weighted- Average
Remaining Contractual Life
|
Stock
Options and SARS
|
Weighted- Average
Remaining Contractual Life
|
Stock
Options and SARS
|
Weighted- Average
Remaining Contractual Life
|
||||||||||||||||||||
|
$5.00
- $9.99
|
90,000 |
9.8
years
|
-
|
-
|
63,000
|
9.8
years
|
||||||||||||||||||||
|
10.00
- 14.99
|
- |
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||
|
15.00
- 19.99
|
81,722 |
5.2
years
|
81,722
|
5.2
years
|
81,722
|
5.2
years
|
||||||||||||||||||||
|
20.00
- 24.99
|
656,952 |
4.6
years
|
646,114
|
4.5
years
|
653,700
|
4.5
years
|
||||||||||||||||||||
|
25.00
- 29.99
|
1,195,369 |
7.0
years
|
564,649
|
5.7
years
|
848,080
|
6.4
years
|
||||||||||||||||||||
|
30.00
- 34.99
|
213,668 |
3.1
years
|
197,665
|
2.7
years
|
208,867
|
3.0
years
|
||||||||||||||||||||
| 2,237,711 |
1,490,150
|
1,855,369
|
||||||||||||||||||||||||
The
weighted average exercise price of the 1,855,369 options or SARs vested or
expected to vest as of December 31, 2008 was $25.21.
As of
December 31, 2008, the intrinsic value of options and SARs outstanding,
exercisable and vested and expected to vest was zero. This was the
result of the stock price at December 31, 2008 being less than the grant date
exercise price for all outstanding awards. During 2008, 2007 and
2006, the total intrinsic value of options exercised was $2.6 million,
$3.8 million and $4.1 million, respectively.
As of
December 31, 2008, there was $3.1 million of total unrecognized
compensation cost related to non-vested stock options and SARS. This
cost is expected to be recognized over a weighted-average period of 1.6
years
The
weighted-average grant date fair values of options and SARs granted in 2008,
2007 and 2006 were $9.71, $11.24 and $9.91, respectively. Under the
fair value-based method of accounting for stock-based compensation cost, Farmer
Mac recognized compensation cost of $2.8 million, $3.7 million and
$2.4 million during 2008, 2007 and 2006, respectively. The fair
values were estimated using the Black-Scholes option pricing model based on the
following assumptions:
|
For
the Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Risk-free
interest rate
|
2.4% | 4.8% | 5.0% | |||||||||
|
Expected
years until exercise
|
6
years
|
6
years
|
6
years
|
|||||||||
|
Expected
stock volatility
|
52.2% | 36.0% | 36.9% | |||||||||
|
Dividend
yield
|
2.2% | 1.4% | 1.6% | |||||||||
The
risk-free interest rates used in the model were based on the U.S. Treasury yield
curve in effect at the grant date. Farmer Mac used historical data to
estimate the timing of option exercises and stock option cancellation rates used
in the model. Expected volatilities were based on historical
volatility of Farmer Mac’s Class C common stock. The dividend yields
were based on the expected dividends as a percentage of the value of Farmer
Mac’s Class C common stock on the grant date.
Statutory
and Regulatory Capital Requirements
Farmer
Mac is subject to three statutory and regulatory capital
requirements:
|
|
·
|
Statutory minimum
capital required – Farmer Mac’s statutory minimum capital level is an
amount of core capital (stockholders’ equity less accumulated other
comprehensive (loss)/income plus mezzanine equity) equal to the sum of
2.75 percent of Farmer Mac’s aggregate on-balance sheet assets, as
calculated for regulatory purposes, plus 0.75 percent of the aggregate
off-balance sheet obligations of Farmer Mac, specifically
including:
|
|
|
o
|
the
unpaid principal balance of outstanding Farmer Mac Guaranteed
Securities;
|
|
|
o
|
instruments
issued or guaranteed by Farmer Mac that are substantially equivalent to
Farmer Mac Guaranteed Securities, including LTSPCs;
and
|
|
|
o
|
other
off-balance sheet obligations of Farmer
Mac.
|
|
|
·
|
Statutory
critical capital requirement – Farmer Mac’s critical capital level is an
amount of core capital equal to 50 percent of the total minimum capital
requirement at that time.
|
|
|
·
|
Risk-based
capital – The Act directs FCA to establish a risk-based capital stress
test for Farmer Mac, using specified stress-test
parameters.
|
Farmer
Mac is required to comply with the higher of the minimum capital requirement or
the risk-based capital requirement.
As of
December 31, 2008, Farmer Mac’s minimum and critical capital requirements were
$193.5 million and $96.7 million, respectively, and its actual core capital
level was $207.0 million, $13.5 million above the minimum capital
requirement and $110.2 million above the critical capital
requirement. As of December 31, 2007, Farmer Mac’s minimum and
critical capital requirements were $186.0 million and $93.0 million,
respectively, and its actual core capital level was $226.4 million, $40.4
million above the minimum capital requirement and $133.4 million above the
critical capital requirement.
Based on
the risk-based capital stress test, Farmer Mac’s risk-based capital requirement
as of December 31, 2008 was $57.3 million and Farmer Mac’s regulatory capital
(core capital plus the allowance for losses) of $223.4 million exceeded
that amount by approximately $166.1 million. Farmer Mac’s risk-based
capital requirement as of December 31, 2007 was $42.8 million and Farmer Mac’s
regulatory capital (core capital plus the allowance for losses) of
$230.3 million exceeded that amount by approximately $187.5
million.
|
10.
|
INCOME
TAXES
|
The
components of the provision for federal income taxes for the years ended
December 31, 2008, 2007 and 2006 were as follows:
|
For
the Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Current
|
$ | 17,514 | $ | 17,007 | $ | 10,518 | ||||||
|
Deferred:
|
||||||||||||
|
Allowances
for losses
|
(4,392 | ) | 234 | 1,434 | ||||||||
|
Financial
derivatives
|
(33,251 | ) | (14,839 | ) | 1,736 | |||||||
|
Securities
classified as trading
|
(3,724 | ) | - | - | ||||||||
|
Stock
option expense
|
(966 | ) | (1,288 | ) | (852 | ) | ||||||
|
Premium
amortization
|
(900 | ) | (1,286 | ) | - | |||||||
|
Other
|
2,855 | 89 | (147 | ) | ||||||||
|
Total
deferred
|
(40,378 | ) | (17,090 | ) | 2,171 | |||||||
|
Income
tax (benefit)/expense
|
$ | (22,864 | ) | $ | (83 | ) | $ | 12,689 | ||||
A
reconciliation of tax at the statutory federal tax rate to the income tax
provision for the years ended December 31, 2008, 2007 and 2006 is as
follows:
|
For the Year Ended December
31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Tax
(benefit)/expense at statutory rate
|
$ | (60,630 | ) | $ | 2,302 | $ | 15,646 | |||||
|
Effect
of non-taxable dividend income
|
(2,337 | ) | (2,584 | ) | (2,576 | ) | ||||||
|
Deferred
tax asset valuation allowance for capital losses on investment
securities
|
39,989 | - | - | |||||||||
|
Other
|
114 | 199 | (381 | ) | ||||||||
|
Income
tax (benefit)/expense
|
$ | (22,864 | ) | $ | (83 | ) | $ | 12,689 | ||||
|
Statutory
tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Effective
tax rate
|
-13.2 | % | -1.3 | % | 28.4 | % | ||||||
The
components of the deferred tax assets and liabilities as of December 31, 2008
and 2007 were as follows:
|
As
of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Deferred
tax assets:
|
||||||||
|
Basis
differences related to financial derivatives
|
$ | 54,780 | $ | 21,529 | ||||
|
Allowance
for losses
|
5,752 | 1,360 | ||||||
|
Unrealized
losses on available-for-sale securities
|
25,423 | 1,249 | ||||||
|
Stock-based
compensation
|
2,693 | 2,141 | ||||||
|
Other-than-temporary
impairment on investments
|
37,184 | - | ||||||
|
(Valuation
allowance)
|
(36,563 | ) | - | |||||
|
Amortization
of premiums on investments
|
3,426 | 2,526 | ||||||
|
(Valuation
allowance)
|
(3,426 | ) | - | |||||
|
Other
|
1,441 | 1,634 | ||||||
|
Total
deferred tax assets
|
90,710 | 30,439 | ||||||
|
Deferred
tax liability:
|
||||||||
|
Gains
on assets classified as trading
|
2,796 | - | ||||||
|
Other
|
121 | 200 | ||||||
|
Total
deferred tax liability
|
2,917 | 200 | ||||||
|
Net
deferred tax asset
|
$ | 87,793 | $ | 30,239 | ||||
A
valuation allowance is required to reduce a deferred tax asset to an amount that
is more likely than not to be realized. Future realization of the tax
benefit from a deferred tax asset depends on the existence of sufficient taxable
income of the appropriate character. After the evaluation of both
positive and negative objective evidence regarding the likelihood that its
deferred tax assets will be realized, Farmer Mac established a valuation
allowance of $40.0 million as of December 31, 2008, which was attributable to
non deductible capital losses on investment securities. Farmer Mac
did not establish a valuation allowance for the remainder of its deferred tax
assets because it believes it is more likely than not that those deferred tax
assets will be realized.
In
determining its deferred tax asset valuation allowance, Farmer Mac considered
its taxable income in each of the three prior years (tax carryback period), its
estimate of future taxable income, the character of that income, and its
determination that a significant portion of the cumulative pre-tax losses for
the three year period ended December 31, 2008 was the result of the recognition
of financial derivatives at their fair values. For its estimate of
future taxable income, Farmer Mac considered that as its existing financial
derivative positions approach maturity, the related unrealized fair value losses
will be restored to taxable income over time. This income is in
addition to the taxable income earned from the net effective spread between its
interest earning assets and net funding costs.
On
January 1, 2007, Farmer Mac adopted FIN 48 and recorded a liability for
uncertain tax positions of $1.5 million with a corresponding $1.5 million
increase in deferred tax assets. As of December 31, 2008 and 2007,
both the recorded liability for uncertain tax positions and the corresponding
deferred tax asset were $0.9 million. The following table presents
the changes in unrecognized tax benefits for the years ended December 31,
2008 and 2007.
|
For
the Year Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Beginning
balance
|
$ | 851 | $ | 1,474 | ||||
|
Increases
based on tax positions related to current year
|
126 | (441 | ) | |||||
|
Reductions
for tax positions of prior years
|
(43 | ) | (182 | ) | ||||
|
Ending
balance
|
$ | 934 | $ | 851 | ||||
The
resolution of the unrecognized tax benefits presented above would represent
temporary differences between Farmer Mac’s net income and taxable income and,
therefore, would not result in a change to the Corporation’s effective tax
rate. Upon adoption and as of December 31, 2008 and 2007,
accrued interest payable related to unrecognized tax benefits was immaterial and
no tax penalty was recorded. It is reasonably possible that changes
in the gross balance of unrecognized tax benefits may occur within the next 12
months. Tax years 2005 through 2008 remain subject to
examination.
|
11.
|
EMPLOYEE
BENEFITS
|
Farmer Mac
makes contributions to a defined contribution retirement plan for all of its
employees. Farmer Mac contributed 13.2 percent of the lesser of an
employee’s gross salary or the maximum compensation permitted under the Economic
Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) ($230,000 for 2008,
$225,000 for 2007 and $220,000 for 2006), plus 5.7 percent of the difference
between: (1) the lesser of the gross salary or the amount established under
EGTRRA; and (2) the Social Security Taxable Wage Base. Employees are
fully vested after having been employed for approximately three
years. Expense for this plan for each of the years ended December 31,
2008, 2007 and 2006 was $0.7 million.
|
12.
|
OFF-BALANCE
SHEET GUARANTEES AND LTSPCs, COMMITMENTS AND
CONTINGENCIES
|
Farmer
Mac offers approved agricultural and rural residential mortgage lenders two
credit enhancement alternatives to increase their liquidity or lending capacity
while retaining the cash flow benefits of their loans: (1) Farmer Mac
Guaranteed Securities, which are available through either the Farmer Mac I
program, the Farmer Mac II program or the Rural Utilities program; and (2)
LTSPCs, which are available through the Farmer Mac I program or Rural Utilities
program. Both of these alternatives result in the creation of
off-balance sheet obligations for Farmer Mac. Farmer Mac accounts for
these transactions and other financial guarantees in accordance with FIN
45. In accordance with FIN 45, Farmer Mac records, at the
inception of a guarantee, a liability for the fair value of its obligation to
stand ready to perform under the terms of each guarantee and an asset that is
equal to the fair value of the fees that will be received over the life of each
guarantee. The fair values of the guarantee obligation and asset at
inception are based on the present value of expected cash flows using
management’s best estimate of certain key assumptions, which include prepayment
speeds, forward yield curves and discount rates commensurate with the risks
involved. Because the cash flows of these instruments may be interest
rate path dependent, these values and projected discount rates are derived using
a Monte Carlo simulation model. The guarantee obligation and
corresponding asset are subsequently amortized into guarantee and commitment fee
income in relation to the decline in the unpaid principal balance on the
underlying agricultural real estate mortgage loans.
The
contractual terms of Farmer Mac’s guarantees range from less than 1 year to 31
years. However, the actual term of each guarantee may be
significantly less than the contractual term based on the prepayment
characteristics of the related agricultural real estate mortgage
loans. Farmer Mac’s maximum potential exposure under these guarantees
is comprised of the unpaid principal balance of the underlying agricultural real
estate mortgage loans. In accordance with FIN 45, guarantees issued
or modified on or after January 1, 2003 are recorded in the consolidated balance
sheets. Farmer Mac’s maximum potential exposure was $6.4 billion and
$5.9 billion as of December 31, 2008 and 2007, respectively. Farmer
Mac’s maximum potential exposure for guarantees issued prior to January 1, 2003,
which in accordance with FIN 45 are not recorded on the consolidated balance
sheets, was $469.4 million and $529.5 million as of December 31, 2008 and 2007,
respectively. The maximum exposure from these guarantees is not
representative of the actual loss Farmer Mac is likely to incur, based on
historical loss experience. In the event Farmer Mac was required to
make payments under its guarantees, Farmer Mac would have the right to enforce
the terms of the loans, and in the event of default, would have access to the
underlying collateral. For information on Farmer Mac’s methodology
for determining the reserve for losses for its financial guarantees, see
Note 2(j) and Note 8. The following table presents changes
in Farmer Mac’s guarantee and commitment obligation in the consolidated balance
sheets for the years ended December 31, 2008, 2007 and 2006.
|
For
the Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Beginning
balance, January 1
|
$ | 52,130 | $ | 35,359 | $ | 17,625 | ||||||
|
Additions
to the guarantee and commitment obligation (1)
|
8,512 | 24,117 | 22,074 | |||||||||
|
Amortization
of the guarantee and commitment obligation
|
(5,688 | ) | (7,346 | ) | (4,340 | ) | ||||||
|
Ending
balance, December 31
|
$ | 54,954 | $ | 52,130 | $ | 35,359 | ||||||
|
(1)
Represents the fair value of the guarantee and commitment obligation at
inception.
|
||||||||||||
Off-Balance
Sheet Farmer Mac Guaranteed Securities
Agricultural
real estate mortgage loans, rural utilities loans and other related assets may
be placed into trusts that are used as vehicles for the securitization of the
transferred assets and the Farmer Mac-guaranteed beneficial interests in the
trusts are sold to investors. Farmer Mac is obligated under its
guarantee to ensure that the securities make timely payments to investors of
principal and interest based on the underlying loans, regardless of whether the
trust has actually received such scheduled loan payments. As
consideration for Farmer Mac’s assumption of the credit risk on these
securities, Farmer Mac receives guarantee fees that are recognized as earned on
an accrual basis over the life of the loan and based upon the outstanding
balance of the Farmer Mac Guaranteed Security.
Farmer
Mac is required to perform under its obligation when the underlying loans for
the off-balance sheet Farmer Mac Guaranteed Securities do not make their
scheduled installment payments. When a loan underlying a Farmer Mac I
Guaranteed Security becomes 90 days or more past due, Farmer Mac may, in
its sole discretion, repurchase the loan from the trust and generally does
repurchase such loans, thereby reducing the principal balance of the outstanding
Farmer Mac I Guaranteed Security.
The
following table presents the maximum principal amount of potential undiscounted
future payments that Farmer Mac could be required to make under all off-balance
sheet Farmer Mac Guaranteed Securities as of December 31, 2008 and 2007,
not including offsets provided by any recourse provisions, recoveries from third
parties or collateral for the underlying loans.
|
Outstanding
Balance of Off-Balance Sheet
|
||||||||
|
Farmer
Mac Guaranteed Securities
|
||||||||
|
As
of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Farmer
Mac I Guaranteed Securities
|
$ | 4,642,983 | $ | 4,518,300 | ||||
|
Farmer
Mac II Guaranteed Securities
|
30,095 | 24,815 | ||||||
|
Total
off-balance sheet Farmer Mac I and II
|
$ | 4,673,078 | $ | 4,543,115 | ||||
If Farmer
Mac repurchases a loan that is collateral for a Farmer Mac Guaranteed Security,
Farmer Mac would have the right to enforce the terms of the loan, and in the
event of a default, would have access to the underlying
collateral. Farmer Mac typically recovers a significant portion of
the value of defaulted loans purchased either through borrower payments, loan
payoffs, payments by third parties or foreclosure and sale of the property
securing the loans.
Farmer
Mac has recourse to the USDA for any amounts advanced for the timely payment of
principal and interest on Farmer Mac II Guaranteed Securities. That
recourse is the USDA guarantee, a full faith and credit obligation of the United
States that becomes enforceable if a lender fails to repurchase the
USDA-guaranteed portion from its owner within 30 days after written demand
from the owner when (a) the borrower under the guaranteed loan is in default not
less than 60 days in the payment of any principal or interest due on the
USDA-guaranteed portion, or (b) the lender has failed to remit to the owner the
payment made by the borrower on the USDA-guaranteed portion or any related loan
subsidy within 30 days after the lender’s receipt of the
payment.
The
following table summarizes cash flows received from and paid to the trusts that
hold agricultural real estate mortgage loans in off-balance sheet Farmer Mac I
Guaranteed Securities.
|
For
the Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Proceeds
from new securitizations
|
$ | 98,843 | $ | 1,324 | $ | 3,994 | ||||||
|
Guarantee
fees received
|
12,134 | 11,647 | 5,775 | |||||||||
|
Purchases
of assets from the trusts
|
647 | 1,562 | 707 | |||||||||
|
Servicing
advances
|
9 | 31 | 19 | |||||||||
|
Repayments
of servicing advances
|
2 | 39 | 4 | |||||||||
For those
securities issued or modified on or after January 1, 2003, Farmer Mac has
recorded a liability for its obligation to stand ready under the guarantee in
the guarantee and commitment obligation on the consolidated balance
sheets. This liability approximated $37.1 million as of December 31,
2008 and $36.4 million as of December 31, 2007. As of
December 31, 2008 and 2007, the weighted-average remaining maturity of all loans
underlying off-balance sheet Farmer Mac Guaranteed Securities, excluding
AgVantage securities, was 13.9 years and 15.5 years, respectively. As
of December 31, 2008 and 2007, the weighted-average remaining maturity of the
off-balance sheet AgVantage securities was 4.4 years and 5.7 years,
respectively. For information on Farmer Mac’s methodology for
determining the reserve for losses on off-balance sheet Farmer Mac Guaranteed
Securities, see Note 2(j) and Note 8.
Long-Term
Standby Purchase Commitments
An LTSPC
is a commitment by Farmer Mac to purchase eligible loans from a segregated pool
of loans under enumerated circumstances, either for cash or in exchange for
Farmer Mac I Guaranteed Securities, on one or more undetermined future
dates. As consideration for its assumption of the credit risk on
loans underlying an LTSPC, Farmer Mac receives a commitment fee payable monthly
in arrears in an amount approximating what would have been the guarantee fee if
the transaction were structured as a swap for Farmer Mac Guaranteed
Securities.
An LTSPC
permits a seller to nominate from its portfolio a segregated pool of loans for
participation in the Farmer Mac I program, which are retained in the
seller’s portfolio and serviced by the seller. Farmer Mac reviews the
loan pool to confirm that it conforms to Farmer Mac’s underwriting
standards. Upon Farmer Mac’s approval of the eligible loans, the
seller effectively transfers the credit risk on those loans to Farmer Mac,
thereby reducing the seller’s credit and concentration risk exposures and,
consequently, its regulatory capital requirements and its loss reserve
requirements. Credit risk is transferred through Farmer Mac’s
commitment to purchase the segregated loans from the counterparty based on
Farmer Mac’s original credit review and acceptance of the credit risk on the
loans.
The
specific events or circumstances that would require Farmer Mac to purchase some
or all of the segregated loans under its LTSPCs include: (1) the failure of the
borrower under any loan to make installment payments under that loan for a
period of at least four months; or (2) the determination by the holder of the
LTSPC to sell or exchange some or all of the loans under the LTSPC to Farmer
Mac.
Farmer
Mac purchases loans subject to an LTSPC at:
|
|
·
|
par
(if the loans become delinquent for at least four months or are in
material non-monetary default), with accrued and unpaid interest on the
defaulted loans payable out of any future loan payments or liquidation
proceeds as received;
|
|
|
·
|
a
mark-to-market price or in exchange for Farmer Mac I Guaranteed Securities
(if the loans are not delinquent and are standard loan products as to
which Farmer Mac offers daily rates for commitments to purchase);
or
|
|
|
·
|
either
(1) a mark-to-market negotiated price for all (but not some) loans in the
pool, based on the sale of Farmer Mac I Guaranteed Securities in the
capital markets or the funding obtained by Farmer Mac through the issuance
of matching debt in the capital markets, or (2) in exchange for Farmer Mac
I Guaranteed Securities (if the loans are not four months
delinquent).
|
As of
December 31, 2008 and 2007, the maximum principal amount of potential
undiscounted future payments that Farmer Mac could be requested to make under
all LTSPCs, not including offsets provided by any recourse
provisions, recoveries from third parties or collateral for the underlying
loans, was $2.2 billion and $1.9 billion, respectively.
In the
event of loan default, Farmer Mac would have the right to enforce the terms of
the loans including the right to foreclose upon the collateral underlying such
loans. Farmer Mac believes that it will generally recover a
significant portion of the value of the defaulted loans purchased either through
borrower payments, loan payoffs, payments by third parties or foreclosure and
sale of the collateral.
As of
December 31, 2008 and 2007, the weighted-average remaining maturity of all loans
underlying LTSPCs was 15.3 years and 14.2 years, respectively. For
those LTSPCs issued or modified on or after January 1, 2003, Farmer Mac has
recorded a liability for its obligation to stand ready under the commitment in
the guarantee and commitment obligation on the consolidated balance
sheet. This liability approximated $17.9 million as of
December 31, 2008 and $15.7 million as of December 31,
2007. For information on Farmer Mac’s methodology for determining the
reserve for losses for LTSPCs, see Note 2(j) and Note 8.
Commitments
Farmer
Mac enters into mandatory and optional delivery commitments to purchase
loans. Most loan purchase commitments entered into by Farmer Mac are
mandatory commitments, in which Farmer Mac charges a fee to extend or cancel the
commitment. As of December 31, 2008 and 2007, commitments to
purchase Farmer Mac I and II loans totaled $26.7 million and $17.0 million,
respectively, all of which were mandatory commitments. Any optional
loan purchase commitments are sold forward under optional commitments to deliver
Farmer Mac Guaranteed Securities that may be cancelled by Farmer Mac without
penalty.
Farmer
Mac is exposed to interest rate risk from the time it commits to purchase a loan
to the time it either: (a) sells Farmer Mac Guaranteed Securities
backed by the loan or (b) issues debt to retain the loan in its
portfolio. There were no commitments to sell Farmer Mac Guaranteed
Securities as of December 31, 2008 and 2007. Farmer Mac manages the
interest rate risk related to loans not yet sold or funded as a retained
investment through the use of forward sale contracts involving
government-sponsored enterprise debt and mortgage-backed securities, futures
contracts involving U.S. Treasury securities and interest rate
swaps. See Note 2(h) and Note 6 for information regarding financial
derivatives.
Rental
expense for Farmer Mac’s office space for each of the years ended December 31,
2008, 2007 and 2006 was $0.6 million, $0.7 million and $0.6 million,
respectively. The future minimum lease payments under Farmer Mac’s
non-cancelable leases for its office space and other contractual obligations are
as follows:
|
Future
Minimum Lease Payments
|
Other
Contractual Obligations
|
|||||||
|
(in
thousands)
|
||||||||
|
2009
|
$ | 729 | $ | 808 | ||||
|
2010
|
685 | 268 | ||||||
|
2011
|
602 | 190 | ||||||
|
2012
|
5 | 167 | ||||||
|
2013
|
5 | 63 | ||||||
|
Thereafter
|
- | - | ||||||
|
Total
|
$ | 2,026 | $ | 1,496 | ||||
Other
contractual obligations in the table above include minimum amounts due under
non-cancelable agreements to purchase goods or services that are enforceable and
legally binding and specify all significant terms. These agreements
include agreements for the provision of consulting services, information
technology support, equipment maintenance, and financial analysis software and
services. The amounts actually paid under these agreements will
likely be higher due to the variable components of some of these agreements
under which the ultimate obligation owed is determined by reference to actual
usage or hours worked.
|
13.
|
FAIR
VALUE DISCLOSURES
|
Fair
Value Measurement
Effective
January 1, 2008, Farmer Mac adopted SFAS 157 which defines fair value,
establishes a hierarchy for ranking fair value measurements, and expands
disclosures about fair value measurements. SFAS 157 defines fair
value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (also referred to as an exit price).
In
determining fair value, Farmer Mac uses various valuation approaches, including
market, income and/or cost approaches. The fair value hierarchy
established in SFAS 157 requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair
value. When available, the fair value of Farmer Mac’s financial
instruments is based on quoted market prices, valuation techniques that use
observable market-based inputs or unobservable inputs that are corroborated by
market data. Pricing information obtained from third parties is
internally validated for reasonableness prior to use in the consolidated
financial statements.
When
observable market prices are not readily available, Farmer Mac estimates the
fair value using techniques that rely on alternate market data or internally
developed models using significant inputs that are generally less readily
observable. Market data includes prices of financial instruments with
similar maturities and characteristics, duration, interest rate yield curves,
measures of volatility and prepayment rates. If market data needed to
estimate fair value is not available, Farmer Mac estimates fair value using
internally-developed models that employ a discounted cash flow
approach. Even when market assumptions are not readily available,
Farmer Mac’s assumptions reflect those that market participants would use in
pricing the asset or liability at the measurement date.
The fair
value hierarchy established in SFAS 157 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
Fair
value is primarily determined using a reputable and nationally recognized third
party pricing service for a significant portion of Farmer Mac’s investment
portfolio, including most asset-backed securities, corporate debt securities,
Government/GSE guaranteed mortgage-backed securities and preferred stock issued
by Fannie Mae. The prices obtained are non-binding and generally
representative of recent market trades. The fair values of certain
asset-backed and Government guaranteed mortgage-backed securities are estimated
based on quotations from brokers or dealers. Farmer Mac corroborates
its primary valuation source by obtaining a secondary price from another
independent third party pricing service. Farmer Mac classifies these
fair value measurements as level 2.
For
investment securities which are thinly traded or not quoted, Farmer Mac
estimates fair value using internally-developed models that employ a discounted
cash flow approach. Farmer Mac maximizes the use of observable market
data, including prices of financial instruments with similar maturities and
characteristics, duration, interest rate yield curves, measures of volatility
and prepayment rates. Farmer Mac generally considers a market to be
inactive if the following conditions exist: (1) there are few transactions
for the financial instruments; (2) the prices in the market are not
current; (3) the price quotes vary significantly either over time or among
independent pricing services or dealers; or (4) there is a limited
availability of public market information. Farmer Mac classifies
these fair value measurements as level 3.
Due to
the lack of an active market for Farmer Mac’s investments in ARCs and GSE
preferred stock issued by CoBank, ACB and AgFirst Farm Credit Bank with par
values of $131.5 million, $88.5 million and $88.0 million, respectively, Farmer
Mac transferred these securities from Level 2 to Level 3 during
2008. Farmer Mac’s transfers in and out of level 3 are as of the
beginning of the reporting period on a quarterly basis.
Available-for-Sale
and Trading Farmer Mac Guaranteed Securities
Farmer
Mac estimates the fair value of its Farmer Mac Guaranteed Securities by
discounting the projected cash flows of these instruments at projected interest
rates. The fair values are based on the present value of expected
cash flows using management’s best estimate of certain key assumptions, which
include prepayment speeds, forward yield curves and discount rates commensurate
with the risks involved. Farmer Mac classifies these measurements as
level 3 because there is limited market activity and therefore little or no
price transparency. On a sample basis, Farmer Mac corroborates the
fair value of its Farmer Mac Guaranteed Securities by obtaining a secondary
valuation from an independent third party pricing service.
Financial
Derivatives
The fair
value of exchange-traded U.S. Treasury futures is based on unadjusted quoted
prices for identical financial instruments. Farmer Mac classifies
these fair value measurements as level 1.
Farmer
Mac’s derivative portfolio consists primarily of interest rate swaps and forward
sales contracts on mortgage-backed securities and the debt of other
GSEs. Farmer Mac estimates the fair value of these financial
instruments based upon the counterparty valuations. Farmer Mac
internally values its derivative portfolio using a discounted cash flow
valuation technique and obtains a secondary valuation for certain interest rate
swaps to corroborate the counterparty valuations. Farmer Mac also
regularly reviews the counterparty valuations as part of the collateral exchange
process. Farmer Mac classifies these fair value measurements as
level 2.
Certain
basis swaps are nonstandard interest rate swap structures and are therefore
internally modeled using significant assumptions and unobservable inputs,
resulting in level 3 classification. Farmer Mac uses a discounted
cash flow valuation technique, using management’s best estimates of certain key
assumptions, which include prepayment speeds, forward yield curves and discount
rates commensurate with the risks involved.
As of
December 31, 2008, the consideration of credit risk, Farmer Mac’s or the
counterparties’, did not result in a material adjustment to the valuations of
Farmer Mac’s derivative portfolio.
Nonrecurring
Fair Value Measurements and Classification
Loans
Held-for-Sale
Loans
held for sale are reported at the lower of cost or fair value in the
consolidated balance sheets. Farmer Mac internally models the fair
value of loans by discounting the projected cash flows of these instruments at
projected interest rates. The fair values are based on the present
value of expected cash flows using management’s best estimate of certain key
assumptions, which include prepayment speeds, forward yield curves and discount
rates commensurate with the risks involved. The fair values of these
instruments are classified as level 3 measurements. As of December
31, 2008 and 2007, Farmer Mac’s loans held for sale were reported at
cost.
Fair
Value Classification and Transfers
As of
December 31, 2008, Farmer Mac’s assets and liabilities recorded at fair value
included financial instruments valued at $2.8 billion whose fair values were
estimated by management in the absence of readily determinable fair values
(i.e., Level 3). These financial instruments measured as Level 3
represented 55 percent of total assets and 72 percent of financial
instruments measured at fair value as of December 31, 2008.
The
following table presents information about Farmer Mac’s assets and liabilities
measured at fair value on a recurring and nonrecurring basis as of December 31,
2008, and indicates the fair value hierarchy of the valuation techniques used by
Farmer Mac to determine such fair value.
|
Assets
and Liabilities Measured at Fair Value as of December 31,
2008
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Recurring:
|
(dollars
in thousands)
|
|||||||||||||||
|
Assets:
|
||||||||||||||||
|
Investment
Securities:
|
||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans (1)
|
$ | - | $ | - | $ | 178,577 | $ | 178,577 | ||||||||
|
Floating
rate asset-backed securities
|
- | 81,256 | - | 81,256 | ||||||||||||
|
Floating
rate corporate debt securities
|
- | 419,065 | - | 419,065 | ||||||||||||
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
- | 335,665 | - | 335,665 | ||||||||||||
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
- | 7,563 | - | 7,563 | ||||||||||||
|
Floating
rate GSE subordinated debt
|
- | 49,189 | - | 49,189 | ||||||||||||
|
Floating
rate GSE preferred stock
|
- | 781 | - | 781 | ||||||||||||
|
Total
available-for-sale investment securities
|
- | 893,519 | 178,577 | 1,072,096 | ||||||||||||
|
Trading:
|
||||||||||||||||
|
Floating
rate asset-backed securities
|
- | - | 2,211 | 2,211 | ||||||||||||
|
Fixed
rate GSE preferred stock
|
- | - | 161,552 | 161,552 | ||||||||||||
|
Total
trading investment securities
|
- | - | 163,763 | 163,763 | ||||||||||||
|
Total
investment securities
|
- | 893,519 | 342,340 | 1,235,859 | ||||||||||||
|
Farmer
Mac Guaranteed Securities:
|
||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||
|
Farmer
Mac I
|
- | - | 349,292 | 349,292 | ||||||||||||
|
Farmer
Mac II
|
- | - | 522,565 | 522,565 | ||||||||||||
|
Rural
Utilities
|
- | - | 639,837 | 639,837 | ||||||||||||
|
Total
available-for-sale guaranteed securities
|
- | - | 1,511,694 | 1,511,694 | ||||||||||||
|
Trading:
|
||||||||||||||||
|
Farmer
Mac II
|
- | - | 496,864 | 496,864 | ||||||||||||
|
Rural
Utilities
|
- | - | 442,686 | 442,686 | ||||||||||||
|
Total
trading guaranteed securities
|
- | - | 939,550 | 939,550 | ||||||||||||
|
Total
Farmer Mac Guaranteed Securities
|
- | - | 2,451,244 | 2,451,244 | ||||||||||||
|
Financial
Derivatives
|
28 | 27,041 | - | 27,069 | ||||||||||||
|
Total
Assets at fair value
|
$ | 28 | $ | 920,560 | $ | 2,793,584 | $ | 3,714,172 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Financial
Derivatives
|
$ | - | $ | 177,464 | $ | 3,719 | $ | 181,183 | ||||||||
|
Total
Liabilities at fair value
|
$ | - | $ | 177,464 | $ | 3,719 | $ | 181,183 | ||||||||
|
Nonrecurring:
|
||||||||||||||||
|
Loans
held for sale
|
$ | - | $ | - | $ | - | $ | - | ||||||||
(1)
Includes the fair value of Farmer Mac's put rights related to $119.9 million
(par value) of its ARC holdings. See Note 4 and Note 15 to the
consolidated financial statements for more information related to these put
rights.
The
following table presents additional information about assets and liabilities
measured at fair value on a recurring and nonrecurring basis for which Farmer
Mac has used significant Level 3 inputs to determine fair value for the
year ended December 31, 2008.
|
Level
3 Assets and Liabilities Measured at Fair Value for the Year Ended
December 31, 2008
|
||||||||||||||||||||||||
|
Beginning
Balance
|
Purchases,
Sales, Issuances and Settlements, Net
|
Realized
and Unrealized Gains/(Losses) included in Income
|
Unrealized
Gains/(Losses) included in Other Comprehensive Income
|
Net
Transfers In and/or Out
|
Ending
Balance
|
|||||||||||||||||||
|
Recurring:
|
(in
thousands)
|
|||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Investment
Securities:
|
||||||||||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||||||
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans (1)
|
$ | - | $ | 62,406 | $ | - | $ | (15,373 | ) | $ | 131,544 | $ | 178,577 | |||||||||||
|
Floating
rate corporate debt securities
|
- | 400,000 | - | (669 | ) | (399,331 | ) | - | ||||||||||||||||
|
Fixed
rate corporate debt securities
|
500,138 | - | - | 2,951 | (503,089 | ) | - | |||||||||||||||||
|
Total
available-for-sale
|
500,138 | 462,406 | - | (13,091 | ) | (770,876 | ) | 178,577 | ||||||||||||||||
|
Trading:
|
||||||||||||||||||||||||
|
Floating
rate asset-backed securities (2)
|
8,179 | (939 | ) | (5,029 | ) | - | - | 2,211 | ||||||||||||||||
|
Fixed
rate mortgage-backed securities
|
415,813 | 29,367 | 13,846 | - | (459,026 | ) | - | |||||||||||||||||
|
Fixed
rate GSE preferred stock (2)
|
- | (659 | ) | (16,889 | ) | - | 179,100 | 161,552 | ||||||||||||||||
|
Total
trading
|
423,992 | 27,769 | (8,072 | ) | - | (279,926 | ) | 163,763 | ||||||||||||||||
|
Total
investment securities
|
924,130 | 490,175 | (8,072 | ) | (13,091 | ) | (1,050,802 | ) | 342,340 | |||||||||||||||
|
Farmer
Mac Guaranteed Securities:
|
||||||||||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||||||
|
Farmer
Mac I
|
338,958 | (23,036 | ) | - | 8,378 | 24,992 | 349,292 | |||||||||||||||||
|
Farmer
Mac II
|
- | 41,856 | - | (12,869 | ) | 493,578 | 522,565 | |||||||||||||||||
|
Rural
Utilities
|
- | (270,000 | ) | - | 7,417 | 902,420 | 639,837 | |||||||||||||||||
|
Total
available-for-sale
|
338,958 | (251,180 | ) | - | 2,926 | 1,420,990 | 1,511,694 | |||||||||||||||||
|
Trading:
|
||||||||||||||||||||||||
|
Farmer
Mac II (3)
|
428,670 | 55,234 | 12,959 | - | - | 496,863 | ||||||||||||||||||
|
Rural
Utilities (2)
|
- | (5,734 | ) | (10,605 | ) | - | 459,026 | 442,687 | ||||||||||||||||
|
Total
trading
|
428,670 | 49,500 | 2,354 | - | 459,026 | 939,550 | ||||||||||||||||||
|
Total
Farmer Mac Guaranteed Securities
|
767,628 | (201,680 | ) | 2,354 | 2,926 | 1,880,016 | 2,451,244 | |||||||||||||||||
|
Total
Assets at fair value
|
$ | 1,691,758 | $ | 288,495 | $ | (5,718 | ) | $ | (10,165 | ) | $ | 829,214 | $ | 2,793,584 | ||||||||||
|
Liabilities:
|
||||||||||||||||||||||||
|
Financial
Derivatives (4)
|
$ | (1,106 | ) | $ | - | $ | (2,613 | ) | $ | - | $ | - | $ | (3,719 | ) | |||||||||
|
Total
Liabilities at fair value
|
$ | (1,106 | ) | $ | - | $ | (2,613 | ) | $ | - | $ | - | $ | (3,719 | ) | |||||||||
|
Nonrecurring:
|
||||||||||||||||||||||||
|
Loans
held for sale
|
$ | - | $ | (142,756 | ) | $ | - | $ | - | $ | 142,756 | $ | - | |||||||||||
|
(1)
|
Includes
the fair value of Farmer Mac's put rights related to $119.9 million (par
value) of its ARC holdings. See Note 4 and Note 15 to the
consolidated financial statements for more information related to these
put rights.
|
|
(2)
|
Unrealized
losses are attributable to assets still held as of December 31, 2008 and
are recorded in (losses)/gains on trading
assets.
|
|
(3)
|
Includes
unrealized gains of approximately $13.8 million attributable to assets
still held as of December 31, 2008 that are recorded in (losses)/gains on
trading assets.
|
|
(4)
|
Unrealized
losses are attributable to liabilities still held as of December 31, 2008
and are recorded in (losses)/gains on financial
derivatives.
|
Fair
Value Option
SFAS 159
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 SFAS 159 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 SFAS 159, Farmer Mac elected to
measure $600.5 million of investment securities and $427.3 million of
Farmer Mac II Guaranteed Securities at fair value, with changes in fair value
reflected in earnings as they occur. Upon adoption, Farmer Mac
recorded a cumulative effect of adoption adjustment of $12.1 million, net of
tax, as an increase to the beginning balance of retained
earnings. During 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 under SFAS 159
because they were funded or hedged principally with financial derivatives and,
therefore, it was expected that the changes in fair value of the assets would
provide partial economic and financial reporting offsets to the related
financial derivatives. Due to the significant declines in the fair
values of investment securities attributable to the widening of credit spreads
experienced during 2008, such financial reporting offsets were not
achieved. For 2008, Farmer Mac recorded net losses on trading assets
of $5.6 million for changes in fair values of the assets selected for the
fair value option. These losses are recognized as “(Losses)/gains on
trading assets” in the consolidated statements of operations.
During
fourth quarter 2008, Farmer Mac elected to measure put rights related to
$119.9 million (par value) of its ARC holdings at fair value upon the
election of the fair value option as permitted by SFAS 159. See Note
4 and Note 15 to the consolidated financial statements for more information
related to these put rights.
|
Impact
of Adopting SFAS 159 to Retained Earnings as of January 1,
2008
|
||||||||||||
|
Carrying
Value as of January 1, 2008 Prior to Adoption of Fair Value
Option
|
Transition
Gain
|
Fair
Value as of January 1, 2008 After Adoption of Fair Value
Option
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Available-for-sale
Investment Securities:
|
||||||||||||
|
Fixed
rate GSE preferred stock (1)
|
$ | 184,655 | $ | 2,783 | $ | 184,655 | ||||||
|
Fixed
rate mortgage-backed securities (1)
|
415,813 | 14,504 | 415,813 | |||||||||
|
Held-to-maturity
Farmer Mac Guaranteed Securities:
|
||||||||||||
|
Farmer
Mac II Guaranteed Securities
|
427,330 | 1,340 | 428,670 | |||||||||
|
Pre-tax
cumulative effect of adoption
|
18,627 | |||||||||||
|
Tax
effect
|
6,519 | |||||||||||
|
Cumulative
effect of adoption to beginning retained earnings
|
$ | 12,108 | ||||||||||
(1)
Farmer Mac adopted the fair value option for certain securities classified
within its investment portfolio previously classified as
available-for-sale. These securities are presented in the condensed
consolidated balance sheet at fair value in accordance with Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities and the amount of the transition gain was
recognized in accumulated other comprehensive loss prior to the adoption of SFAS
159.
Disclosures
about Fair Value of Financial Instruments
The
following table sets forth the estimated fair values and the carrying values for
financial assets, liabilities and guarantees and commitments as of December 31,
2008 and 2007 in accordance with SFAS No. 107, Disclosures about Fair Value of
Financial Instruments.
|
As
of December 31,
|
||||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 278,412 | $ | 278,412 | $ | 101,445 | $ | 101,445 | ||||||||
|
Investment
securities
|
1,235,859 | 1,235,859 | 2,624,366 | 2,624,366 | ||||||||||||
|
Farmer
Mac Guaranteed Securities
|
2,451,244 | 2,451,244 | 1,297,889 | 1,298,823 | ||||||||||||
|
Loans
|
789,613 | 774,596 | 778,896 | 766,219 | ||||||||||||
|
Financial
derivatives
|
27,069 | 27,069 | 2,288 | 2,288 | ||||||||||||
|
Interest
receivable
|
73,058 | 73,058 | 91,939 | 91,939 | ||||||||||||
|
Guarantee
and commitment fees receivable:
|
||||||||||||||||
|
LTSPCs
|
20,434 | 19,232 | 15,598 | 17,095 | ||||||||||||
|
Farmer
Mac Guaranteed Securities
|
36,071 | 41,877 | 35,292 | 40,709 | ||||||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Notes
payable:
|
||||||||||||||||
|
Due
within one year
|
3,773,430 | 3,757,099 | 3,828,899 | 3,829,698 | ||||||||||||
|
Due
after one year
|
944,490 | 887,999 | 777,052 | 744,649 | ||||||||||||
|
Financial
derivatives
|
181,183 | 181,183 | 55,273 | 55,273 | ||||||||||||
|
Accrued
interest payable
|
40,470 | 40,470 | 50,004 | 50,004 | ||||||||||||
|
Guarantee
and commitment obligation:
|
||||||||||||||||
|
LTSPCs
|
19,058 | 17,856 | 14,193 | 15,691 | ||||||||||||
|
Farmer
Mac Guaranteed Securities
|
31,291 | 37,098 | 31,022 | 36,439 | ||||||||||||
The
carrying value of cash and cash equivalents and certain short-term investment
securities is a reasonable estimate of their approximate fair
value. Farmer Mac estimates the fair value of its guarantee and
commitment fees receivable/obligation and notes payable by discounting the
projected cash flows of these instruments at projected interest rates. The fair
values are based on the present value of expected cash flows using management’s
best estimate of certain key assumptions, which include prepayment speeds,
forward yield curves and discount rates commensurate with the risks
involved. Because the cash flows of these instruments may be interest
rate path dependent, these values and projected discount rates are derived using
a Monte Carlo simulation model.
Different
market assumptions and estimation methodologies could significantly affect
estimated fair value amounts.
|
14.
|
QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)
|
|
2008
Quarter Ended
|
||||||||||||||||
|
Dec.
31
|
Sept.
30
|
June
30
|
Mar.
31
|
|||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||
|
Interest
income:
|
||||||||||||||||
|
Interest
income
|
$ | 56,191 | $ | 60,583 | $ | 66,812 | $ | 72,109 | ||||||||
|
Interest
expense
|
31,095 | 39,260 | 42,454 | 54,171 | ||||||||||||
|
Net
interest income
|
25,096 | 21,323 | 24,358 | 17,938 | ||||||||||||
|
(Provision)/recovery
for loan losses
|
(13,800 | ) | (731 | ) | - | - | ||||||||||
|
Net
interest income after provision for loan losses
|
11,296 | 20,592 | 24,358 | 17,938 | ||||||||||||
|
Non-interest
(loss)/income:
|
||||||||||||||||
|
Guarantee
and commitment fees
|
7,807 | 7,281 | 6,659 | 6,634 | ||||||||||||
|
(Losses)/gains
on financial derivatives
|
(100,712 | ) | (19,021 | ) | 31,050 | (41,720 | ) | |||||||||
|
Gains/(losses)
on trading assets
|
11,025 | (14,507 | ) | (17,268 | ) | 10,111 | ||||||||||
|
Impairment
losses on available-for-sale investment securities
|
(3,788 | ) | (97,108 | ) | (5,344 | ) | - | |||||||||
|
Gains/(losses)
on sale of available-for-sale investment securities
|
251 | (85 | ) | 150 | - | |||||||||||
|
(Losses)/gains
on sale of Farmer Mac Guaranteed Securities
|
(22 | ) | 1,531 | - | - | |||||||||||
|
Gains
on the repurchase of debt
|
24 | 840 | - | - | ||||||||||||
|
Other
income
|
98 | 192 | 662 | 461 | ||||||||||||
|
Non-interest
(loss)/income
|
(85,317 | ) | (120,877 | ) | 15,909 | (24,514 | ) | |||||||||
|
Non-interest
expense
|
11,405 | 8,246 | 6,721 | 6,240 | ||||||||||||
|
(Loss)/income
before income taxes
|
(85,426 | ) | (108,531 | ) | 33,546 | (12,816 | ) | |||||||||
|
Income
tax (benefit)/expense
|
(26,327 | ) | (2,973 | ) | 11,555 | (5,119 | ) | |||||||||
|
Net
(loss)/income
|
(59,099 | ) | (105,558 | ) | 21,991 | (7,697 | ) | |||||||||
|
Preferred
stock dividends
|
(2,019 | ) | (578 | ) | (560 | ) | (560 | ) | ||||||||
|
Net
(loss)/income available to common stockholders
|
$ | (61,118 | ) | $ | (106,136 | ) | $ | 21,431 | $ | (8,257 | ) | |||||
|
Earnings
per common share:
|
||||||||||||||||
|
Basic
(loss)/earnings per Common share
|
$ | (6.03 | ) | $ | (10.55 | ) | $ | 2.15 | $ | (0.84 | ) | |||||
|
Diluted
(loss)/earnings per common share
|
$ | (6.03 | ) | $ | (10.55 | ) | $ | 2.13 | $ | (0.84 | ) | |||||
|
Common
stock dividends per common share
|
$ | 0.10 | $ | 0.10 | $ | 0.10 | $ | 0.10 | ||||||||
|
2007
Quarter Ended
|
||||||||||||||||
|
Dec.
31
|
Sept.
30
|
June
30
|
Mar.
31
|
|||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||
|
Interest
income:
|
||||||||||||||||
|
Interest
income
|
$ | 79,839 | $ | 76,694 | $ | 71,511 | $ | 69,714 | ||||||||
|
Interest
expense
|
63,464 | 66,177 | 63,032 | 60,632 | ||||||||||||
|
Net
interest income
|
16,375 | 10,517 | 8,479 | 9,082 | ||||||||||||
|
Recovery/(provision)
for loan losses
|
- | - | - | 215 | ||||||||||||
|
Net
interest income after provision for loan losses
|
16,375 | 10,517 | 8,479 | 9,297 | ||||||||||||
|
Non-interest
(loss)/income:
|
||||||||||||||||
|
Guarantee
and commitment fees
|
6,599 | 6,421 | 6,354 | 5,858 | ||||||||||||
|
(Losses)/gains
on financial derivatives
|
(30,907 | ) | (24,906 | ) | 19,892 | (4,026 | ) | |||||||||
|
Losses
on trading assets
|
(253 | ) | - | (67 | ) | (7 | ) | |||||||||
|
Gains
on sale of available-for-sale investment securities
|
180 | 87 | 21 | - | ||||||||||||
|
Gains
on the sale of real estate owned
|
- | 98 | 32 | - | ||||||||||||
|
Other
income
|
248 | 712 | 42 | 409 | ||||||||||||
|
Non-interest
(loss)/income
|
(24,133 | ) | (17,588 | ) | 26,274 | 2,234 | ||||||||||
|
Non-interest
expense
|
6,314 | 6,346 | 6,606 | 5,611 | ||||||||||||
|
(Loss)/income
before income taxes
|
(14,072 | ) | (13,417 | ) | 28,147 | 5,920 | ||||||||||
|
Income
tax (benefit)/expense
|
(5,332 | ) | (5,407 | ) | 9,218 | 1,438 | ||||||||||
|
Net
(loss)/income
|
(8,740 | ) | (8,010 | ) | 18,929 | 4,482 | ||||||||||
|
Preferred
stock dividends
|
(560 | ) | (560 | ) | (560 | ) | (560 | ) | ||||||||
|
Net
(loss)/income available to common stockholders
|
$ | (9,300 | ) | $ | (8,570 | ) | $ | 18,369 | $ | 3,922 | ||||||
|
Earnings
per common share:
|
||||||||||||||||
|
Basic
(loss)/earnings per common share
|
$ | (0.90 | ) | $ | (0.82 | ) | $ | 1.79 | $ | 0.37 | ||||||
|
Diluted
(loss)/earnings per common share
|
$ | (0.90 | ) | $ | (0.82 | ) | $ | 1.74 | $ | 0.37 | ||||||
|
Common
stock dividends per common share
|
$ | 0.10 | $ | 0.10 | $ | 0.10 | $ | 0.10 | ||||||||
|
15.
|
SUBSEQUENT
EVENTS
|
As
discussed in Note 4, Farmer Mac’s asset-backed investment securities include
callable, AAA-rated auction-rate certificates (“ARCs”), the interest rates on
which are reset through an auction process, most commonly at intervals of 28
days, or at formula-based floating rates in the event of a failed auction.
All ARCs held by Farmer Mac are collateralized entirely by pools of Federal
Family Education Loan Program (“FFELP”) guaranteed student loans that are backed
by the full faith and credit of the United States. Farmer Mac held
$178.6 million of ARCs (including related put rights) as of December 31,
2008, compared to $131.5 million as of December 31, 2007. 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. Farmer Mac believes that the
credit quality of these securities is high, based on that guarantee and the
securities’ continued AAA ratings. To date, Farmer Mac has received all
interest due on ARCs it holds and expects to continue to do so. Farmer Mac
does not believe that the auction failures will affect the Corporation’s
liquidity or its ability to fund its operations or make dividend payments.
On October 31, 2008, Farmer Mac accepted an offer of Auction Rate Securities
Rights, Series B-2 from UBS AG related to $119.9 million (par value) of the
ARCs in Farmer Mac’s investment portfolio, which granted Farmer Mac put rights
related to these securities. Under the terms of the rights, UBS has the
discretion to purchase or sell the $119.9 million (par value) of ARCs at
any time without prior notice so long as Farmer Mac receives par value, while
Farmer Mac has the right to require UBS to purchase the securities at par value
at any time between January 2, 2009 and January 4, 2011. Farmer Mac
elected the fair value option for these put rights and recorded them at their
fair value as of December 31, 2008. Farmer Mac exercised its rights
and sold the ARCs to UBS on January 7, 2009, thus reducing the remaining
par value of the ARC portfolio to $74.1 million. As of December 31,
2008, Farmer Mac recorded $119.9 million of ARC holdings and put rights at an
amount equal to the par amount of these securities and $74.1 million at fair
values of approximately 79 percent of par. Farmer Mac believes
it is likely the remaining $74.1 million of ARCs will be called or
repurchased during the next two years.
As of
September 30, 2008, Farmer Mac had an investment of $81.7 million in The Reserve
Primary Fund (the “Fund”), a money market fund that has suspended redemptions
and is being liquidated. On September 15, 2008, Farmer Mac delivered
a timely redemption request to redeem its entire investment in the Fund, but its
confirmed redemption request was not honored. The Fund announced on
September 16, 2008 that the net asset value of the Fund decreased below $1.00
per share as a result of the valuing at zero the Fund’s holdings of debt
securities issued by Lehman Brothers, but that all redemption requests received
before 3:00 p.m. that day would be redeemed at $1.00 per share. On
September 22, 2008, the Fund announced that redemptions of shares in the Fund
were being suspended for the protection of the Fund’s investors pursuant to an
SEC order until the financial markets allow an orderly liquidation to be
effected. Investments in money market funds are generally
recorded in “Cash and cash equivalents” on the Corporation’s balance sheet;
however, based on the foregoing information, as of September 30, 2008 the
Corporation presented $39.2 million of its investment in the Fund as “Cash
and cash equivalents” and $42.5 million of its unsettled trades with the Fund
separately on the balance sheet as “Prepaid expenses and other assets,” both at
net asset values of $1.00 per share.
On
December 3, 2008, the Fund announced that it had adopted a Plan of
Liquidation (the “Plan”) for the orderly liquidation of the assets of the Fund,
to be implemented subject to the supervision of the SEC. Under the
terms of the Plan, interim distributions are to be made to shareholders pro rata
out of Fund assets, up to the amount of a special reserve. On
February 26, 2009, the Fund announced its decision to initially set
aside $3.5 billion in a special reserve to cover potential liabilities for
damages and associated expenses related to lawsuits and regulatory actions
against the Fund. The special reserve was estimated based upon a
range of costs and expenses that might be included in the special reserve and
may be increased or decreased as further information becomes
available. Interim distributions will continue to be made up to
$0.9172 per share unless the Fund determines the need to increase the
special reserve. Amounts in the special reserve will be distributed
to shareholders once claims, if any are successful, have been paid or set aside
for payment.
The Fund
distributed cash to Farmer Mac of $64.4 million during the fourth quarter of
2008 and an additional $5.4 million on February 20, 2009. As of
December 31, 2008, Farmer Mac had $17.3 million of unsettled trades with the
Fund presented as “Prepaid expenses and other assets” on the balance sheet.
Farmer Mac believes that it will receive its remaining investment upon final
distribution of the Fund; however it may take an extended period of
time. Farmer Mac will continue to monitor further developments with
respect to the expected recovery of its remaining investment in the
Fund.
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
|
None.
|
Item 9A.
|
Controls
and Procedures
|
(a)
Management’s
Evaluation of Disclosure Controls and Procedures. Farmer Mac
maintains disclosure controls and procedures designed to ensure that information
required to be disclosed in the Corporation’s periodic filings under the
Exchange Act, including this Annual Report on Form 10-K, is recorded, processed,
summarized and reported on a timely basis. These disclosure controls
and procedures include controls and procedures designed to ensure that
information required to be disclosed under the Exchange Act is accumulated and
communicated to the Corporation’s management on a timely basis to allow
decisions regarding required disclosure. Management, including Farmer
Mac’s Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of the Corporation’s disclosure
controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the
Exchange Act) as of December 31, 2008. Based on management’s
assessment, the Chief Executive Officer and the Chief Financial Officer have
concluded that Farmer Mac’s disclosure controls and procedures were effective as
of December 31, 2008.
See Item
8 above for management’s report on internal control over financial reporting and
the accompanying report of independent registered public accounting
firm.
(b)
Changes in Internal
Control Over Financial Reporting. There were no changes in
Farmer Mac’s internal control over financial reporting during the quarter ended
December 31, 2008 that have materially affected, or are reasonably likely to
materially affect, Farmer Mac’s internal control over financial
reporting.
|
Item 9B.
|
Other
Information
|
None.
PART
III
|
Item 10.
|
Directors,
Executive Officers and Corporate
Governance
|
Farmer
Mac has adopted a code of business conduct and ethics (the “Code”) that applies
to all directors, officers, employees and agents of Farmer Mac, including Farmer
Mac’s principal executive officer, principal financial officer, principal
accounting officer and other senior financial officers. A copy of the
Code is available in the “Investors—Corporate Governance” section of Farmer
Mac’s internet website (www.farmermac.com). Farmer Mac will post any
amendment to, or waiver from, a provision of the Code in that same section of
its internet website. A print copy of the Code is available free of
charge upon written request to Farmer Mac’s Corporate Secretary.
Additional
information required by this item is incorporated by reference to the
Corporation’s definitive proxy statement to be filed on or about April 22,
2009.
|
Item 11.
|
Executive
Compensation
|
The
information required by this item is incorporated by reference to the
Corporation’s definitive proxy statement to be filed on or about April 22,
2009.
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The
information required by this item is incorporated by reference to the
Corporation’s definitive proxy statement to be filed on or about April 22,
2009.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The
information required by this item is incorporated by reference to the
Corporation’s definitive proxy statement to be filed on or about April 22,
2009.
|
Item
14.
|
Principal
Accountant Fees and Services
|
The
information required by this item is incorporated by reference to the
Corporation’s definitive proxy statement to be filed on or about April 22,
2009.
PART
IV
|
Exhibits
and Financial Statement Schedules
|
|
|
(a)
|
(1)
|
Financial
Statements.
|
Refer to
Item 8 above.
|
|
(2)
|
Financial
Statement Schedules.
|
All
schedules are omitted since they are not applicable, not required or the
information required to be set forth therein is included in the consolidated
financial statements or in notes thereto.
|
|
(3)
|
Exhibits.
|
|
*
|
3.1
|
-
|
Title
VIII of the Farm Credit Act of 1971, as most recently amended by the Food,
Conservation and Energy Act of 2008 (Form 10-Q filed August 12,
2008).
|
|
*
|
3.2
|
-
|
Amended
and Restated By-Laws of the Registrant (Form 10-K filed
March 17, 2008).
|
|
*
|
4.1
|
-
|
Specimen
Certificate for Farmer Mac Class A Voting Common Stock (Form 10-Q
filed May 15, 2003).
|
|
*
|
4.2
|
-
|
Specimen
Certificate for Farmer Mac Class B Voting Common Stock (Form 10-Q
filed May 15, 2003).
|
|
*
|
4.3
|
-
|
Specimen
Certificate for Farmer Mac Class C Non-Voting Common Stock (Form 10-Q
filed May 15, 2003).
|
|
**
|
-
|
Second
Amended and Restated Certificate of Designation of Terms and Conditions of
Farmer Mac Senior Cumulative Perpetual Preferred Stock, Series
B-1.
|
|
|
**
|
-
|
Second
Amended and Restated Certificate of Designation of Terms and Conditions of
Farmer Mac Senior Cumulative Perpetual Preferred Stock, Series
B-2.
|
|
|
**
|
-
|
Certificate
of Designation of Terms and Conditions of Farmer Mac Senior Cumulative
Perpetual Preferred Stock, Series
B-3.
|
_______________
|
*
|
Incorporated
by reference to the indicated prior
filing.
|
|
**
|
Filed
with this report.
|
|
†
|
Management
contract or compensatory plan.
|
|
#
|
Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment.
|
|
**
|
4.7
|
-
|
Certificate
of Designation of Terms and Conditions of Non-Voting Cumulative Preferred
Stock, Series C.
|
|
†*
|
10.1
|
-
|
Amended
and Restated 1997 Incentive Plan (Form 10-Q filed
November 14, 2003).
|
|
†*
|
10.1.1
|
-
|
Form
of stock option award agreement under 1997 Incentive Plan (Form 10-K
filed March 16, 2005).
|
|
†*
|
10.1.2
|
-
|
2008
Omnibus Incentive Plan (Form 10-Q filed August 12,
2008).
|
|
†*
|
10.1.3
|
-
|
Form
of SAR Agreement under the 2008 Omnibus Incentive Plan (Previously filed
as Exhibit 10 to Form 8-K filed June 11,
2008).
|
|
†*
|
10.2
|
-
|
Compiled
Amended and Restated Employment Agreement dated June 5, 2008 between
Henry D. Edelman and the Registrant (Form 8-K filed August 1,
2008).
|
|
†*
|
10.3
|
-
|
Compiled
Amended and Restated Employment Agreement dated June 5, 2008 between
Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 12,
2008).
|
|
†*
|
10.4
|
-
|
Compiled
Amended and Restated Employment Contract dated as of June 5, 2008
between Tom D. Stenson and the Registrant (Form 10-Q filed August 12,
2008).
|
|
†*
|
10.5
|
-
|
Compiled
Amended and Restated Employment Contract dated June 5, 2008 between
Timothy L. Buzby and the Registrant (Form 10-Q filed August 12,
2008).
|
|
†*
|
10.6
|
-
|
Compiled
Amended and Restated Employment Contract dated June 5, 2008 between Mary
K. Waters and the Registrant(Form 10-Q filed August 12,
2008).
|
|
*
|
10.7
|
-
|
Farmer
Mac I Seller/Servicer Agreement dated as of August 7, 1996 between Zions
First National Bank and the Registrant (Form 10-Q filed November 14,
2002).
|
|
*
|
10.8
|
-
|
Medium-Term
Notes U.S. Selling Agency Agreement dated as of October 1, 1998 between
Zions First National Bank and the Registrant (Form 10-Q filed
November 14,
2002).
|
_______________
|
*
|
Incorporated
by reference to the indicated prior
filing.
|
|
**
|
Filed
with this report.
|
|
†
|
Management
contract or compensatory plan.
|
|
#
|
Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment.
|
|
*
|
10.9
|
-
|
Discount
Note Dealer Agreement dated as of September 18, 1996 between Zions First
National Bank and the Registrant (Form 10-Q filed November 14,
2002).
|
|
*#
|
10.10
|
-
|
ISDA
Master Agreement and Credit Support Annex dated as of June 26, 1997
between Zions First National Bank and the Registrant (Form 10-Q filed
November 14, 2002).
|
|
*#
|
10.11
|
-
|
Amended
and Restated Master Central Servicing Agreement dated as of May 1,
2004 between Zions First National Bank and the Registrant (Previously
filed as Exhibit 10.11.2 to Form 10-Q filed August 9,
2004).
|
|
*#
|
10.12
|
-
|
Loan
Closing File Review Agreement dated as of August 2, 2005 between
Zions First National Bank and the Registrant (Form 10-Q filed
November 9, 2005).
|
|
*#
|
10.13
|
-
|
Long
Term Standby Commitment to Purchase dated as of August 1, 1998 between
AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed
November 14, 2002).
|
|
*#
|
10.13.1
|
-
|
Amendment
No. 1 dated as of January 1, 2000 to Long Term Standby
Commitment to Purchase dated as of August 1, 1998 between AgFirst
Farm Credit Bank and the Registrant (Form 10-Q filed November 14,
2002).
|
|
*
|
10.13.2
|
-
|
Amendment
No. 2 dated as of September 1, 2002 to Long Term Standby Commitment to
Purchase dated as of August 1, 1998, as amended by Amendment No. 1 dated
as of January 1, 2000, between AgFirst Farm Credit Bank and the Registrant
(Form 10-Q filed November 14, 2002).
|
|
*
|
10.14
|
-
|
Lease
Agreement, dated June 28, 2001 between EOP – Two Lafayette, L.L.C. and the
Registrant (Previously filed as Exhibit 10.10 to Form 10-K filed March 27,
2002).
|
|
*#
|
10.15
|
-
|
Long
Term Standby Commitment to Purchase dated as of August 1, 2007
between Farm Credit Bank of Texas and the Registrant (Previously filed as
Exhibit 10.20 to Form 10-Q filed November 8,
2007).
|
|
*#
|
10.16
|
-
|
Long
Term Standby Commitment to Purchase dated as of June 1, 2003 between
Farm Credit Bank of Texas and the Registrant (Form 10-Q filed
November 9, 2004).
|
_______________
|
*
|
Incorporated
by reference to the indicated prior
filing.
|
|
**
|
Filed
with this report.
|
|
†
|
Management
contract or compensatory plan.
|
|
#
|
Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment.
|
|
*#
|
10.16.1
|
- |
Amendment
No. 1 dated as of December 8, 2006 to Long Term Standby Commitment to
Purchase dated as of June 1, 2003 between Farm Credit Bank of Texas and
the Registrant (Form 10-K filed
March 15, 2007).
|
|
*#
|
10.17
|
-
|
Central
Servicer Delinquent Loan Servicing Transfer Agreement dated as of
July 1, 2004 between AgFirst Farm Credit Bank and the Registrant
(Form 10-Q filed November 9, 2004).
|
|
†*
|
10.18
|
-
|
Form
of Indemnification Agreement for Directors (Previously filed as Exhibit
10.1 to Form 8-K filed April 9, 2008).
|
|
†*
|
10.19
|
-
|
Description
of compensation agreement between the Registrant and its directors
(Form 10-Q filed August 9, 2007).
|
|
†*
|
10.20
|
-
|
Work
for Hire Agreement dated October 20, 2008 between William T.
Sandalls, Jr. and the Registrant (Form 10-Q filed November 10,
2008).
|
|
†*
|
10.21
|
-
|
Secondment
Agreement effective as of October 1, 2008 between Farm Credit of
Western New York and the Registrant (Form 10-Q filed
November 10, 2008).
|
|
21
|
-
|
Farmer
Mac Mortgage Securities Corporation, a Delaware
corporation.
|
|
|
**
|
-
|
Certification
of Chief Executive Officer relating to the Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2008, pursuant to
Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
**
|
-
|
Certification
of Chief Financial Officer relating to the Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2008, pursuant to
Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
**
|
-
|
Certification
of Chief Executive Officer and Chief Financial Officer relating to the
Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2008, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
_______________
|
*
|
Incorporated
by reference to the indicated prior
filing.
|
|
**
|
Filed
with this report.
|
|
†
|
Management
contract or compensatory plan.
|
|
#
|
Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment.
|
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION
|
/s/
Michael A. Gerber
|
March
16, 2009
|
||
|
By:
|
Michael
A. Gerber
|
Date
|
|
|
President
and
|
|||
|
Chief
Executive Officer
|
|||
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
|
Name
|
Title
|
Date
|
||
|
/s/
Lowell L. Junkins
|
Acting
Chairman of the Board and
|
March
16, 2009
|
||
|
Lowell
L. Junkins
|
Director
|
|||
|
/s/
Michael A. Gerber
|
President
and Chief Executive
|
March
16, 2009
|
||
|
Michael
A. Gerber
|
Officer
(Principal
Executive Officer)
|
|||
|
/s/
William T. Sandalls, Jr.
|
Chief
Financial Officer
|
March
16, 2009
|
||
|
William
T. Sandalls, Jr.
|
(Principal
Financial Officer)
|
|||
|
/s/
Timothy L. Buzby
|
Vice
President – Controller
|
March
16, 2009
|
||
|
Timothy
L. Buzby
|
and
Treasurer
|
|||
|
(Principal
Accounting Officer)
|
||||
|
Name
|
Title
|
Date
|
||
|
/s/
Julia Bartling
|
Director
|
March
16, 2009
|
||
|
Julia
Bartling
|
||||
|
/s/
Dennis L. Brack
|
Director
|
March
16, 2009
|
||
|
Dennis
L. Brack
|
||||
|
/s/
Grace T. Daniel
|
Director
|
March
16, 2009
|
||
|
Grace
T. Daniel
|
||||
|
|
||||
|
/s/
Paul A. DeBriyn
|
Director
|
March
16, 2009
|
||
|
Paul
A. DeBriyn
|
||||
|
/s/
James R. Engebretsen
|
Director
|
March
16, 2009
|
||
|
James
R. Engebretsen
|
||||
|
/s/
Dennis A. Everson
|
Director
|
March
16, 2009
|
||
|
Dennis
A. Everson
|
||||
|
/s/
Ernest M. Hodges
|
Director
|
March
16, 2009
|
||
|
Ernest
M. Hodges
|
||||
|
/s/
Mitchell A. Johnson
|
Director
|
March
16, 2009
|
||
|
Mitchell
A. Johnson
|
||||
|
/s/
Glen O. Klippenstein
|
Director
|
March
16, 2009
|
||
|
Glen
O. Klippenstein
|
||||
|
/s/
Clark B. Maxwell
|
Director
|
March
16, 2009
|
||
|
Clark
B. Maxwell
|
||||
|
/s/
Brian J. O’Keane
|
Director
|
March
16, 2009
|
||
|
Brian
J. O’Keane
|
||||
|
/s/
John Dan Raines, Jr.
|
Director
|
March
16, 2009
|
||
|
John
Dan Raines, Jr.
|
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