As filed
with the Securities and Exchange Commission on
March 17,
2008
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
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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, 2007.
or
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¨
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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 ¨ 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 ¨ 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 ¨
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 ¨
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Accelerated
filer x
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Non-accelerated
filer ¨
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Smaller reporting
company ¨
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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 ¨ 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 $25,151,032 and $302,099,806,
respectively, as of June 30, 2007, based upon the closing prices for the
respective classes on June 29, 2007 reported by the New York Stock
Exchange. For purposes of this information, the outstanding shares of
Class C non-voting common stock owned by directors and executive officers of the
registrant were deemed to be held by affiliates. The aggregate market
value of the Class B voting common stock is not ascertainable due to the absence
of publicly available quotations or prices for the Class B voting common stock
as a result of the limited market for, and infrequency of trades in, Class B
voting common stock and the fact that any such trades are privately negotiated
transactions.
As of March 1, 2008, the registrant had
outstanding 1,030,780 shares of Class A voting
common stock, 500,301 shares of Class B voting common stock and 8,332,699
shares of Class C non-voting common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
The definitive proxy statement relating
to the registrant’s 2008 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-
Table of Contents
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Item 1.
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Item 1A.
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Item 1B.
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Item 2.
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Item 3.
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Item 4.
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Item 5.
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Item 6.
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Item 7.
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Item 7A.
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Item 8.
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Item 9.
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Item 9A.
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Item 9B.
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138
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Item 10.
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Item 11.
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Item 12.
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Item 13.
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Item 14.
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139
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Item 15.
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139
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PART I
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Item
1.
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General
The
Federal Agricultural Mortgage Corporation (“Farmer Mac” or the “Corporation”)
was chartered by the U.S. Congress in the Agricultural Credit Act of 1987 (12
U.S.C. §§ 2279aa et seq.), which amended the Farm Credit Act of 1971
(collectively, as amended, the “Act”). Farmer Mac is a
stockholder-owned instrumentality of the United States that was created to
establish a secondary market for agricultural real estate and rural housing
mortgage loans and to increase the availability of long-term credit at stable
interest rates to American farmers, ranchers and rural
homeowners. Farmer Mac conducts these activities through two
programs—Farmer Mac I and Farmer Mac II. As of December 31,
2007, total volume in these two programs was $8.5 billion.
Under the
Farmer Mac I program, Farmer Mac creates a secondary market for agricultural
mortgage loans and accomplishes its congressional mission of providing liquidity
and lending capacity to agricultural mortgage lenders by:
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purchasing
newly originated and pre-existing (“seasoned”) eligible mortgage loans
directly from lenders;
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guaranteeing
mortgage-backed securities backed by eligible mortgage loans, which are
referred to as “Farmer Mac I Guaranteed
Securities”;
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exchanging
newly issued Farmer Mac I Guaranteed Securities for eligible mortgage
loans that back those securities in “swap” transactions;
and
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issuing
long-term standby purchase commitments (“LTSPCs”) for newly originated and
seasoned eligible mortgage loans.
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To be
eligible for the Farmer Mac I program, loans must meet Farmer Mac’s credit
underwriting, collateral valuation, documentation and other standards that are
discussed in “Business—Farmer Mac Programs—Farmer
Mac I.” Farmer Mac may retain Farmer Mac I Guaranteed
Securities in its portfolio or sell them to third parties. As of
December 31, 2007, outstanding loans held by Farmer Mac and loans that either
back Farmer Mac I Guaranteed Securities or are subject to LTSPCs in the Farmer
Mac I program totaled $7.6 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”). Farmer Mac I Guaranteed Securities and Farmer
Mac II Guaranteed Securities are sometimes collectively referred to as
“Farmer Mac Guaranteed Securities.” As of December 31, 2007,
outstanding Farmer Mac II Guaranteed Securities totaled
$946.6 million.
Farmer
Mac’s two principal sources of revenue are:
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fees
received in connection with outstanding Farmer Mac Guaranteed Securities
and LTSPCs; and
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net
interest income earned on its portfolio of Farmer Mac Guaranteed
Securities, mortgage loans and
investments.
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Farmer
Mac funds its purchases of Farmer Mac Guaranteed Securities, mortgage loans and
investments primarily by issuing debt obligations of various
maturities. As of December 31, 2007, Farmer Mac had $2.2 billion
of discount notes and $2.4 billion of medium-term notes
outstanding. During 2007, the Corporation continued its strategy of
regularly issuing debt to increase its presence in the capital
markets. To the extent the proceeds of the debt issuances exceed
Farmer Mac’s need to fund program assets, those proceeds are invested in high
quality non-program liquid assets.
For more
information about Farmer Mac’s program assets, its financial performance and
sources of capital and liquidity, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
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.
The Farm Credit Administration (“FCA”),
acting through its Office of Secondary Market Oversight, 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” and “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 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 has one class of
preferred stock outstanding. See “Business—Farmer Mac
Programs—Financing—Equity Issuance” for information regarding Farmer Mac’s
preferred stock.
As of December 31, 2007, Farmer Mac
employed 42 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
Farmer Mac I
Under the Farmer Mac I program, Farmer
Mac assumes, for a fee, the credit risk on agricultural mortgage loans by
guaranteeing the timely payment of principal and interest on securities backed
by, or representing interests in, eligible mortgage loans, or by issuing LTSPCs
to acquire designated mortgage loans to accomplish the same result. Farmer Mac
also may assume the credit risk on eligible mortgage loans by purchasing and
retaining them, which transactions constituted approximately 6 percent of
2007 Farmer Mac I program volume and 4 percent of 2006 Farmer Mac I program
volume.
Loan Eligibility
A loan is
eligible for the Farmer Mac I program if it is:
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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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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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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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in
conformance with the Farmer Mac I underwriting, collateral valuation,
documentation and other 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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is
used for the production of one or more agricultural commodities or
products; and
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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 limits the size of these loans to 10 percent of Farmer
Mac’s core capital, resulting in a current maximum loan size of approximately
$23 million for those loans, except that the maximum loan size of loans
collateralizing AgVantage obligations may not exceed
$50 million. For a description of core capital, see
“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.” 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 $9.0 million (adjusted
annually for inflation).
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
$247,184. That limit is adjusted annually for inflation each
November. 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, 2007, rural housing
loans did not represent a significant part of Farmer Mac’s
business.
Loan
Purchases. Farmer Mac offers credit products designed to
increase the secondary market liquidity of agricultural mortgage loans and the
lending capacity of financial institutions that originate agricultural mortgage
loans. Farmer Mac enters into mandatory and optional delivery
commitments to purchase loans and offers rates to price such commitments
daily. Farmer Mac also purchases portfolios of newly originated and
seasoned loans on a negotiated basis. Primarily, Farmer Mac purchases
fixed- and adjustable-rate loans, but it also purchases other types of
loans. Loans purchased by Farmer Mac 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). During 2007, Farmer Mac purchased $128 million of
loans in the Farmer Mac I program, which represented 6 percent of 2007
Farmer Mac I program volume. Of the loans purchased during 2007,
72 percent included balloon payments and 10 percent included yield
maintenance prepayment protection. By comparison, during 2006, Farmer
Mac purchased $99 million of loans under the Farmer Mac I program, which
represented 4 percent of 2006 Farmer Mac I program volume. Of
the loans purchased during 2006, 71 percent included balloon payments and 13
percent included yield maintenance prepayment protection.
During 2007, Farmer Mac’s top ten
sellers generated 4 percent of 2007
Farmer Mac I program volume (69 percent of the total Farmer Mac I loan
purchase volume). Zions First National Bank, Farmer Mac’s largest
combined Class A and Class C stockholder, accounted for 2 percent of 2007
Farmer Mac I program volume (36 percent of 2007 loan purchase
volume). The top ten sellers in 2006 generated 3 percent of 2006
Farmer Mac I program volume (75 percent of Farmer Mac I loan purchase
volume). Zions First National Bank accounted for 1 percent of
2006 Farmer Mac I program volume (27 percent of 2006 loan purchase
volume). For more information regarding loan volume, see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Results of Operations—Business Volume.” For more
information regarding Farmer Mac’s business with related parties, see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Results of Operations—Related Party Transactions” and Note 3 to
the consolidated financial statements.
AgVantage
Transactions. Collateralized mortgage obligation transactions
in the Farmer Mac I program include Farmer Mac’s guarantee and purchase of bonds
that are Farmer Mac I Guaranteed Securities. Those AgVantage
securities, issued by institutions approved by Farmer Mac, are corporate
obligations of the issuer, collateralized by eligible mortgage loans and
guaranteed by Farmer Mac as to timely payment of principal and
interest. Before approving an institution as a participant in
AgVantage transactions, Farmer Mac assesses the institution’s agricultural
mortgage loan performance as well as its creditworthiness. AgVantage
is a registered trademark of Farmer Mac.
Each AgVantage security held by Farmer
Mac is a general obligation of the issuing institution and is secured by
eligible collateral in an amount of at least 111 percent of the outstanding
principal amount of the security. Eligible collateral may consist
of:
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loans
that meet the same loan eligibility criteria applied by Farmer Mac in its
Farmer Mac I loan purchases and
commitments;
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limited
amounts of 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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During
2007, Farmer Mac purchased ten AgVantage securities for $14.6 million
with maturities ranging from one month to ten years from two
institutions. During 2006, Farmer Mac purchased three AgVantage
securities for $5.2 million with maturities ranging from one month to ten years
from three institutions. As of December 31, 2007 and 2006, the
outstanding principal amount of AgVantage securities held by Farmer Mac was
$30.8 million and $23.5 million, respectively. As of
December 31, 2007, Farmer Mac had experienced no losses, nor had it been
called upon to make a guarantee payment, on any of its AgVantage
securities. For information on AgVantage securities that are
off-balance sheet guarantees, see “—Off-Balance Sheet Guarantees and
Commitments—AgVantage Transactions” below.
Off-Balance Sheet Guarantees and Commitments
Swap Transactions and
LTSPCs. Farmer Mac offers two Farmer Mac I credit enhancement
alternatives that allow approved agricultural and rural residential mortgage
lenders both to retain the cash flow benefits of their loans and increase their
liquidity and lending capacity:
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a
swap transaction, in which Farmer Mac acquires eligible loans from sellers
in exchange for Farmer Mac I Guaranteed Securities backed by those
loans. 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;
and
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an
LTSPC, which is not a guarantee of loans or securities, is a Farmer Mac
commitment to purchase eligible mortgage loans from a segregated pool of
loans under enumerated circumstances on one or more undetermined future
dates. 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 a swap
transaction. The loans underlying an LTSPC can be converted
into Farmer Mac I Guaranteed Securities in a swap transaction at the
option of the seller, with no conversion fee paid to Farmer
Mac.
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Both of
these alternative products result in the creation of off-balance sheet
obligations for Farmer Mac in the ordinary course of its business.
A swap
transaction or an LTSPC may involve loans with payment, maturity and interest
rate characteristics that differ from Farmer Mac’s cash purchase product
offerings. 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
underwriting, collateral valuation, documentation and other
standards. Upon Farmer Mac’s acceptance of the eligible loans,
whether under a swap transaction or an LTSPC, 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. Only the
LTSPC structure 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. An LTSPC
commits Farmer Mac to a future purchase 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.
Farmer
Mac generally purchases loans subject to an LTSPC at:
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par
plus accrued interest (if the loans become delinquent for at least four
months);
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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 cash purchase Farmer Mac
loan products); or
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either
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 converted to Farmer Mac I
Guaranteed Securities in a swap transaction (if the loans are not four
months delinquent).
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In 2007,
Farmer Mac entered into $970.8 million of LTSPCs, compared to $1.1 billion
in 2006. LTSPCs remain the preferred credit enhancement alternative
for new non-cash transactions and are a significant portion of the Farmer Mac I
program. During 2007, three sellers converted $681.7 million of
LTSPCs into Farmer Mac I Guaranteed Securities in swap
transactions. Taking account of those conversions, as of
December 31, 2007, Farmer Mac’s outstanding LTSPCs covered
6,922 mortgage loans with an aggregate principal balance of
$1.9 billion and outstanding off-balance sheet Farmer Mac I Guaranteed
Securities were backed by 8,401 mortgage loans having an aggregate principal
balance of $2.0 billion. Additionally, as of December 31, 2007,
Farmer Mac’s outstanding off-balance sheet AgVantage securities totaled
$2.5 billion. For more information regarding guarantee and LTSPC
volume, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Results of Operations—Business Volume.”
AgVantage
Transactions. Securities generated in AgVantage transactions
may be retained by Farmer Mac or sold into the capital markets. The
latter, off-balance sheet AgVantage securities, are Farmer Mac guaranteed
general obligations of highly-rated issuing institutions collateralized by
eligible loans in a principal amount equal to at least 103 percent of the
outstanding principal amount of the security. In April 2007, Farmer
Mac guaranteed $1.0 billion of off-balance sheet AgVantage securities
supported by a ten-year obligation of Metropolitan Life Insurance Company
(“MetLife”) backed by eligible loans. In two transactions in 2006,
Farmer Mac guaranteed an aggregate $1.5 billion principal amount of
AgVantage securities supported by five-year obligations of MetLife backed by
eligible loans.
Underwriting and Collateral Valuation (Appraisal) Standards
As required by the Act, Farmer Mac has
established credit underwriting and collateral valuation (appraisal) standards
for loans under the Farmer Mac I program that at a minimum are intended
to:
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provide
that no agricultural mortgage 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 agricultural mortgage loan;
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protect
the integrity of the appraisal process with respect to any agricultural
mortgage loans; and
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confirm
that the borrower is or will be actively engaged in agricultural
production for an agricultural mortgage
loan.
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Loans
collateralizing AgVantage securities that are, or are backed by, corporate
obligations of highly-rated sellers are required to meet these statutory
standards in place of the underwriting standards set forth below.
Farmer Mac utilizes 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. Those contractors afford Farmer Mac the benefits of
their servicing centers at fees based on their marginal costs, which allows
Farmer Mac to avoid the fixed costs, and some of the marginal costs, associated
with such operations. 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 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 backed by, pools of such
mortgage loans. Further, Farmer Mac requires sellers of agricultural
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 following permitted exceptions:
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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;
|
|
|
Ÿ
|
a
part-time farm loan supported by private mortgage insurance may have an
LTV of up to 90 percent; and
|
|
|
Ÿ
|
a
rural housing loan supported by private mortgage insurance may have an LTV
of up to 97 percent.
|
Farmer
Mac may require that a loan have a lower LTV when it determines that such lower
LTV is appropriate.
In the
case of newly-originated farm loans, particularly loans secured by agricultural
real estate with building improvements contributing more than 60 percent of
the appraised value of the property (referred to by Farmer Mac as facility
loans), borrowers on the loans must, among other criteria set forth in Farmer
Mac’s credit underwriting standards, meet the following standard underwriting
ratios on a pro forma basis (i.e., giving effect to the new loan):
|
|
·
|
total
debt service coverage ratio, including farm and non-farm income, of not
less than 1.25:1;
|
|
|
·
|
debt-to-asset
ratio of 50 percent or less;
|
|
|
·
|
ratio
of current assets to current liabilities of not less than 1:1;
and
|
|
|
·
|
cash
flow debt service coverage ratio on the mortgaged property of not less
than 1:1.
|
Part-time
farm and rural housing loans are underwritten to residential lending guidelines
of government-sponsored enterprises (“GSEs”), with fully documented income and
assets and liabilities. Borrowers’ credit scores are obtained and
used in the underwriting process.
Loans
secured by eligible collateral with LTVs not greater than 55 percent and made to
borrowers with high credit scores may be accepted without demonstration of all
the standard underwriting ratios. In addition, Farmer Mac’s
underwriting standards provide for acceptance of loans that do not conform to
one or more of the standard underwriting ratios when those loans:
|
|
·
|
exceed
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
|
|
|
·
|
are
made to producers 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.
|
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 of
the standard underwriting ratios. As of December 31, 2007, a total of
$1.8 billion (35.5 percent) of the outstanding balance of loans held and
loans underlying LTSPCs and Farmer Mac I Guaranteed Securities issued after the
enactment of the Farm Credit System Reform Act of 1996 (the “1996 Act”) were
approved based upon compensating strengths ($93.2 million of which had original
LTVs of greater than 70 percent). 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. During 2007, $447.9 million (40.8 percent) of the
loans purchased or added under LTSPCs were approved based upon compensating
strengths ($49.8 million of which had original LTVs of greater than
70 percent), as compared to 2006 when $183.8 million (14.9 percent) of
the loans purchased or added under LTSPCs were approved based upon compensating
strengths ($5.4 million of which had original LTVs of greater than
70 percent). The increased reliance upon compensating strengths
in approving those loans for guarantee, purchase or commitment was based
principally upon the ability of the borrowers to cover their total debt
obligations, rather than the adequacy of the income derived from the mortgaged
property to cover the obligation on the loan.
In the
case of a seasoned loan, Farmer Mac considers sustained historical performance
to be a reliable alternative indicator of a borrower’s ability to pay the loan
according to its terms. A seasoned loan generally will be deemed
an eligible loan if:
|
|
·
|
it
has been outstanding for at least five years and has an LTV of
60 percent or less;
|
|
|
·
|
there
have been no payments more than 30 days past due during the previous three
years; and
|
|
|
·
|
there
have been no material restructurings or modifications for credit reasons
during the previous five years.
|
A
seasoned loan that has been outstanding for more than one year but less than
five years must substantially comply with the applicable underwriting standards
for newly originated loans as of the date the loan was originated by the
lender. The loan must also have a payment history that shows no
payment more than 30 days past due during the three-year period immediately
prior to the date the loan is either purchased by Farmer Mac or made subject to
an LTSPC. There is no requirement that each loan’s compliance with
the underwriting standards be re-evaluated after Farmer Mac accepts the loan
into its program.
The due
diligence Farmer Mac performs before purchasing, guaranteeing securities backed
by, or committing to purchase seasoned loans includes:
|
|
·
|
evaluation
of loan database information to determine conformity to the criteria set
forth in the preceding paragraphs;
|
|
|
·
|
confirmation
that loan file data conform to database
information;
|
|
|
·
|
validation
of supporting credit information in the loan files;
and
|
|
|
·
|
review
of loan documentation and collateral
valuations.
|
These and
other due diligence procedures are performed utilizing 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 credit products, it establishes underwriting guidelines for
them. Those guidelines result in industry-specific measures
equivalent to the basic 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 agricultural
economy.
Collateral Valuations
(Appraisals and Evaluations). Farmer Mac’s collateral
valuation standards for newly originated loans purchased or placed under a
Farmer Mac I Guaranteed Security or LTSPC 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 and, for appraisals,
conform to the Uniform Standards of Professional Appraisal Practice promulgated
by the Appraisal Standards Board.
Farmer
Mac’s collateral valuation standards require that the valuation function be
conducted or administered by an individual meeting specific qualification and
competence criteria who:
|
|
·
|
is
not associated, except by the engagement for the collateral valuation,
with the credit underwriters making the loan decision, though the
appraiser or evaluator and the credit underwriter may be directly or
indirectly employed by a common
employer;
|
|
|
·
|
receives
no financial or professional benefit of any kind by virtue of the report
content, valuation or credit decision made or based on the valuation
report; and
|
|
|
·
|
has
no present or contemplated future direct or indirect interest in the
property serving or to serve as
collateral.
|
Farmer
Mac’s collateral valuation standards require uniform reporting of reliable and
credible opinions of the market value based on analyses of comparable property
sales, including consideration of the property’s income producing capacity and,
if relevant thereto, 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.
Sellers
As of
December 31, 2007, Farmer Mac had 224 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 177 as of
December 31, 2006 is principally the result of Farmer Mac’s marketing efforts
related to the Corporation’s alliance with the American Bankers Association, as
well as seller training 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, 2007, approximately 250 lenders were
participating in those networks. As of December 31, 2007, more than
500 lenders were participating, directly or indirectly, 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, including:
|
|
·
|
owning
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;
|
|
|
·
|
having,
in the judgment of Farmer Mac, the ability and experience to make or
purchase and sell agricultural mortgage loans eligible for the Farmer Mac
I program and service such mortgage loans in accordance with Farmer Mac
requirements either through its own staff or through contractors and
originators;
|
|
|
·
|
maintaining
a minimum adjusted net worth of $1.0 million;
and
|
|
|
·
|
entering
into a Seller/Servicer agreement to comply with the terms of the Farmer
Mac Seller/Servicer Guide, including representations and warranties
regarding the eligibility of the loans and accuracy of loan data provided
to Farmer Mac.
|
Servicing
Farmer Mac generally does not directly
service loans held in its portfolio, although it does act as “master servicer”
for pools of loans and 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 I Guaranteed Securities
Farmer Mac guarantees the timely
payment of principal and interest on Farmer Mac Guaranteed
Securities. Farmer Mac Guaranteed Securities backed by agricultural
mortgage loans eligible for the Farmer Mac I program are referred to as “Farmer
Mac I Guaranteed Securities.”
Farmer
Mac’s statutory charter requires offerings of Farmer Mac Guaranteed Securities
to be registered under the Securities Act of 1933, as amended (“the “Securities
Act”) unless an exemption for an offering is available. Farmer Mac
also may offer Farmer Mac Guaranteed Securities in offerings exempt from
registration under the Securities Act such as in private, unregistered
offerings. U.S. Bank National Association, a national banking
association based in Minneapolis, Minnesota, or Farmer Mac serves as trustee for
the trusts that acquire eligible loans and issue Farmer Mac Guaranteed
Securities.
Farmer
Mac I Guaranteed Securities represent beneficial interests in pools of
agricultural mortgage loans or in obligations issued by agricultural lenders,
which obligations are backed by pools of agricultural mortgage loans, and
guaranteed by Farmer Mac. 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. Farmer Mac I Guaranteed Securities issued
prior to the enactment of changes to Farmer Mac’s statutory charter in 1996 are
supported by first-loss subordinated interests that represented 10 percent of
the balance of the loans underlying the securities at issuance and are neither
guaranteed nor owned by Farmer Mac.
Farmer Mac is liable 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. Because it guarantees timely
payments on Farmer Mac I Guaranteed Securities, Farmer Mac assumes the ultimate
credit risk of borrower defaults on the underlying loans and issuer default on
the underlying obligations which are backed by agricultural mortgage
loans. All of the loans supporting Farmer Mac I Guaranteed Securities
are subject to the applicable underwriting standards described above 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.”
Farmer Mac receives guarantee fees in
return for its guarantee obligations on Farmer Mac I Guaranteed
Securities. These 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 Farmer Mac I Guaranteed Securities
outstanding representing interests in loans 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, 2007 and 2006, Farmer Mac sold Farmer Mac I
Guaranteed Securities in the amounts of $1.3 million and $4.0 million,
respectively, to related parties. In 2007 and 2006, Farmer Mac
recognized no gain or loss on any sale of Farmer Mac Guaranteed
Securities. In addition to the Farmer Mac I Guaranteed Securities it
sold in those years, in the years ended December 31, 2007 and 2006, Farmer Mac
guaranteed AgVantage securities supported by obligations of MetLife backed by
eligible loans in the amounts of $1.0 billion and $1.5 billion,
respectively. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Results of Operations—Business
Volume.”
Farmer Mac I
Transactions
During the year ended December 31,
2007, Farmer Mac purchased or placed under guarantee or LTSPC $2.1 billion
of loans under the Farmer Mac I program. As of December 31,
2007, loans held and loans underlying Farmer Mac I Guaranteed Securities and
LTSPCs totaled $7.6 billion. The 1996 Act revised Farmer Mac’s
statutory charter to eliminate the requirement of a first-loss subordinated
interest in Farmer Mac I Guaranteed Securities. As of December 31,
2007, $3.2 million of Farmer Mac I Guaranteed Securities issued prior to the
1996 Act remained outstanding.
The
following table summarizes loans purchased or newly placed under guarantees or
LTSPCs under the Farmer Mac I program for each of the years ended December 31,
2007, 2006 and 2005.
|
For
the Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Loans
and Guaranteed Securities
|
$ | 1,127,709 | $ | 1,598,673 | $ | 110,056 | ||||||
|
LTSPCs
|
970,789 | 1,139,699 | 461,441 | |||||||||
|
Total
|
$ | 2,098,498 | $ | 2,738,372 | $ | 571,497 | ||||||
The
following table presents the outstanding balances of Farmer Mac I loans held and
loans underlying Farmer Mac I Guaranteed Securities and LTSPCs as of the dates
indicated:
|
As
of December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Post-1996
Act:
|
||||||||||||
|
Loans
and Guaranteed Securities
|
$ | 5,645,023 | $ | 4,338,698 | $ | 2,094,410 | ||||||
|
LTSPCs
*
|
1,948,941 | 1,969,734 | 2,329,798 | |||||||||
|
Pre-1996
Act
|
3,174 | 5,057 | 13,046 | |||||||||
|
Total
Farmer Mac I program
|
$ | 7,597,138 | $ | 6,313,489 | $ | 4,437,254 | ||||||
|
*
|
During
2007 and 2006, sellers converted $681.7 million and $1.0 billion,
respectively, of pre-existing LTSPCs into Farmer Mac I Guaranteed
Securities in the form of swap
transactions.
|
Funding of Guarantee
and Purchase Commitment 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 guarantee and purchase
commitment obligations 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 2007, Farmer Mac’s net charge-offs were $0.5 million,
compared to $0.7 million during 2006.
The Act
requires Farmer Mac to set aside, as an allowance for losses in a reserve
account, a portion of the guarantee fees it receives from its guarantee
activities. Among other things, that reserve account must be
exhausted before Farmer Mac may issue obligations to the U.S. Treasury
against the $1.5 billion 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. Although total outstanding guarantees and LTSPCs exceed
the amount held as an allowance for losses and the amount the Corporation may
borrow from the U.S. Treasury, Farmer Mac does not expect its obligations under
the guarantees and LTSPCs to exceed amounts available to satisfy those
obligations. For information regarding the 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.”
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.
Farmer Mac II
General
The Farmer Mac II program was initiated
in 1992 and is authorized under sections 8.0(3) and 8.0(9)(B) of Farmer Mac’s
statutory charter (12 U.S.C. §§ 2279aa(3) and 2279aa(9)(B)), which provide
that:
|
|
·
|
USDA-guaranteed
portions of loans guaranteed under the Consolidated Farm and Rural
Development Act (7 U.S.C. § 1921 et seq.) are statutorily included in the
definition of loans eligible for Farmer Mac’s secondary market
programs;
|
|
|
·
|
USDA-guaranteed
portions are exempted from the credit underwriting, collateral valuation,
documentation and other standards that other loans must meet to be
eligible for Farmer Mac programs, and are exempted from any
diversification and internal credit enhancement that may be required of
pools of other loans eligible for Farmer Mac programs;
and
|
|
|
·
|
Farmer
Mac is authorized to pool and issue Farmer Mac Guaranteed Securities
backed by USDA-guaranteed portions.
|
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 (collectively, the “guaranteed loans”).
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, 2007, there
were 151 active sellers in the Farmer Mac II program, consisting mostly of
community and regional banks, compared to 181 sellers as of December 31, 2006,
for a decrease of 30 active sellers. In the aggregate, more than 500
sellers were participating either directly or indirectly in one or both of the
Farmer Mac I or Farmer Mac II programs during 2007.
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.
Farmer Mac II
Guaranteed Securities
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 in swap transactions
or to other investors for cash.
Farmer Mac II
Transactions
During the years ended December 31,
2007, 2006 and 2005, Farmer Mac issued $210.0 million, 234.7 million
and $200.2 million, respectively, of Farmer Mac II Guaranteed
Securities. As of December 31, 2007, 2006 and 2005,
$946.6 million, $925.8 million and $835.7 million, respectively,
of Farmer Mac II Guaranteed Securities were outstanding. See Note 5
and Note 12 to the consolidated financial statements. The following
table presents Farmer Mac II Guaranteed Securities issued for each of the years
indicated:
|
For
the Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Purchased
and retained
|
$ | 204,931 | $ | 234,684 | $ | 199,843 | ||||||
|
Purchased
and sold
|
5,109 | - | - | |||||||||
|
Swaps
(issued to third parties)
|
- | - | 325 | |||||||||
|
Total
|
$ | 210,040 | $ | 234,684 | $ | 200,168 | ||||||
The
following table presents the outstanding balance of Farmer Mac II Guaranteed
Securities as of the dates indicated:
|
Outstanding
Balance of
|
||||||||||||
|
Farmer
Mac II Guaranteed Securities
|
||||||||||||
|
as
of December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
On-balance
sheet
|
$ | 921,802 | $ | 892,667 | $ | 796,224 | ||||||
|
Off-balance
sheet
|
24,815 | 33,132 | 39,508 | |||||||||
|
Total
|
$ | 946,617 | $ | 925,799 | $ | 835,732 | ||||||
As of
December 31, 2007, Farmer Mac had experienced no credit losses on any of its
Farmer Mac II Guaranteed Securities. As of December 31, 2007, Farmer
Mac had outstanding $0.4 million of principal and interest advances on
Farmer Mac II Guaranteed Securities, compared to $0.1 million as of
December 31, 2006 and $0.4 million as of December 31, 2005.
Financing
Debt Issuance
Farmer
Mac funds its purchases of program, mission-related 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. 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 a nationally recognized
statistical rating organization (“NRSRO”).
Farmer
Mac’s board of directors has authorized the issuance of up to $7.0 billion
outstanding of discount notes and medium-term notes, 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, mission-related assets and non-program
investment assets in accordance with policies established by its board of
directors. In compliance with regulations issued by FCA in 2005,
including dollar amount, issuer concentration and credit quality limitations,
Farmer Mac’s current policies authorize non-program investments in:
|
|
·
|
obligations
of the United States;
|
|
|
·
|
obligations
of 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
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 the Farmer Mac
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. 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, 2007, 1,030,780 shares of Class A voting common stock,
500,301 shares of Class B voting common stock, 8,363,580 shares of
Class C non-voting common stock and 700,000 shares of 6.40 percent
non-voting cumulative preferred stock, Series A were outstanding. Farmer Mac may obtain
additional capital from future issuances of voting and non-voting common stock
and non-voting preferred stock. Farmer Mac has no present intention
to issue any additional shares of common stock, except pursuant to programs in
which members of the board of directors may purchase Class C non-voting common
stock, or employees, members of management or the board of directors may
exercise options to purchase Class C non-voting common stock as part of their
compensation arrangements.
The
following table presents the dividends declared on the common stock during and
subsequent to 2007:
|
Date
|
Per
|
For
|
For
|
||||||
|
Dividend
|
Share
|
Period
|
Period
|
Date
|
|||||
|
Declared
|
Amount
|
Beginning
|
Ending
|
Paid
|
|||||
|
February
5, 2007
|
$ | 0.10 |
January
1, 2007
|
March
31, 2007
|
March
30, 2007
|
||||
|
April
5, 2007
|
0.10 |
April
1, 2007
|
June
30, 2007
|
June
29, 2007
|
|||||
|
August
2, 2007
|
0.10 |
July
1, 2007
|
September
30, 2007
|
September
28, 2007
|
|||||
|
October
4, 2007
|
0.10 |
October
1, 2007
|
December
31, 2007
|
December
31, 2007
|
|||||
|
February
7, 2008
|
0.10 |
January
1, 2008
|
March
31, 2008
|
*
|
|||||
* The
dividend declared on February 7, 2008 is scheduled to be paid on March 31,
2008.
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.”
The
cumulative preferred stock, Series A has a redemption price and liquidation
preference of $50.00 per share, plus accrued and unpaid
dividends. The preferred stock does not have a maturity
date. Beginning on June 30, 2012, Farmer Mac has the option to redeem
the preferred stock at any time, in whole or in part, at the redemption price of
$50.00 per share, plus accrued and unpaid dividends through and including the
redemption date. The costs of issuing the preferred stock were
charged to additional paid-in capital. Farmer Mac pays cumulative
dividends on the preferred stock quarterly in arrears, when and if declared by
the board of directors. Farmer Mac’s ability to declare and pay a
dividend could be restricted if it failed to comply with regulatory capital
requirements. The following table presents the dividends declared on
the preferred stock during and subsequent to 2007:
|
Date
|
Per
|
For
|
For
|
||||||
|
Dividend
|
Share
|
Period
|
Period
|
Date
|
|||||
|
Declared
|
Amount
|
Beginning
|
Ending
|
Paid
|
|||||
|
February
5, 2007
|
$ | 0.80 |
January
1, 2007
|
March
31, 2007
|
April
2, 2007
|
||||
|
April
5, 2007
|
0.80 |
April
1, 2007
|
June
30, 2007
|
July
2, 2007
|
|||||
|
August
2, 2007
|
0.80 |
July
1, 2007
|
September
30, 2007
|
October
1, 2007
|
|||||
|
October
4, 2007
|
0.80 |
October
1, 2007
|
December
31, 2007
|
December
31, 2007
|
|||||
|
February
7, 2008
|
0.80 |
January
1, 2008
|
March
31, 2008
|
*
|
|||||
* The
dividend declared on February 7, 2008 is scheduled to be paid on March 31,
2008.
During
fourth quarter 2005, Farmer Mac established a program to repurchase up to
10 percent, or 958,632 shares, of the Corporation’s outstanding Class C
non-voting common stock. The aggregate number of shares repurchased
by Farmer Mac under that program reached the maximum number of authorized shares
during first quarter 2007, thereby terminating the program according to its
terms. At that time, Farmer Mac announced the establishment of an
additional program to repurchase up to one million additional shares of the
Corporation’s outstanding Class C Non-Voting Common
Stock. Repurchases under that program commenced in accordance with
its terms upon termination of the previous program. During 2007 and
2006, Farmer Mac
repurchased
1,086,541 shares and 796,450 shares, respectively, of its Class C Non-Voting
Common Stock at an average price of $26.61 and $26.82
per share,
respectively,
pursuant to both
of the
Corporation’s previously announced stock repurchase programs. These
2007 and 2006
repurchases
reduced the Corporation’s stockholders’ equity by approximately $29.0
million and
$22.0 million,
respectively. The aggregate number of shares purchased by
Farmer Mac under the stock repurchase program announced in 2007 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, in extreme
circumstances, 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 and Farmer Mac II programs. The Act
provides that the U.S. Treasury is required to purchase such obligations of
Farmer Mac if Farmer Mac certifies that:
|
|
·
|
a
portion of the guarantee fees assessed by Farmer Mac has been set aside 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
|
|
|
·
|
the
proceeds of such obligations are needed to fulfill Farmer Mac’s guarantee
obligations.
|
Such
obligations would bear interest at a rate determined by the U.S. Treasury,
taking into consideration the average rate on outstanding marketable obligations
of the United States as of the last day of the last calendar month ending before
the date of the purchase of the obligations from Farmer Mac, and would be
required to be repurchased from the U.S. Treasury by Farmer Mac within a
“reasonable time.”
The United States government does not
guarantee payments due on Farmer Mac Guaranteed Securities, funds invested in
the equity or debt securities of Farmer Mac, any dividend payments on shares of
Farmer Mac stock or the profitability of Farmer Mac.
GOVERNMENT REGULATION OF FARMER MAC
General
Farmer Mac’s statutory charter requires
offerings of Farmer Mac Guaranteed Securities to be registered under the
Securities Act unless an exemption for an offering is
available. Farmer Mac also is required to file reports with the SEC
pursuant to the SEC’s periodic reporting requirements.
Regulation
Office of Secondary
Market Oversight
As an institution of the FCS, Farmer
Mac is subject to the regulatory authority of FCA. FCA, acting
through its Office of Secondary Market Oversight, 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 the Office of Secondary Market Oversight, 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 1996 Act, establishes three capital standards for Farmer
Mac:
|
|
·
|
Minimum
capital – Farmer Mac’s minimum capital level is an amount of core capital
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:
|
|
|
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.
|
|
|
·
|
Critical
capital – 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. While the Act does not specify the required level
of risk-based capital, that level is permitted to exceed the statutory
minimum capital requirement applicable to Farmer Mac, if so indicated by
the risk-based capital stress test.
|
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:
|
|
·
|
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
|
|
|
·
|
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.
|
The
risk-based capital stress test then adds an additional 30 percent to the
resulting capital requirement for management and operational risk. On
September 13, 2007, FCA published a proposed rule that, if adopted as proposed,
would amend the FCA regulation governing the risk-based capital stress test
applicable to Farmer Mac. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Regulatory
Matters.”
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, 2007 was
$42.8 million and Farmer Mac’s regulatory capital of $230.3 million
exceeded that amount by approximately $187.5 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, 2007, 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 the
Office of Secondary Market Oversight 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 level II
include:
|
|
·
|
requiring
Farmer Mac to submit and comply with a capital restoration
plan;
|
|
|
·
|
prohibiting
the payment of dividends if such payment would result in Farmer Mac being
reclassified as within level III or IV, and requiring the pre-approval of
any dividend payment even if such payment would not result in
reclassification as within level IV;
and
|
|
|
·
|
reclassifying
Farmer Mac as within level III 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.
|
The
mandatory measures applicable to level III include:
|
|
·
|
requiring
Farmer Mac to submit and comply with a capital restoration
plan;
|
|
|
·
|
prohibiting
the payment of dividends if such payment would result in Farmer Mac being
reclassified as within level IV and requiring the pre-approval of any
dividend payment even if such payment would not result in reclassification
as within level IV; and
|
|
|
·
|
reclassifying
Farmer Mac as within a lower level 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.
|
If Farmer
Mac were classified as within level III, then, in addition to the foregoing
mandatory supervisory measures, the Director of the Office of Secondary Market
Oversight could take any of the following discretionary supervisory
measures:
|
|
·
|
imposing
limits on any increase in, or ordering the reduction of, any obligations
of Farmer Mac, including off-balance sheet
obligations;
|
|
|
·
|
limiting
or prohibiting asset growth or requiring the reduction of
assets;
|
|
|
·
|
requiring
the acquisition of new capital in an amount sufficient to provide for
reclassification as within a higher
level;
|
|
|
·
|
terminating,
reducing or modifying any activity the Director determines creates
excessive risk to Farmer Mac; or
|
|
|
·
|
appointing
a conservator or a receiver for Farmer
Mac.
|
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 the Office of Secondary
Market Oversight 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.
Farmer
Mac’s business, operating results and financial condition may be materially and
adversely affected by external factors that may be beyond its
control.
Farmer
Mac’s business, operating results and financial condition may be materially and
adversely affected by external factors that may be beyond its control,
including, but not limited to:
|
|
·
|
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, including, but not limited
to:
|
|
|
o
|
the
possible establishment of additional statutory or regulatory restrictions
or constraints on Farmer Mac that could hamper its growth or diminish its
profitability; and
|
|
|
o
|
the
possible effect of Farmer Mac’s risk-based capital requirement, which
could, under certain circumstances, exceed its statutory minimum capital
requirement;
|
|
|
·
|
Farmer
Mac’s access to the debt markets at favorable rates and
terms;
|
|
|
·
|
competitive
pressures in the purchase of agricultural mortgage loans and the sale of
Farmer Mac Guaranteed Securities and debt
securities;
|
|
|
·
|
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 mortgage loans;
|
|
|
·
|
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 mortgage loans backing Farmer Mac I Guaranteed
Securities or under LTSPCs; and
|
|
|
·
|
the
effects of any changes in federal assistance for agriculture on the
agricultural economy or the value of agricultural real
estate.
|
Farmer
Mac’s business development and profitability depend on the continued growth of
the secondary market for agricultural mortgage loans, the future of which
remains uncertain.
Continued
growth in Farmer Mac’s business may be constrained by conditions that limit the
need for agricultural lenders to obtain the benefits of Farmer Mac’s programs,
including, but not limited to:
|
|
·
|
high
levels of available capital and liquidity of agricultural
lenders;
|
|
|
·
|
the
availability of alternative sources of funding, lending capacity and
credit enhancement for agricultural
lenders;
|
|
|
·
|
downturns
in the agricultural economy that could reduce growth rates and the need
for capital in the agricultural mortgage
market;
|
|
|
·
|
increased
competition in the secondary market for agricultural mortgage
loans;
|
|
|
·
|
reduced
growth rates in the agricultural mortgage market, due largely to the
strong liquidity of many farmers and
ranchers;
|
|
|
·
|
reduced
capital requirements for the FCS, which lessen the demand for
LTSPCs;
|
|
|
·
|
the
historical preference of many agricultural lending institutions to retain
loans in their portfolios rather than to sell them into the secondary
market, notwithstanding the corporate finance and capital planning
benefits they might otherwise realize through participation in Farmer
Mac’s programs;
|
|
|
·
|
a
small number of business partners currently provide a significant
proportion of Farmer Mac’s business volume, as distinguished from program
revenue (which is obtained from diverse sources), as a result of the
Corporation’s successful marketing focus on large program transactions
that emphasize high asset quality, with greater protection against adverse
credit performance and commensurately lower compensation for the
assumption of credit risk and administrative costs, resulting in projected
risk-adjusted marginal returns on equity approximately equal to those of
other Farmer Mac program
transactions;
|
|
|
·
|
the
ability of some lending institutions to subsidize, in effect, their
agricultural mortgage loan rates through low-return use of equity or
acceptance of greater asset and liability mismatch;
and
|
|
|
·
|
legislative
and regulatory developments in this area, as further discussed
below.
|
As a
result of these factors, Farmer Mac may not be able to meet its business
development and profitability goals. To the extent that Farmer Mac
fails to meet these goals, its total revenues, net income and financial
condition could be materially adversely affected.
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. Consequently, Farmer Mac is subject to risks 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. Any of these political or regulatory
developments could have a material and adverse effect on Farmer Mac’s
business. 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 guarantees the timely payment of principal and interest on Farmer Mac
Guaranteed Securities, which are backed by qualified agricultural real estate
mortgage loans. As a result of its guarantee, Farmer Mac assumes the
ultimate credit risk of borrower defaults on the underlying
loans. Farmer Mac also issues LTSPCs for pools of qualified loans
that commit Farmer Mac to purchase certain loans under enumerated circumstances
on one or more undetermined future dates.
Repayment
of the qualified loans underlying Farmer Mac Guaranteed Securities or subject to
LTSPCs 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. If the cash flow from a farming operation decreases (for
example, as a result of adverse weather conditions that destroy a crop or that
prevent the planting or harvesting of a crop), the farmer’s ability to repay the
loan may be impaired. Protracted adverse weather, animal and plant
disease outbreaks, market or other conditions affecting a particular geographic
region and particular commodities related to the agricultural mortgage loans
backing Farmer Mac Guaranteed Securities or subject to LTSPCs, or significant
loan payment defaults by farmers for other reasons, could require Farmer Mac to
pay under its guarantees and LTSPCs and could have a material adverse effect on
the Corporation’s financial condition and results of operations.
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 financial condition and future earnings.
The
primary types of risk in the conduct of Farmer Mac’s business are:
|
|
·
|
credit
risk associated with the agricultural mortgage loans that Farmer Mac
purchases or commits to purchase or that back Farmer Mac Guaranteed
Securities;
|
|
|
·
|
interest
rate risk on all program, mission-related and non-program assets held on
balance sheet, that results principally
from:
|
|
|
o
|
potential
changes in the relationship between the interest rates paid by the
Corporation on its liabilities and the yields it receives on investments
of like maturity or reset term; or
|
|
|
o
|
potential
timing differences between the maturities or interest rate resets of the
assets and the liabilities used to fund the acquisition and carry of the
assets;
|
|
|
·
|
credit
risk associated with Farmer Mac’s business relationships with other
institutions, such as counterparties to swap and other hedging
arrangements; and
|
|
|
·
|
risks
as to the creditworthiness of the issuers of AgVantage securities and the
Corporation’s non-program
investments.
|
Any of
these risks could materially and adversely affect Farmer Mac’s financial
condition 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
Farmer Mac is not a party to any
material pending legal proceedings.
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 2007.
PART II
|
Item
5.
|
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.
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)
|
||||||||||||||||
|
2008
|
||||||||||||||||
|
First
quarter (through March 1, 2008)
|
$ | 20.15 | $ | 16.50 | $ | 29.21 | $ | 24.04 | ||||||||
|
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 | ||||||||||||
|
2006
|
||||||||||||||||
|
Fourth
quarter
|
19.50 | 17.20 | 28.41 | 24.90 | ||||||||||||
|
Third
quarter
|
19.30 | 17.55 | 28.19 | 25.68 | ||||||||||||
|
Second
quarter
|
19.90 | 16.95 | 29.65 | 25.05 | ||||||||||||
|
First
quarter
|
21.95 | 18.60 | 31.06 | 27.53 | ||||||||||||
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, 2002 to December 31,
2007. The graph assumes that $100 was invested on December 31,
2002 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.
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
Securities Exchange Act of 1934, as amended (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).
As of
March 1, 2008, Farmer Mac estimates that there were 1,235 registered owners
of the Class A voting common stock, 94 registered owners of the Class
B voting common stock and 1,153 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. Since fourth
quarter 2004, Farmer Mac has paid a quarterly dividend of $0.10 per share on all
classes of the Corporation’s common stock pursuant to a policy adopted by the
Corporation’s board of directors. On February 7, 2008, Farmer
Mac’s board of directors declared a quarterly dividend of $0.10 per share on the
Corporation’s common stock payable on March 31, 2008. Farmer Mac
expects to continue to pay comparable quarterly cash dividends for the
foreseeable future, subject to the outlook and indicated capital needs of the
Corporation and the determination of the board of directors. 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 23, 2008. 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. On October 3, 2007, 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
727 shares of its Class C non-voting common stock, at an issue price of $29.36
per share, to the seven directors who elected to receive such stock in lieu of
their cash retainers. Also on October 3, 2007, Farmer Mac granted
options under its 1997 Incentive Plan to purchase an aggregate of 24,000 shares
of Class C non-voting common stock, at an exercise price of $32.77 per share, to
seven non-officer employees as incentive compensation.
(b)
Not
applicable.
(c) As
shown in the table below, Farmer Mac repurchased 524,259 shares of its
Class C non-voting common stock during fourth quarter 2007 at an average
price of $26.51 per share. All of the repurchased shares were
purchased in open market transactions and were retired to become authorized but
unissued shares available for future issuance.
|
Issuer
Purchases of Equity Securities
|
||||||||||||||||
|
Period
|
Total
Number
of
Class C
Shares
Purchased
|
Average
Price
Paid
per
Class
C
Share
|
Total
Number of
Class
C Shares
Purchased
as
Part
of Publicly
Announced
Program*
|
Maximum
Number
of Class
C
Shares that May
Yet
Be Purchased
Under
the
Program
|
||||||||||||
|
October
1, 2007 - October 31, 2007
|
- | $ | - | - | 555,950 | |||||||||||
|
November
1, 2007 - November 30, 2007
|
237,102 | 26.89 | 237,102 | 318,848 | ||||||||||||
|
December
1, 2007 - December 31, 2007
|
287,157 | 26.20 | 287,157 | 31,691 | ||||||||||||
|
Total
|
524,259 | 26.51 | 524,259 | 31,691 | ||||||||||||
|
|
*
|
On
February 5, 2007, Farmer Mac announced the establishment of a program to
repurchase up to one million shares of the Corporation’s outstanding Class
C Non-Voting Common Stock. The aggregate number of shares
purchased by Farmer Mac under this new stock repurchase program reached
the maximum number of authorized shares during first quarter 2008, thereby
terminating the program according to its
terms.
|
Item
6. Selected Financial Data
|
As of December 31,
|
||||||||||||||||||||
|
Summary
of Financial Condition:
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 101,445 | $ | 877,714 | $ | 458,852 | $ | 430,504 | $ | 623,674 | ||||||||||
|
Investment
securities
|
2,624,366 | 1,830,904 | 1,621,941 | 1,056,143 | 1,064,782 | |||||||||||||||
|
Farmer
Mac Guaranteed Securities
|
1,298,823 | 1,330,418 | 1,330,976 | 1,376,847 | 1,508,134 | |||||||||||||||
|
Loans,
net
|
766,219 | 775,421 | 799,516 | 882,874 | 982,446 | |||||||||||||||
|
Total
assets
|
4,977,613 | 4,953,673 | 4,341,445 | 3,847,410 | 4,299,670 | |||||||||||||||
|
Notes
payable:
|
||||||||||||||||||||
|
Due
within one year
|
3,829,698 | 3,298,097 | 2,587,704 | 2,620,172 | 2,799,384 | |||||||||||||||
|
Due
after one year
|
744,649 | 1,296,691 | 1,406,527 | 864,412 | 1,138,892 | |||||||||||||||
|
Total
liabilities
|
4,754,020 | 4,705,184 | 4,095,416 | 3,612,176 | 4,089,178 | |||||||||||||||
|
Stockholders'
equity
|
223,593 | 248,489 | 246,029 | 235,234 | 210,492 | |||||||||||||||
|
Selected
Financial Ratios:
|
||||||||||||||||||||
|
Return
on average assets
|
0.09 | % | 0.64 | % | 1.15 | % | 0.96 | % | 0.92 | % | ||||||||||
|
Return
on average common equity
|
2.20 | % | 14.03 | % | 22.87 | % | 20.76 | % | 24.16 | % | ||||||||||
|
Average
equity to assets
|
4.75 | % | 5.32 | % | 5.88 | % | 5.47 | % | 4.61 | % | ||||||||||
|
For the Year Ended December
31,
|
||||||||||||||||||||
|
Summary
of Operations:
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||
|
Interest
Income:
|
||||||||||||||||||||
|
Net
interest income after recovery/ (provision) for loan
losses
|
$ | 44,668 | $ | 40,686 | $ | 50,689 | $ | 65,763 | $ | 72,278 | ||||||||||
|
Non-interest
(loss)/income:
|
||||||||||||||||||||
|
Guarantee
and commitment fees
|
25,232 | 21,815 | 19,554 | 20,977 | 20,685 | |||||||||||||||
|
(Losses)/gains
on financial derivatives and trading assets
|
(40,274 | ) | 1,617 | 11,537 | (14,687 | ) | (17,653 | ) | ||||||||||||
|
Gains
on sale of available-for-sale investment securities
|
288 | 1,150 | - | 200 | - | |||||||||||||||
|
Gain
on sale of Farmer Mac Guaranteed Securities
|
- | - | - | 367 | - | |||||||||||||||
|
Gain
on the repurchase of debt
|
- | - | 116 | - | - | |||||||||||||||
|
Gains
on the sale of real estate owned
|
130 | 809 | 34 | 523 | 178 | |||||||||||||||
|
Representation
and warranty claims income
|
- | 718 | 79 | 2,816 | - | |||||||||||||||
|
Other
income
|
1,411 | 1,001 | 1,872 | 1,295 | 812 | |||||||||||||||
|
Non-interest
(loss)/income
|
(13,213 | ) | 27,110 | 33,192 | 11,491 | 4,022 | ||||||||||||||
|
Non-interest
expense
|
24,877 | 23,094 | 11,518 | 16,263 | 15,182 | |||||||||||||||
|
Income
before income taxes
|
6,578 | 44,702 | 72,363 | 60,991 | 61,118 | |||||||||||||||
|
Income
tax (benefit)/expense
|
(83 | ) | 12,689 | 23,091 | 19,751 | 19,847 | ||||||||||||||
|
Net
income
|
6,661 | 32,013 | 49,272 | 41,240 | 41,271 | |||||||||||||||
|
Preferred
stock dividends
|
(2,240 | ) | (2,240 | ) | (2,240 | ) | (2,240 | ) | (2,240 | ) | ||||||||||
|
Net
income available to common stockholders
|
$ | 4,421 | $ | 29,773 | $ | 47,032 | $ | 39,000 | $ | 39,031 | ||||||||||
|
Allowance
for Losses Activity:
|
||||||||||||||||||||
|
(Recovery)/provision
for losses
|
$ | (142 | ) | $ | (3,408 | ) | $ | (8,777 | ) | $ | (412 | ) | $ | 7,285 | ||||||
|
Net
charge-offs/(recoveries)
|
526 | 690 | (329 | ) | 4,540 | 5,243 | ||||||||||||||
|
Ending
balance
|
3,887 | 4,555 | 8,653 | 17,101 | 22,053 | |||||||||||||||
|
Earnings
Per Common Share and Dividends:
|
||||||||||||||||||||
|
Basic
earnings per common share
|
$ | 0.43 | $ | 2.74 | $ | 4.14 | $ | 3.24 | $ | 3.32 | ||||||||||
|
Diluted
earnings per common share
|
$ | 0.42 | $ | 2.68 | $ | 4.09 | $ | 3.20 | $ | 3.24 | ||||||||||
|
Common
stock dividends per common share
|
$ | 0.40 | $ | 0.40 | $ | 0.40 | $ | 0.10 | $ | - | ||||||||||
|
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, 2007, 2006 and 2005 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, 2007, 2006 and 2005.
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 and provisions for
losses;
|
|
|
·
|
trends
in expenses;
|
|
·
|
trends in non-program investments; |
|
|
·
|
changes
in capital position; and
|
|
|
·
|
other
business and financial matters.
|
Management’s
expectations for Farmer Mac’s future necessarily involve a number of assumptions
and estimates and the evaluation of risks and uncertainties. Various
factors or events could cause Farmer Mac’s actual results to differ materially
from the expectations as expressed or implied by the forward-looking statements,
including the factors discussed under “Risk Factors” in Part I, Item 1A of this
Annual Report on Form 10-K and uncertainties regarding:
|
|
·
|
lender
interest in Farmer Mac credit products and the Farmer Mac secondary
market;
|
|
|
·
|
increases
in general and administrative expenses attributable to growth of the
business and regulatory environment, including the hiring of additional
personnel with expertise in key functional
areas;
|
|
|
·
|
the
rate and direction of development of the secondary market for agricultural
mortgage loans;
|
|
|
·
|
the
general rate of growth in agricultural mortgage
indebtedness;
|
|
|
·
|
borrower
preferences for fixed-rate agricultural mortgage
indebtedness;
|
|
|
·
|
legislative
or regulatory developments that could affect Farmer
Mac;
|
|
|
·
|
the
willingness of investors to invest in Farmer Mac Guaranteed Securities;
and
|
|
|
·
|
developments
in the financial markets, including possible reaction to events involving
GSEs other than 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 Policy and Estimates
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States (“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 policy that is both important to
the portrayal of Farmer Mac’s financial condition and results of operations and
requires complex, subjective judgments is the accounting policy for the
allowance for losses. 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 issued after the Farm Credit System Reform Act of 1996 (the
“1996 Act”) and long-term standby purchase commitments (“LTSPCs”), 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
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs 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 maintains an allowance for losses to cover estimated losses on loans held,
real estate owned and loans underlying LTSPCs and post-1996 Act Farmer Mac I
Guaranteed Securities 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 methodology for determining its allowance for losses incorporates the
Corporation’s proprietary automated loan classification system. That
system scores loans based on criteria such as historical repayment performance,
loan seasoning, loan size and loan-to-value ratio. For the purposes
of the loss allowance methodology, the loans in Farmer Mac’s portfolio of loans
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs
have been scored and classified for each calendar quarter since first quarter
2000. The allowance methodology captures the migration of loan scores
across concurrent and overlapping three-year time horizons and calculates loss
rates separately within each loan classification for (1) loans underlying
LTSPCs and (2) loans held and loans underlying post-1996 Act Farmer
Mac I Guaranteed Securities. The calculated loss rates are
applied to the current classification distribution of Farmer Mac’s portfolio to
estimate inherent losses, on the assumption that the historical credit losses
and trends used to calculate loss rates will continue in the
future. Management evaluates this assumption by taking into
consideration factors, including:
|
|
·
|
economic
conditions;
|
|
|
·
|
geographic
and agricultural commodity/product concentrations in the
portfolio;
|
|
|
·
|
the
credit profile of the portfolio;
|
|
|
·
|
delinquency
trends of the portfolio;
|
|
|
·
|
historical
charge-off and recovery activities of the portfolio;
and
|
|
|
·
|
other
factors to capture current portfolio trends and characteristics that
differ from historical experience.
|
Management believes that its use of
this methodology produces a reliable estimate of probable losses, as of the
balance sheet date, for all loans held, real estate owned and loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, in accordance with
SFAS 5 and SFAS 114.
The
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.
Prior to
third quarter 2007, no allowance for losses had been made for loans underlying
Farmer Mac I Guaranteed Securities issued prior to the 1996 Act (“Pre-1996 Act
Farmer Mac I Guaranteed Securities”), AgVantage securities or securities issued
under the Farmer Mac II program (“Farmer Mac II Guaranteed
Securities”). Pre-1996 Act Farmer Mac I Guaranteed Securities
are supported by unguaranteed first loss subordinated interests, which had been
expected to exceed the estimated credit losses on those
loans. Through June 30, 2007, Farmer Mac had not experienced any
credit losses on any Pre-1996 Act Farmer Mac I Guaranteed
Securities. In third quarter 2007, Farmer Mac charged off $0.4
million related to one loan underlying Pre-1996 Act Farmer Mac I Guaranteed
Securities. The remaining $3.2 million of Pre-1996 Act Farmer
Mac I Guaranteed Securities represent interests in seasoned performing loans
with low loan-to-value ratios. Farmer Mac does not expect to incur
any further losses on the remaining Pre-1996 Act Farmer Mac I Guaranteed
Securities in the future. Each AgVantage security is a general
obligation of an issuing institution approved by Farmer Mac and is
collateralized by eligible mortgage loans. As of December 31, 2007,
there were no probable losses inherent in Farmer Mac’s AgVantage securities due
to the high credit quality of the obligors, as well as the underlying
collateral. As of December 31, 2007, Farmer Mac had not experienced
any credit losses on any AgVantage Securities and does not expect to incur any
such losses in the future. The guaranteed portions collateralizing
Farmer Mac II Guaranteed Securities are guaranteed by USDA. Each USDA
guarantee is an obligation backed by the full faith and credit of the United
States. As of December 31, 2007, 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.
Further
information regarding the allowance for losses is included in “—Risk
Management—Credit Risk - Loans.”
Results
of Operations
Overview. Net income
available to common stockholders for 2007 was $4.4 million or
$0.42 per diluted common share, compared to $29.8 million or $2.68 per
diluted common share in 2006 and $47.0 million or $4.09 per diluted common
share in 2005. The primary reasons for the decline in net income from
2006 to 2007 were losses on financial derivatives, attributable to the
significant decline in interest rates during the latter half of 2007, partially
offset by increases in net interest income and guarantee and commitment
fees. The primary reasons for the decline in net income from 2005 to
2006 were reduced gains on financial derivatives and reduced recoveries for
losses. These items are described in greater detail
below.
The cumulative effects of Farmer Mac’s
stock repurchases of 1,086,541, 796,450, 800,202 and 299,248 shares during 2007,
2006, 2005 and 2004, respectively, on diluted earnings per share for 2007, 2006
and 2005 were increases of $0.09, $0.39 and $0.36, respectively.
During the latter half of 2007,
interest rate and credit spread volatility in the capital markets increased,
with correspondingly greater fluctuations in the market values of fixed income
securities and mortgage-backed securities in particular. Throughout
that period and through the date of this report, Farmer Mac had ready access to
the capital markets and regularly issued discount notes and medium-term notes at
favorable rates. Farmer Mac’s short-term funding spreads below the
corresponding London Interbank Offered Rate, or LIBOR, improved
significantly. Consequently, Farmer Mac’s effective net interest
yield on program assets and short-term and floating rate investments was
significantly higher than the effective net interest yields it earned on
such assets and investments in previous quarters. It is uncertain how
long those favorable funding spreads to LIBOR will continue, and at what levels;
therefore, no assurance can be given as to how long Farmer Mac will continue to
earn these higher effective net interest yields. The improvements in the
effective net interest yield are offset by losses attributable to declines in
fair value of financial derivatives. Also during third and fourth
quarters of 2007, widening of credit market spreads caused declines
in the fair value of many corporate securities in Farmer Mac’s investment
portfolio, resulting in increased unrealized losses, some of which may be
realized in the future if those securities are not held to maturity or do not
otherwise recover in value.
During
2007, Farmer Mac’s program volume totaled $2.3 billion, compared to 2006
volume of $3.0 billion. Farmer Mac’s outstanding program volume
as of December 31, 2007 was $8.5 billion, compared to $7.2 billion as
of December 31, 2006. For 2007, Farmer Mac’s new business volume
included the:
|
|
·
|
addition
of $970.8 million of Farmer Mac I eligible loans under
LTSPCs;
|
|
|
·
|
purchase
of $127.7 million of newly originated Farmer Mac I eligible
loans;
|
|
|
·
|
guarantee
of $1.0 billion of AgVantage securities;
and
|
|
|
·
|
purchase
of $210.0 million of Farmer Mac II USDA-guaranteed
portions.
|
In
addition to its program volume during 2007, Farmer Mac purchased, as
mission-related non-program investments consistent with parameters approved by
FCA, $405.4 million of mortgage-backed securities representing beneficial
ownership interests in distribution cooperative mortgage loans made by the
National Rural Utilities Cooperative Finance Corporation (“Nat Rural”) to its
rural electric cooperative members. These transactions improve Nat
Rural’s pricing to its members and advance Farmer Mac’s role in financing rural
America.
As part
of Farmer Mac’s continuing evaluation of the overall credit quality of its
portfolio, the state of the U.S. agricultural economy, the continued upward
trends in agricultural land values and the level of Farmer Mac’s outstanding
guarantees and commitments, Farmer Mac determined that the appropriate level of
allowance for losses as of December 31, 2007 was
$3.9 million. This resulted in the release of approximately $0.1
million from the allowance for losses during 2007, compared to the release of
$3.4 million and $8.8 million from the allowance for losses in 2006 and
2005, respectively. As of December 31, 2007, the allowance for losses
of $3.9 million was 8 basis points relative to the outstanding post-1996 Act
Farmer Mac I portfolio (excluding AgVantage securities), compared to
$4.6 million and 10 basis points as of December 31,
2006. For further discussion of the change in the allowance for
losses and provision for losses, see “—Risk Management—Credit Risk -
Loans.”
As of
December 31, 2007, Farmer Mac’s 90-day delinquencies (Farmer Mac I loans
purchased or placed under Farmer Mac I Guaranteed Securities or LTSPCs after
enactment of the 1996 Act that were 90 days or more past due, in foreclosure,
restructured after delinquency, or in bankruptcy, excluding loans performing
under either their original loan terms or a court-approved bankruptcy plan) were
$10.6 million, representing 0.21 percent of the principal balance of the
outstanding post-1996 Act Farmer Mac I portfolio (excluding AgVantage
securities), compared to $19.7 million (0.41 percent) as of December 31, 2006
and $25.5 million (0.58 percent) as of December 31, 2005.
The
following table presents Farmer Mac’s non-performing assets, which represent the
aggregate of 90-day delinquencies, loans performing in bankruptcy and real
estate owned.
|
As
of December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
90-day
delinquencies (including loans in foreclosure and loans restructured after
delinquency)
|
$ | 10,584 | $ | 19,655 | ||||
|
Loans
performing in bankruptcy
|
20,750 | 17,480 | ||||||
|
Real
estate owned
|
590 | 2,097 | ||||||
|
Non-performing
assets
|
$ | 31,924 | $ | 39,232 | ||||
The
following table presents historical information regarding Farmer Mac’s
non-performing assets and 90-day delinquencies:
|
Outstanding
|
||||||||||||||||||||||||
|
Post-1996
Act
|
||||||||||||||||||||||||
|
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, 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 | % | ||||||||||||||||
|
September
30, 2005
|
4,273,268 | 64,186 | 1.50 | % | 23,602 | 40,584 | 0.95 | % | ||||||||||||||||
|
June
30, 2005
|
4,360,670 | 60,696 | 1.39 | % | 23,925 | 36,771 | 0.85 | % | ||||||||||||||||
|
March
31, 2005
|
4,433,087 | 70,349 | 1.59 | % | 24,561 | 45,788 | 1.04 | % | ||||||||||||||||
|
December
31, 2004
|
4,642,208 | 50,636 | 1.09 | % | 25,353 | 25,283 | 0.55 | % | ||||||||||||||||
(1)
Excludes loans underlying AgVantage securities.
Farmer
Mac recorded $0.5 million in net charge-offs in 2007, compared with
$0.7 million in net charge-offs in 2006 and $0.3 million in net
recoveries in 2005. Additionally, Farmer Mac recorded gains on the
sale of real estate owned of $0.1 million, $0.8 million and $34,000 in
2007, 2006 and 2005, respectively.
As of
December 31, 2007, approximately $1.4 billion (27 percent) of Farmer Mac’s
portfolio of post-1996 Act Farmer Mac I loans and loans underlying LTSPCs
and Farmer Mac Guaranteed Securities were in their peak default years
(approximately years three through five after origination), compared to
$1.5 billion (31 percent) as of December 31, 2006 and $1.3 billion (29
percent) as of December 31, 2005. Notwithstanding the recent
historical trends in delinquency rates and the overall agricultural economy
during 2007, the level of 90-day delinquencies could increase and higher
charge-offs could follow.
Outlook
for 2008. USDA’s most recent publications (as available on
USDA’s website as of March 1, 2008) forecast:
|
|
·
|
2008
net cash farm income to be $96.6 billion, an increase of
$9 billion over 2007 estimates, and a 42 percent premium over the
10-year average $68 billion.
|
|
|
·
|
2008
net farm income to be $92.3 billion, an increase of $3.6 billion
over 2007 estimates, and a sizable increase ($31 billion) over the
10-year average of
$61.1 billion.
|
|
|
·
|
Total
direct U.S. government payments to be $13.4 billion in 2008, up from
$12 billion in 2007, but still 20 percent below the 5-year
average. Direct payment rates are fixed in legislation and are
not affected by the level of program crop
prices.
|
|
|
·
|
Countercyclical
payments to decrease to $0.93 billion in 2008 from $1.2 billion
in 2007.
|
|
|
·
|
Marketing
loan benefits, which include loan deficiency payments, marketing loan
gains, and certificate exchange gains, to drop to $8 million in 2008 from
$80 million in 2007.
|
|
|
·
|
The
value of U.S. farm real estate to increase 14.9 percent in 2008 to
$2.2 trillion from the current projection of $1.9 trillion for
2007.
|
|
|
·
|
The
amount of farm real estate debt to increase by 2.8 percent in 2008 to
$120.8 billion, compared to the current projection of
$117.5 billion in 2007.
|
The USDA
forecasts referenced above relate to U.S. agriculture generally, but should
collectively be favorable for Farmer Mac’s financial condition relative to its
exposure to outstanding guarantees and commitments, as they indicate strong
borrower cash flows, and increased farm real estate values in most U.S.
agricultural regions.
Much of
Farmer Mac’s recent business volume has been a product of the Corporation’s
ongoing efforts to diversify its marketing focus to include large program
transactions that emphasize high asset quality, with greater protection against
adverse credit performance and commensurately lower compensation for the
assumption of credit risk and administrative costs, resulting in projected
risk-adjusted marginal returns on equity approximately equal to those of other
Farmer Mac program transactions. As a result of those efforts, during
2007 Farmer Mac:
|
|
·
|
guaranteed
$1.0 billion principal amount of securities supported by a 10-year
general obligation of MetLife backed by eligible loans in an AgVantage
transaction; and
|
|
|
·
|
issued
standby purchase commitments aggregating $970.8 million in LTSPC
transactions with several
counterparties.
|
In
addition, Farmer Mac purchased $210.0 million of guaranteed portions of
USDA-guaranteed loans. These transactions and other Farmer Mac I
program volume brought new business volume in 2007 to $2.3 billion, and
total volume outstanding in both Farmer Mac programs to $8.5 billion as of
December 31, 2007, a new record.
Farmer
Mac had significant new business volume during 2007, however, its future
business with agricultural mortgage lenders may be constrained by:
|
|
·
|
high
levels of available capital and liquidity of agricultural
lenders;
|
|
|
·
|
changes
in the capital, liquidity or funding needs of major business
partners;
|
|
|
·
|
alternative
sources of funding, lending capacity and credit enhancement for
agricultural lenders; and
|
|
|
·
|
increased
competition in the secondary market for agricultural mortgage
loans.
|
Continued
growth in volume and improvements in earnings will require significant new
business pursuant to Farmer Mac’s strategy of diversifying its marketing focus
to include large program transactions that emphasize high asset quality, with
greater protection against adverse credit performance and commensurately lower
compensation for the assumption of credit risk and administrative costs,
resulting in projected risk-adjusted marginal returns on equity approximately
equal to those of other Farmer Mac program transactions. With
particular respect to changes in the capital, liquidity or funding needs of
major business partners, the off-balance sheet AgVantage transactions to date
may have filled the capacity of current customers for that product and it is
uncertain whether the needs of prospective new customers will sustain the recent
level of business growth in that product. With particular respect to
alternative sources of lending capacity and credit enhancement for agricultural
lenders, significant amortization of existing LTSPC and securitization volume is
expected over the next several years and it is uncertain whether that volume
will be replaced in light of those alternatives, and even more uncertain whether
any replacement volume will be done at the favorable profit levels of the
amortizing volume.
Looking
ahead, Farmer Mac sees opportunities for increased business volume and income
growth as a result of the Corporation’s product development and marketing
efforts. Farmer Mac’s marketing initiatives, which continue to
generate business opportunities for 2008 and, it believes, beyond,
include:
|
|
·
|
expanded
use of AgVantage transactions, targeting highly-rated financial
institutions with large agricultural mortgage
portfolios;
|
|
|
·
|
agribusiness
and rural development loans associated with agriculture, in fulfillment of
Farmer Mac’s Congressional mission;
|
|
|
·
|
new
structures for LTSPC transactions, including risk sharing provisions;
and
|
|
|
·
|
an
ongoing alliance with the American Bankers Association (“ABA”), renewed
for a three-year term on October 29, 2007, under which Farmer Mac
facilitates access and offers improved pricing to ABA member institutions
and the ABA promotes member participation in Farmer
Mac programs.
|
Some of
the agribusiness and rural development initiatives will require Farmer Mac to
consider credit risks that expand upon or differ from those the Corporation has
accepted previously. Farmer Mac will use underwriting standards
appropriate to those credit risks, and likely will draw upon outside expertise
to analyze and evaluate the credit and funding aspects of loans submitted
pursuant to those initiatives.
Farmer
Mac believes important new business opportunities would result from expansion of
its statutory guarantee authorities. In that regard:
|
|
·
|
on
July 27, 2007, the United States House of Representatives passed its
version of a 2007 Farm Bill (H.R. 2419) that would expand Farmer Mac’s
charter to authorize the Corporation to purchase and guarantee securities
backed by rural utilities (electric and telephone) loans made by
cooperative lenders, particularly Nat Rural and institutions of the Farm
Credit System; and
|
|
|
·
|
on
December 14, 2007, the United States Senate passed the “Food and Energy
Security Act,” which contains an expansion of authority for Farmer Mac
similar to that in H.R. 2419.
|
A
conference committee has not yet met to reconcile the differences between the
two bills. At this time, no assurance can be given that either the House
or Senate legislation will be enacted into law or, if enacted, that it will
result in significant additional business volume for Farmer
Mac.
A
detailed presentation of Farmer Mac’s financial results for the years ended
December 31, 2007, 2006 and 2005 follows.
Net
Interest Income. Net interest income was $44.5 million
for 2007, $38.3 million for 2006 and $50.6 million for 2005. The
net interest yield was 85 basis points for the year ended December 31,
2007, compared to 85 basis points for the year ended December 31, 2006 and
131 basis points for the year ended December 31, 2005.
As
discussed in Note 6 to the consolidated financial statements, Farmer Mac
accounts for its financial derivatives as undesignated financial
derivatives. Accordingly, the Corporation classifies the net interest
income and expense realized on financial derivatives as gains and losses on
financial derivatives and trading assets. This classification had no
effect on the net interest yield for the year ended December 31, 2007 and
resulted in increases in the net interest yield of 7 basis points and 43
basis points, respectively, for the years ended December 31, 2006 and
2005.
Net
interest income includes guarantee fees for loans purchased after April 1, 2001
(the effective date of Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
(“SFAS 140”)), but not for loans purchased prior to that
date. The effect of SFAS 140 was a reclassification of approximately
$3.3 million (6 basis points) of guarantee fee income as interest
income for the year ended December 31, 2007, compared to $3.4 million (8
basis points) for the year ended December 31, 2006 and $3.7 million
(10 basis points) for the year ended December 31, 2005.
The net
interest yields for the years ended December 31, 2007, 2006 and 2005 included
the benefits of yield maintenance payments of 7 basis points, 9 basis
points and 12 basis points, respectively. Yield maintenance
payments represent the present value of expected future interest income streams
and accelerate the recognition of interest income from the related
loans. Because the timing and amounts of these payments vary greatly,
variations do not necessarily indicate positive or negative trends to gauge
future financial results. For the years ended December 31, 2007, 2006
and 2005, the after-tax effects of yield maintenance payments on net income and
diluted earnings per share were $2.5 million or $0.24 per diluted share,
$2.5 million or $0.23 per diluted share and $3.1 million or
$0.27 per diluted share, respectively.
The
following table provides information regarding interest-earning assets and
funding for the years ended December 31, 2007, 2006 and 2005. The
balance of non-accruing loans is included in the average balance of
interest-earning loans and Farmer Mac Guaranteed Securities presented, though
the related income is accounted for on the cash basis. Therefore, as
the balance of non-accruing loans and the income received increases or
decreases, the net interest yield will fluctuate accordingly. Net
interest income and the yield will also fluctuate due to the uncertainty of the
timing and amounts of yield maintenance payments. The average rate
earned on cash and investments reflects higher short-term market interest rates
in 2007 compared to 2006 and 2005, and the short-term or floating rate nature of
most investments acquired and outstanding during 2007. The higher
average rate on loans and Farmer Mac Guaranteed Securities reflects the reset of
adjustable-rate mortgages to higher rates and the acquisition of new
higher-yielding loans compared to rates on loans that have
matured. The higher 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 upward trend in the average rate on
notes payable due after one year reflects the retirement of older debt and the
issuance of new debt at higher market rates during 2007.
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||
|
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
|
$ | 3,195,475 | $ | 174,196 | 5.45 | % | $ | 2,474,900 | $ | 128,199 | 5.18 | % | $ | 1,753,735 | $ | 70,414 | 4.02 | % | ||||||||||||||||||
|
Loans
and Farmer Mac Guaranteed Securities
|
2,020,290 | 123,562 | 6.12 | % | 2,055,657 | 121,723 | 5.92 | % | 2,120,508 | 122,158 | 5.76 | % | ||||||||||||||||||||||||
|
Total
interest-earning assets
|
5,215,765 | 297,758 | 5.71 | % | 4,530,557 | 249,922 | 5.52 | % | 3,874,243 | 192,572 | 4.97 | % | ||||||||||||||||||||||||
|
Funding:
|
||||||||||||||||||||||||||||||||||||
|
Notes
payable due within one year
|
3,493,047 | 176,786 | 5.06 | % | 2,731,245 | 134,084 | 4.91 | % | 1,925,348 | 62,137 | 3.23 | % | ||||||||||||||||||||||||
|
Notes
payable due after one year (1)
|
1,521,738 | 76,519 | 5.03 | % | 1,583,592 | 77,548 | 4.90 | % | 1,745,478 | 79,800 | 4.57 | % | ||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
5,014,785 | 253,305 | 5.05 | % | 4,314,837 | 211,632 | 4.90 | % | 3,670,826 | 141,937 | 3.87 | % | ||||||||||||||||||||||||
|
Net
non-interest-bearing funding
|
200,980 | - | 0.00 | % | 215,720 | - | 0.00 | % | 203,417 | - | 0.00 | % | ||||||||||||||||||||||||
|
Total
funding
|
$ | 5,215,765 | 253,305 | 4.86 | % | $ | 4,530,557 | 211,632 | 4.67 | % | $ | 3,874,243 | 141,937 | 3.66 | % | |||||||||||||||||||||
|
Net
interest income/yield
|
$ | 44,453 | 0.85 | % | $ | 38,290 | 0.85 | % | $ | 50,635 | 1.31 | % | ||||||||||||||||||||||||
(1)
Includes current portion of long-term notes.
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 increases in income due to changes in rate reflect the
reset of variable-rate investments and adjustable-rate mortgages to higher rates
and the acquisition of new higher-yielding investments, loans and Farmer Mac
Guaranteed Securities, as described above. The increases in expense
reflect the increased cost of short-term or floating rate funding due to the
increase in short-term interest rates.
|
2007 vs. 2006
|
2006 vs. 2005
|
|||||||||||||||||||||||
|
Increase/(Decrease) Due to
|
Increase/(Decrease) Due to
|
|||||||||||||||||||||||
|
Rate
|
Volume
|
Total
|
Rate
|
Volume
|
Total
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Income
from interest-earning assets:
|
||||||||||||||||||||||||
|
Cash
and investments
|
$ | 7,014 | $ | 38,983 | $ | 45,997 | $ | 24,548 | $ | 33,237 | $ | 57,785 | ||||||||||||
|
Loans
and Farmer Mac Guaranteed Securities
|
3,957 | (2,118 | ) | 1,839 | 3,356 | (3,791 | ) | (435 | ) | |||||||||||||||
|
Total
|
10,971 | 36,865 | 47,836 | 27,904 | 29,446 | 57,350 | ||||||||||||||||||
|
Expense
from interest-bearing liabilities
|
6,477 | 35,196 | 41,673 | 42,153 | 27,542 | 69,695 | ||||||||||||||||||
|
Change
in net interest income
|
$ | 4,494 | $ | 1,669 | $ | 6,163 | $ | (14,249 | ) | $ | 1,904 | $ | (12,345 | ) | ||||||||||
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 $25.2 million for 2007, compared to
$21.8 million for 2006 and $19.6 million for
2005. Notwithstanding reductions in average guarantee and commitment
fee rates – as a result of the Corporation’s previously-referenced successful
marketing focus on large program transactions that emphasize high asset quality
– the amounts of these fees have risen with increases in the average balance of
outstanding guarantees and LTSPCs. For 2007, 2006 and 2005, the
effects of SFAS 140 classified guarantee fees received of $3.3 million,
$3.4 million and $3.7 million, respectively, as interest income,
although management considers that amount to have been earned in consideration
for the assumption of credit risk. That portion of the difference or
“spread” between the cost of Farmer Mac’s debt funding for loans and the yield
on post-1996 Act Farmer Mac I Guaranteed Securities held on its books
compensates for credit risk. When a post-1996 Act Farmer Mac I
Guaranteed Security is sold to a third party, Farmer Mac continues to receive
the guarantee fee component of that spread, which continues to compensate Farmer
Mac for its assumption of credit risk. The portion of the spread that
compensates for interest rate risk would not typically continue to be received
by Farmer Mac if the asset were sold.
Gains
and Losses on Financial Derivatives and Trading
Assets. Statement of Financial Accounting Standards
No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended (“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
income. As discussed in Note 6 to the consolidated financial
statements, the Corporation accounts for its financial derivatives as
undesignated financial derivatives. The net effect of gains and
losses on financial derivatives and trading assets recorded in Farmer Mac’s
consolidated statements of operations was a net loss of $40.3 million for 2007
and a net gain of $1.6 million and $11.5 million for 2006 and 2005,
respectively.
Farmer
Mac enters into financial derivatives transactions to hedge interest rate risks
inherent in its business, and does not use financial derivatives transactions
for trading or speculative purposes. The Corporation applies fair
value accounting to its financial derivatives transactions pursuant to SFAS 133;
it does not apply hedge accounting to those derivatives. Changes in
the fair value of financial derivatives caused by changes in interest rates are
recognized immediately in earnings, notwithstanding that they offset
substantially changes in the value of the hedged items. Therefore,
factors unrelated to the performance of the Corporation’s business may cause the
Corporation’s GAAP earnings to be more volatile than – and even
counter-directional to – the underlying economics of its business
operations.
Gains on
Sale of Available-for-Sale Investment Securities. During 2007
and 2006, Farmer Mac recognized realized gains of $0.3 million and
$1.2 million, respectively, from the sale of securities from its
available-for-sale portfolio. During 2005, Farmer Mac did not realize
any gains from the sale of securities from its available-for-sale
portfolio.
Representation
and Warranty Claims Income. During 2006 and
2005, Farmer Mac recovered approximately $0.7 million and $0.1 million,
respectively, 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
2007.
Other
Income. Other income was $1.4 million, $1.0 million and
$1.9 million for the years ended December 31, 2007, 2006 and 2005,
respectively. The increase in 2007 and 2005 compared to 2006 was the
result of a higher level of late fees received in 2007 and 2005 and increased
income on recovered loan valuations recorded in 2007.
Expenses. Compensation and
employee benefits were $14.2 million, $11.9 million and $8.2 million
for 2007, 2006 and 2005, respectively. Those amounts reflect the
recordation of stock option expense of $3.7 million and $2.4 million in
2007 and 2006, respectively, resulting from the adoption of Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payments (“SFAS
123(R)”), effective January 1, 2006. No such expense was recorded in
2005. That upward trend also reflects a higher level of incentive
compensation paid in 2007. General and administrative expenses, including legal,
independent audit, and consulting fees, were $8.5 million,
$9.8 million and $9.7 million for 2007, 2006 and 2005,
respectively. Farmer Mac expects all of the above-mentioned expenses
to continue at approximately the same levels as 2007 through 2008.
Regulatory
fees were $2.2 million, $2.3 million and $2.3 million for 2007, 2006
and 2005, respectively. FCA has advised Farmer Mac that its estimated
assessment for 2008 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, 2007, 2006 and 2005 include both their
originally estimated assessments and revisions to those estimates that reflect
actual costs incurred. These revisions have resulted in both
additional assessments and refunds in the past.
Income
Tax (Benefit)/Expense. Income tax (benefit)/expense totaled
$(0.1) million in 2007, compared to $12.7 million in 2006 and
$23.1 million in 2005. Farmer Mac’s effective tax rates for
2007, 2006 and 2005 were approximately -1.3 percent, 28.4 percent and 31.9
percent, respectively. Farmer Mac’s 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 exceeded Farmer Mac’s tax expense at its statutory tax
rate. For more information about income taxes, see Note 10 to the
consolidated financial statements.
Effects
of SFAS 133. Farmer Mac
records financial derivatives at fair value on its balance sheet with the
related changes in fair value recognized in the consolidated statement of
operations. Although the Corporation’s use of financial derivatives
achieves its economic and risk management objectives, its classification of
financial derivatives as undesignated hedges under SFAS 133 allows factors
unrelated to the economic performance of the Corporation’s business, such as
changes in interest rates, to increase the volatility – or even change the
direction – of the Corporation’s earnings under GAAP.
Farmer
Mac enters into financial derivative transactions principally to protect against
risk from the effects of market price or interest rate movements on the value of
assets, future cash flows and debt issuance, not for trading or speculative
purposes. Farmer Mac enters into interest rate swap contracts to
adjust the characteristics of its short-term debt to match more closely the cash
flow and duration characteristics of its longer-term 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 economically the variable cash flows related to the forecasted issuance
of short-term debt into effectively fixed-rate medium-term and long-term notes
that match the anticipated duration, repricing and interest rate characteristics
of the corresponding assets. Since this strategy provides Farmer Mac
with approximately the same cash flows as those that are inherent in the
issuance of medium-term notes, Farmer Mac uses either the bond market or the
swap market based upon their relative pricing efficiencies.
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.
Business
Volume. Loans are brought into the Farmer Mac I and Farmer Mac
II programs as follows:
|
|
·
|
Farmer
Mac purchases eligible loans and guarantees timely payments of principal
and interest of securities backed by those loans as part of the Farmer Mac
I program. Farmer Mac may retain some or all of those
securities in its portfolio or sell them to third parties in capital
markets transactions.
|
|
|
·
|
Farmer
Mac purchases USDA-guaranteed portions and guarantees timely payments of
principal and interest of securities backed by those guaranteed portions
as part of the Farmer Mac II program. Farmer Mac may retain
some or all of those securities in its portfolio or sell them to third
parties in capital markets
transactions.
|
|
|
·
|
Farmer
Mac enters into LTSPCs for eligible loans. Farmer Mac’s
commitments through LTSPCs include either newly originated or seasoned
eligible loans, and are part of the Farmer Mac I
program.
|
|
|
·
|
Farmer
Mac exchanges Farmer Mac Guaranteed Securities for eligible loans or
USDA-guaranteed portions in swap transactions. Farmer Mac
Guaranteed Securities exchanged for USDA-guaranteed portions are part of
the Farmer Mac II program; Farmer Mac Guaranteed Securities exchanged for
any other eligible loans are part of the Farmer Mac I
program.
|
|
|
·
|
Farmer
Mac purchases and guarantees mortgage-backed bonds collateralized by
eligible mortgage loans, which are referred to as AgVantage securities, a
category of Farmer Mac Guaranteed Securities and part of the Farmer Mac I
program.
|
During
2007, the volume of loans purchased or placed under Farmer Mac Guaranteed
Securities and LTSPCs totaled $2.3 billion, a decrease from 2006 volume of
$3.0 billion. That decrease was attributable to a decrease of
$471.0 million in Farmer Mac I loan and Guaranteed Securities volume, a decrease
of $168.9 million in LTSPC volume, and a decrease of $24.6 million in
Farmer Mac II volume, compared to 2006 volume levels. Farmer Mac does
not believe that this decrease represents a trend in the Corporation’s business
volume but, rather, is indicative of normal fluctuations in its
business. During 2006, the volume of loans purchased or placed under
Farmer Mac Guaranteed Securities and LTSPCs totaled $3.0 billion, an
increase from 2005 volume of $771.7 million. That increase was
attributable to an increase of $1.5 billion in Farmer Mac I loan and
Guaranteed Securities volume, an increase of $0.7 million in LTSPC volume,
and an increase of $34.5 million in Farmer Mac II volume, compared to 2005
volume levels. The following table sets forth information regarding
the volume of loans purchased or placed under Farmer Mac Guaranteed Securities
or LTSPCs for the periods indicated:
|
Farmer Mac Loan Purchases, Guarantees and
LTSPCs
|
||||||||||||
|
For the Year Ended December
31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Farmer
Mac I:
|
||||||||||||
|
Loans
and Guaranteed Securities
|
$ | 1,127,709 | $ | 1,598,673 | $ | 110,056 | ||||||
|
LTSPCs
|
970,789 | 1,139,699 | 461,441 | |||||||||
|
Farmer
Mac II
|
210,040 | 234,684 | 200,168 | |||||||||
|
Total
|
$ | 2,308,538 | $ | 2,973,056 | $ | 771,665 | ||||||
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 post-1996 Act 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 I 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 2007 and 2006
was less than one year. Of those loans, 72 percent and 71 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 17.3 and 16.9 years, respectively.
During
2007, 2006 and 2005, Farmer Mac securitized loans it purchased and sold the
resulting Farmer Mac Guaranteed Securities in the amount of $1.3 million,
$4.0 million and $53.3 million, respectively. Of those
securitization transactions, $46.7 million were sold to Zions First
National Bank in 2005 and $1.3 million, $4.0 million and $6.6 million
of such securities were sold to AgStar Financial Services, ACA in 2007, 2006 and
2005, respectively. Both Zions First National Bank and AgStar
Financial Services, ACA are related parties with respect to Farmer
Mac. During 2007 and 2006, Farmer Mac issued $681.7 million and
$1.0 billion, respectively, of Farmer Mac I Guaranteed Securities in the
form of swap transactions, of which $400.2 million and $470.2 million,
respectively, were issued to related parties. Those related party
transactions consisted of a $400.2 million swap transaction with AgStar
Financial Services, ACA during 2007 and a $341.2 million swap transaction
with AgStar Financial Services, ACA and a $129.0 million swap transaction
with Sacramento Valley Farm Credit, ACA during 2006. All of the swap
transactions resulted from the participants’ exercise of a conversion feature
incorporated in all existing LTSPCs. 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,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Loans
securitized and sold as Farmer Mac I Guaranteed Securities
|
$ | 1,324 | $ | 3,994 | $ | 53,315 | ||||||
|
AgVantage
securities
|
1,000,000 | 1,500,000 | - | |||||||||
|
Swap
transactions
|
681,732 | 1,034,860 | - | |||||||||
|
Total
Farmer Mac Guaranteed Securities Issuances
|
$ | 1,683,056 | $ | 2,538,854 | $ | 53,315 | ||||||
The
outstanding principal balance of loans held and loans underlying LTSPCs and on-
and off-balance sheet Farmer Mac Guaranteed Securities increased 18.0 percent to
$8.5 billion as of December 31, 2007 from $7.2 billion as of December
31, 2006. 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,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Farmer
Mac I:
|
||||||||||||
|
Post-1996
Act:
|
||||||||||||
|
Loans
and Guaranteed Securities
|
$ | 5,645,023 | $ | 4,338,698 | $ | 2,094,410 | ||||||
|
LTSPCs
|
1,948,941 | 1,969,734 | 2,329,798 | |||||||||
|
Pre-1996
Act
|
3,174 | 5,057 | 13,046 | |||||||||
|
Farmer
Mac II
|
946,617 | 925,799 | 835,732 | |||||||||
|
Total
|
$ | 8,543,755 | $ | 7,239,288 | $ | 5,272,986 | ||||||
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,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Farmer
Mac I newly originated and current seasoned loan purchases
|
$ | 127,709 | $ | 98,673 | $ | 110,056 | ||||||
|
Defaulted
loans purchased underlying off-balance sheet Farmer Mac I Guaranteed
Securities
|
1,562 | 707 | 2,191 | |||||||||
|
Defaulted
loans purchased underlying LTSPCs
|
1,033 | 7,449 | 1,237 | |||||||||
|
Defaulted
loans underlying on-balance sheet Farmer Mac I Guaranteed Securities
transferred to loans
|
1,316 | 1,467 | 7,483 | |||||||||
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 2007, 2006 and 2005 was
8 years, 7 years and 6 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. In 2007, 2006 and 2005, Farmer Mac
conducted business with entities that are related parties as a result of either
a member of Farmer Mac’s board of directors being affiliated with the entity in
some capacity or the entity being the holder of at least 10 percent of a
class of voting common stock. These transactions were 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.
Balance
Sheet Review
Assets. Total
assets as of December 31, 2007 compared to December 31, 2006 were unchanged at
$5.0 billion. On-balance sheet program assets (Farmer Mac
Guaranteed Securities and loans) decreased $40.8 million during 2007 to a total
of $2.1 billion. Farmer Mac’s non-program assets increased $64.7
million to $2.9 billion as of December 31, 2007.
The
following table presents Farmer Mac’s on-balance sheet program assets based on
the frequency that their interest rates reset.
|
Outstanding
Balance of Loans Held and Loans Underlying
|
||||||||
|
On-Balance
Sheet Farmer Mac Guaranteed Securities
|
||||||||
|
As
of December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Fixed
rate (10-yr. wtd. avg. term)
|
$ | 962,320 | $ | 891,429 | ||||
|
5-
to 10-year ARMs and resets
|
750,472 | 761,754 | ||||||
|
1-Month
to 3-Year ARMs
|
352,250 | 452,656 | ||||||
|
Total
held in portfolio
|
$ | 2,065,042 | $ | 2,105,839 | ||||
Liabilities. Total
liabilities increased to $4.8 billion as of December 31, 2007 from
$4.7 billion as of December 31, 2006. The increase in
liabilities was due primarily to (1) an overall increase in financial
derivatives liability due to the decline in fair value resulting from changes in
interest rates and (2) an increase in Farmer Mac’s guarantee and commitment
obligation resulting from an increase in the level of outstanding Farmer Mac
Guaranteed Securities and LTSPCs. 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, 2007, stockholders’ equity totaled $223.6 million, compared to
$248.5 million as of December 31, 2006. The decrease was
primarily due to $8.1 million of after-tax unrealized losses on investment
securities and Farmer Mac Guaranteed Securities classified as
available-for-sale, the $29.0 million repurchase of Class C non-voting common
stock, and the payment of preferred and common stock dividends in the amounts of
$2.2 million and $4.1 million, respectively. These reductions to
capital were partially offset by $6.7 million of net income earned during
2007 and $7.8 million in capital additions resulting from the exercise of stock
options. Farmer Mac’s return on average common equity was
2.2 percent for 2007, compared to 14.0 percent for 2006 and
22.9 percent for 2005.
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, 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, 2006, Farmer Mac’s core
capital totaled $243.5 million and exceeded its statutory minimum capital
requirement of $174.5 million by $69.0 million. As of December
31, 2007, Farmer Mac’s risk-based capital stress test generated a risk-based
capital requirement of $42.8 million. Farmer Mac’s regulatory capital
of $230.3 million exceeded that amount by approximately
$187.5 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.”
Off-Balance
Sheet Farmer Mac Guaranteed Securities and LTSPCs. 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 or the Farmer Mac II program, and (2) LTSPCs, which are available only
through the Farmer Mac I program. Both of these alternatives result
in the creation of off-balance sheet obligations for Farmer Mac in the ordinary
course of its business.
As of
December 31, 2007 and 2006, outstanding off-balance sheet Farmer Mac Guaranteed
Securities and LTSPCs totaled $6.5 billion and $5.2 billion,
respectively. The following table presents the balance of outstanding
LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities as of
December 31, 2007 and 2006:
|
Outstanding
Balance of LTSPCs and
|
||||||||
|
Off-Balance Sheet Farmer Mac Guaranteed
Securities
|
||||||||
|
As of December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Farmer
Mac I Post-1996 Act obligations:
|
||||||||
|
Farmer
Mac I Guaranteed Securities
|
$ | 4,518,300 | $ | 3,149,895 | ||||
|
LTSPCs
|
1,948,941 | 1,969,734 | ||||||
|
Total
Farmer Mac I Post-1996 Act obligations
|
6,467,241 | 5,119,629 | ||||||
|
Farmer
Mac II Guaranteed Securities
|
24,815 | 33,132 | ||||||
|
Total
off-balance sheet Farmer Mac I and II
|
$ | 6,492,056 | $ | 5,152,761 | ||||
For more
information about off-balance sheet Farmer Mac Guaranteed Securities, see
“—Risk
Management—Credit Risk - Loans” and Note 12 to the consolidated financial
statements.
Risk
Management
Interest
Rate Risk. Farmer Mac is subject to interest rate risk on all
assets held for investment because of possible timing differences in the cash
flows of the assets and related liabilities. This risk is primarily
related to loans held and on-balance sheet Farmer Mac Guaranteed Securities
because of the ability of borrowers to prepay their mortgages before the
scheduled maturities, thereby increasing the risk of asset and liability cash
flow mismatches. Cash flow mismatches in a changing interest rate
environment can reduce the earnings of the Corporation if assets repay sooner
than expected and the resulting cash flows must be reinvested in lower-yielding
investments when Farmer Mac’s funding costs cannot be correspondingly reduced,
or if assets repay more slowly than expected and the associated debt must be
replaced by higher-cost debt.
Yield
maintenance provisions and other prepayment penalties contained in many
agricultural mortgage loans reduce, but do not eliminate, prepayment risk,
particularly in the case of a defaulted loan where yield maintenance may not be
collected. Those provisions require borrowers to make an additional
payment when they prepay their loans so that, when reinvested with the prepaid
principal, yield maintenance payments generate substantially the same cash flows
that would have been generated had the loan not prepaid. Those
provisions create a disincentive to prepayment and compensate the Corporation
for some of its interest rate risks. As of December 31, 2007, 43
percent of the total outstanding balance of retained Farmer Mac I loans and
Guaranteed Securities had yield maintenance provisions and 6 percent had other
forms of prepayment protection (together covering 78 percent of all loans with
fixed interest rates). Of the Farmer Mac I new and current loans
purchased in 2007, 10 percent had yield maintenance or another form of
prepayment protection (including 15 percent of all loans with fixed interest
rates). As of December 31, 2007, none of the USDA-guaranteed portions
underlying Farmer Mac II Guaranteed Securities had yield maintenance provisions;
however, 27 percent contained prepayment penalties. Of the
USDA-guaranteed portions purchased in 2007, 4 percent contained various forms of
prepayment penalties.
Taking
into consideration the prepayment provisions and the default probabilities
associated with its mortgage assets, Farmer Mac uses prepayment models to
project and value cash flows associated with these assets. Because
borrowers’ behavior in various interest rate environments may change over time,
Farmer Mac periodically evaluates the effectiveness of these models compared to
actual prepayment experience and adjusts and refines the models as necessary to
improve the precision of subsequent prepayment forecasts.
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 $101.4 million of cash and cash equivalents as of December 31, 2007
matures within three months and is match-funded with discount notes having
similar maturities. As of December 31, 2007, $1.5 billion of the
$2.6 billion of investment securities (57.7 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 the present value of all future
cash flows from on- and off-balance sheet assets, liabilities and financial
derivatives, discounted at current interest rates and spreads. The
following schedule summarizes the results of Farmer Mac’s MVE sensitivity
analysis as of December 31, 2007 and December 31, 2006 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
|
2007
|
2006
|
||
|
+
300 bp
|
-10.6%
|
-7.9%
|
||
|
+
200 bp
|
-6.3%
|
-4.7%
|
||
|
+
100 bp
|
-2.5%
|
-1.9%
|
||
|
-
100 bp
|
-0.1%
|
0.0%
|
||
|
-
200 bp
|
-1.4%
|
-1.1%
|
||
|
-
300 bp
|
-3.4%
|
-2.1%
|
||
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, 2007, Farmer
Mac’s effective duration gap, another standard measure of interest rate risk
that measures the difference between the sensitivities of assets compared to
that of liabilities, was plus 0.7 months, compared to plus 0.7 months
as of December 31, 2006. Duration matching helps to maintain the
correlation of cash flows and stable portfolio earnings even when interest rates
are not stable.
As of
December 31, 2007, a uniform or parallel increase of 100 basis points would have
increased Farmer Mac’s net interest income (“NII”), a shorter-term measure of
interest rate risk, by 1.0 percent, while a parallel decrease of 100 basis
points would have decreased NII by 2.2 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, 2007, both MVE and NII showed 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, including interest rate swaps, are
included in the MVE, NII and duration gap analyses. Farmer Mac
generally enters into various interest rate swaps to reduce interest rate risk
as follows:
|
|
·
|
“floating-to-fixed
interest rate swaps” in which it pays fixed rates of interest to, and
receives floating rates of interest from, counterparties; these swaps
adjust the characteristics of short-term debt to match more closely the
cash flow and duration characteristics of longer-term reset and fixed-rate
mortgages and other assets and may provide an overall lower effective cost
of borrowing than would otherwise be available in the conventional debt
market;
|
|
|
·
|
“fixed-to-floating
interest rate swaps” in which it receives fixed rates of interest from,
and pays floating rates of interest to, counterparties; these swaps adjust
the characteristics of long-term debt to match more closely the cash flow
and duration characteristics of short-term or floating-rate assets;
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; these swaps alter interest rate indices of liabilities to
match those of assets, and vice
versa.
|
As of
December 31, 2007, Farmer Mac had $2.7 billion combined notional
amount of interest rate swaps, with terms ranging from one to fifteen
years, of which $1.4 billion were floating-to-fixed interest rate swaps,
$0.2 billion were basis swaps and $1.1 billion were fixed-to-floating
interest rate swaps.
Farmer
Mac enters into financial derivative transactions principally to protect against
risk from the effects of market price or interest rate movements on the value of
certain assets, future cash flows or debt issuance, not for trading or
speculative purposes. As discussed in Note 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, 2007, Farmer Mac had
uncollateralized net exposures of $3.3 million to one counterparty.
Credit
Risk – Loans. Farmer Mac’s
primary exposure to credit risk is the risk of loss resulting from the inability
of borrowers to repay their mortgages in conjunction with a deficiency in the
value of the collateral relative to the amount outstanding on the mortgage and
the costs of liquidation. Farmer Mac is exposed to credit risk
on:
|
|
·
|
loans
it holds;
|
|
|
·
|
loans
underlying Farmer Mac Guaranteed Securities;
and
|
|
|
·
|
loans
underlying LTSPCs.
|
Loans
held or loans underlying Farmer Mac Guaranteed Securities or LTSPCs can be
divided into four groups:
|
|
·
|
loans
held;
|
|
|
·
|
loans
underlying pre-1996 Act Farmer Mac I Guaranteed
Securities;
|
|
|
·
|
loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities or LTSPCs;
and
|
|
|
·
|
USDA-guaranteed
portions underlying Farmer Mac II Guaranteed
Securities.
|
For loans
underlying pre-1996 Act Farmer Mac I Guaranteed Securities, ten percent
first-loss subordinated interests mitigate Farmer Mac’s credit risk
exposure. Before Farmer Mac incurs a credit loss, full recourse must
first be taken against the subordinated interest. The 1996 Act
eliminated the subordinated interest requirement. As a result, Farmer
Mac generally assumes 100 percent of the credit risk on loans held and
loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs. 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 loans underlying
pre-1996 Act Farmer Mac I Guaranteed Securities because of the subordinated
interests, or to USDA-guaranteed portions because of the USDA
guarantee. The outstanding principal balances of loans held and loans
underlying LTSPCs and Farmer Mac Guaranteed Securities are summarized in the
following table.
|
Outstanding
Balance of Farmer Mac Loans and Loans Underlying
|
||||||||||||
|
Farmer
Mac Guaranteed Securities and LTSPCs
|
||||||||||||
|
As
of December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Farmer
Mac I:
|
||||||||||||
|
Post-1996
Act:
|
||||||||||||
|
Loans
and Guaranteed Securities
|
$ | 5,645,023 | $ | 4,338,698 | $ | 2,094,410 | ||||||
|
LTSPCs
|
1,948,941 | 1,969,734 | 2,329,798 | |||||||||
|
Pre-1996
Act
|
3,174 | 5,057 | 13,046 | |||||||||
|
Farmer
Mac II
|
946,617 | 925,799 | 835,732 | |||||||||
|
Total
|
$ | 8,543,755 | $ | 7,239,288 | $ | 5,272,986 | ||||||
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 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 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 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.”
Farmer
Mac maintains an allowance for losses to cover estimated probable losses on
loans held, real estate owned and loans underlying post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs, in accordance with SFAS 5 and SFAS
114. For accepting the credit risk on loans underlying post-1996 Act
Farmer Mac I Guaranteed Securities and LTSPCs, Farmer Mac receives guarantee
fees and commitment fees, respectively. For loans held, Farmer Mac
receives interest income that includes a component that correlates to its
guarantee fee, which Farmer Mac views as compensation for assuming credit
risk.
Prior to
third quarter 2007, no allowance for losses had been made for loans underlying
Pre-1996 Act Farmer Mac I Guaranteed Securities, AgVantage securities or Farmer
Mac II Guaranteed Securities. Pre-1996 Act Farmer Mac I
Guaranteed Securities are supported by unguaranteed first loss subordinated
interests, which had been expected to exceed the estimated credit losses on
those loans. Through June 30, 2007, Farmer Mac had not
experienced any credit losses on any Pre-1996 Act Farmer Mac I Guaranteed
Securities. In third quarter 2007, Farmer Mac charged off $0.4
million related to one loan underlying Pre-1996 Act Farmer Mac I Guaranteed
Securities. The remaining $3.2 million of Pre-1996 Act Farmer
Mac I Guaranteed Securities represent interests in seasoned performing loans
with low loan-to-value ratios. Farmer Mac does not expect to incur
any further losses on the remaining Pre-1996 Act Farmer Mac I Guaranteed
Securities in the future. Each AgVantage security is a general
obligation of an issuing institution approved by Farmer Mac and is
collateralized by eligible mortgage loans. As of December 31,
2007, there were no probable losses inherent in Farmer Mac’s AgVantage
securities due to the high credit quality of the obligors, as well as the
underlying collateral. As of December 31, 2007, Farmer Mac had not
experienced any credit losses on any AgVantage securities and does not expect to
incur any such losses in the future. The guaranteed portions
collateralizing Farmer Mac II Guaranteed Securities are guaranteed by the
USDA. Each USDA guarantee is an obligation backed by the full faith
and credit of the United States. As of December 31, 2007, Farmer Mac
had not experienced any credit losses on any Farmer Mac II Guaranteed Securities
and does not expect to incur any such losses in the future.
Farmer
Mac’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 post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs, 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
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs and real
estate owned.
|
Farmer
Mac’s methodology for determining its allowance for losses incorporates the
Corporation’s proprietary automated loan classification system. That
system scores loans based on criteria such as historical repayment performance,
loan seasoning, loan size and LTV ratio. For the purposes of the loss
allowance methodology, the loans in Farmer Mac’s portfolio of loans and loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs have been
scored and classified for each calendar quarter since first quarter
2000. The allowance methodology captures the migration of loan scores
across concurrent and overlapping three-year time horizons and calculates loss
rates separately within each loan classification for (1) loans underlying
LTSPCs and (2) loans held and loans underlying post-1996 Act Farmer
Mac I Guaranteed Securities. The calculated loss rates are
applied to the current classification distribution of Farmer Mac’s portfolio to
estimate inherent losses, on the assumption that the historical credit losses
and trends used to calculate loss rates will continue in the
future. Management evaluates this assumption by taking into
consideration several 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 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 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, for all loans held, real estate
owned and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs, in accordance with SFAS 5 and SFAS 114.
The
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.
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, 2007:
|
Allowance
|
REO
|
Total
|
||||||||||||||
|
for
Loan
|
Valuation
|
Reserve
|
Allowance
|
|||||||||||||
|
Losses
|
Allowance
|
for
Losses
|
for
Losses
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Balance
as of January 1, 2003
|
$ | 2,662 | $ | 592 | $ | 16,757 | $ | 20,011 | ||||||||
|
Provision/(recovery)
for losses
|
6,524 | 1,230 | (469 | ) | 7,285 | |||||||||||
|
Charge-offs
|
(3,220 | ) | (1,814 | ) | (440 | ) | (5,474 | ) | ||||||||
|
Recoveries
|
1 | 230 | - | 231 | ||||||||||||
|
Balance
as of December 31, 2003
|
$ | 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 | ||||||||
Farmer
Mac released $0.1 million from the allowance for losses during 2007, compared to
a release of $3.4 million in 2006. During 2007, Farmer Mac charged
off $0.5 million in losses against the allowance for losses and had $20,000
in recoveries. During 2006, Farmer Mac charged off
$1.0 million in losses against the allowance for losses and had
$0.4 million in recoveries. The charge-offs for 2007 and 2006
did not include any amounts related to previously accrued or advanced interest
on loans or Farmer Mac I Guaranteed Securities.
As of
December 31, 2007, Farmer Mac’s allowance for losses totaled $3.9 million, or
8 basis points of the outstanding principal balance of loans held and loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities (excluding AgVantage
securities) and LTSPCs, compared to $4.6 million
(10 basis points) as of December 31, 2006. The
year-to-year decrease in this ratio is a result of the overall improved credit
quality of the Farmer Mac portfolio and the strong U.S. agricultural
economy.
The
credit issues that have arisen in the housing and consumer sectors of the
economy have not, to date, affected the agricultural economy in general or
Farmer Mac’s guarantee portfolio in particular, as demonstrated by the continued
historically low levels of 90-day delinquencies and non-performing
assets. As of December 31, 2007, Farmer Mac’s 90-day delinquencies
totaled $10.6 million and represented 0.21 percent of the principal balance
of all loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities (excluding AgVantage securities) and LTSPCs, compared to
$19.7 million (0.41 percent) as of December 31,
2006. 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, 2007, loans held and loans underlying post-1996 Act Farmer Mac
I Guaranteed Securities (excluding AgVantage securities) and LTSPCs that were 90
days or more past due, in foreclosure, restructured after delinquency, in
bankruptcy (including loans performing under either their original loan terms or
a court-approved bankruptcy plan) and real estate owned (“post-1996 Act
non-performing assets”) totaled $31.9 million and represented 0.63 percent
of the principal balance of all loans held and loans underlying post-1996 Act
Farmer Mac I Guaranteed Securities and LTSPCs, compared to $39.2 million
(0.82 percent) as of December 31, 2006. Loans that have
been restructured after delinquency were insignificant and are included within
the reported 90-day delinquency and non-performing asset
disclosures.
The
following table presents historical information regarding Farmer Mac’s
non-performing assets and 90-day delinquencies:
|
Outstanding
|
||||||||||||||||||||||||
|
Post-1996
Act
|
||||||||||||||||||||||||
|
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, 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 | % | ||||||||||||||||
|
September
30, 2005
|
4,273,268 | 64,186 | 1.50 | % | 23,602 | 40,584 | 0.95 | % | ||||||||||||||||
|
June
30, 2005
|
4,360,670 | 60,696 | 1.39 | % | 23,925 | 36,771 | 0.85 | % | ||||||||||||||||
|
March
31, 2005
|
4,433,087 | 70,349 | 1.59 | % | 24,561 | 45,788 | 1.04 | % | ||||||||||||||||
|
December
31, 2004
|
4,642,208 | 50,636 | 1.09 | % | 25,353 | 25,283 | 0.55 | % | ||||||||||||||||
(1)
Excludes loans underlying AgVantage securities.
As of December 31, 2007, approximately
$1.4 billion (27 percent) of Farmer Mac’s outstanding loans held and
loans underlying post-1996 Act Farmer Mac I Guaranteed Securities (excluding
AgVantage securities) and LTSPCs were in their peak delinquency and default
years (approximately years three through five after origination), compared to
$1.5 billion (31 percent) as of December 31, 2006.
As of
December 31, 2007, Farmer Mac individually analyzed $10.7 million of its
$36.6 million of impaired assets for collateral shortfalls against updated
appraised values, other updated collateral valuations or discounted
values. Farmer Mac evaluated the remaining $25.9 million of
impaired assets for which updated valuations were not available in the aggregate
in consideration of their similar risk characteristics and historical
statistics. All of the $10.7 million of assets analyzed
individually were adequately collateralized. Accordingly, Farmer Mac
did not record any specific allowances for under-collateralized assets as of
December 31, 2007. Farmer Mac’s non-specific or general allowances
were $3.9 million as of December 31, 2007.
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, 2007,
the weighted-average original LTV for loans held and loans underlying Farmer Mac
I Guaranteed Securities (excluding AgVantage securities) and LTSPCs was
50 percent, and the weighted-average original LTV for all post-1996 Act
non-performing assets was 58 percent. The following table
summarizes the post-1996 Act non-performing assets by original LTV:
|
Distribution
of Post-1996 Act Non-performing
|
||||||||
|
Assets
by Original LTV Ratio as of December 31, 2007
|
||||||||
|
(dollars
in thousands)
|
||||||||
|
Post-1996
Act
|
||||||||
|
Non-performing
|
||||||||
|
Original
LTV Ratio
|
Assets
|
Percentage
|
||||||
|
0.00%
to 40.00%
|
$ | 1,225 | 4 | % | ||||
|
40.01%
to 50.00%
|
5,374 | 17 | % | |||||
|
50.01%
to 60.00%
|
15,456 | 48 | % | |||||
|
60.01%
to 70.00%
|
9,254 | 29 | % | |||||
|
70.01%
to 80.00%
|
547 | 2 | % | |||||
|
80.01%
+
|
68 | 0 | % | |||||
|
Total
|
$ | 31,924 | 100 | % | ||||
The
following table presents outstanding loans held and loans underlying post-1996
Act Farmer Mac I Guaranteed Securities (excluding AgVantage securities) and
LTSPCs, post-1996 Act non-performing assets as of December 31, 2007 by year of
origination, geographic region and commodity/collateral type:
|
Farmer
Mac I Post-1996 Act Non-performing Assets
|
||||||||||||||||
|
Distribution
of
|
Post-
|
|||||||||||||||
|
Outstanding
|
Outstanding
|
1996
Act
|
||||||||||||||
|
Loans,
|
Loans,
|
Non-
|
Non-
|
|||||||||||||
|
Guarantees
and
|
Guarantees
and
|
performing
|
performing
|
|||||||||||||
|
LTSPCs
|
LTSPCs
(1)
|
Assets
(2)
|
Asset
Rate
|
|||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
By
year of origination:
|
||||||||||||||||
|
Before
1997
|
11 | % | $ | 573,863 | $ | 7,108 | 1.24 | % | ||||||||
|
1997
|
4 | % | 219,883 | 5,028 | 2.29 | % | ||||||||||
|
1998
|
7 | % | 364,798 | 5,256 | 1.44 | % | ||||||||||
|
1999
|
8 | % | 410,851 | 6,131 | 1.49 | % | ||||||||||
|
2000
|
4 | % | 217,835 | 3,322 | 1.53 | % | ||||||||||
|
2001
|
8 | % | 408,100 | 2,787 | 0.68 | % | ||||||||||
|
2002
|
10 | % | 494,446 | 236 | 0.05 | % | ||||||||||
|
2003
|
10 | % | 503,485 | 206 | 0.04 | % | ||||||||||
|
2004
|
7 | % | 369,211 | - | 0.00 | % | ||||||||||
|
2005
|
11 | % | 551,456 | 155 | 0.03 | % | ||||||||||
|
2006
|
12 | % | 565,678 | 1,695 | 0.30 | % | ||||||||||
|
2007
|
8 | % | 383,558 | - | 0.00 | % | ||||||||||
|
Total
|
100 | % | $ | 5,063,164 | $ | 31,924 | 0.63 | % | ||||||||
|
By
geographic region (3):
|
||||||||||||||||
|
Northwest
|
16 | % | $ | 824,054 | $ | 23,419 | 2.84 | % | ||||||||
|
Southwest
|
39 | % | 1,975,118 | 3,440 | 0.17 | % | ||||||||||
|
Mid-North
|
22 | % | 1,112,281 | 1,411 | 0.13 | % | ||||||||||
|
Mid-South
|
11 | % | 561,930 | 1,979 | 0.35 | % | ||||||||||
|
Northeast
|
8 | % | 398,335 | 895 | 0.22 | % | ||||||||||
|
Southeast
|
4 | % | 191,446 | 780 | 0.41 | % | ||||||||||
|
Total
|
100 | % | $ | 5,063,164 | $ | 31,924 | 0.63 | % | ||||||||
|
By
commodity/collateral type:
|
||||||||||||||||
|
Crops
|
41 | % | $ | 2,084,819 | $ | 14,264 | 0.68 | % | ||||||||
|
Permanent
plantings
|
20 | % | 993,893 | 13,761 | 1.38 | % | ||||||||||
|
Livestock
|
26 | % | 1,328,874 | 2,808 | 0.21 | % | ||||||||||
|
Part-time
farm/rural housing
|
7 | % | 368,585 | 1,091 | 0.30 | % | ||||||||||
|
Ag
storage and processing (including ethanol facilities)
|
5 | % | 245,753 | - | 0.00 | % | ||||||||||
|
Other
|
1 | % | 41,240 | - | 0.00 | % | ||||||||||
|
Total
|
100 | % | $ | 5,063,164 | $ | 31,924 | 0.63 | % | ||||||||
|
(1)
|
Excludes
loans underlying AgVantage
securities.
|
|
(2)
|
Includes
loans 90 days or more past due, in foreclosure, restructured after
delinquency, in bankruptcy (including loans performing under either their
original loan terms or a court-approved bankruptcy plan), and real estate
owned.
|
|
(3)
|
Geographic
regions - Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY); Southwest (AZ,
CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South
(KS, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA,
RI, TN, VA, VT, WV); and Southeast (AL, AR, FL, GA, LA, MS,
SC).
|
The
following table presents Farmer Mac’s cumulative net credit losses relative to
the cumulative original balance for all loans purchased and loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities (excluding AgVantage
securities) and LTSPCs as of December 31, 2007, 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 Post-1996 Act Credit Losses Relative to all
|
||||||||||||
|
Cumulative
Original Loans, Guarantees and LTSPCs
|
||||||||||||
|
Cumulative
|
||||||||||||
|
Original
Loans,
|
Cumulative
|
Cumulative
|
||||||||||
|
Guarantees
|
Net
Credit
|
Loss
|
||||||||||
|
and
LTSPCs (1)
|
Losses
|
Rate
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
By
year of origination:
|
||||||||||||
|
Before
1997
|
$ | 3,432,978 | $ | 1,589 | 0.05 | % | ||||||
|
1997
|
758,090 | 2,493 | 0.33 | % | ||||||||
|
1998
|
1,129,609 | 3,895 | 0.34 | % | ||||||||
|
1999
|
1,149,387 | 1,291 | 0.11 | % | ||||||||
|
2000
|
741,208 | 2,285 | 0.31 | % | ||||||||
|
2001
|
1,078,714 | 701 | 0.06 | % | ||||||||
|
2002
|
1,069,510 | - | 0.00 | % | ||||||||
|
2003
|
881,863 | - | 0.00 | % | ||||||||
|
2004
|
603,977 | - | 0.00 | % | ||||||||
|
2005
|
727,964 | 10 | 0.00 | % | ||||||||
|
2006
|
697,007 | - | 0.00 | % | ||||||||
|
2007
|
460,785 | - | 0.00 | % | ||||||||
|
Total
|
$ | 12,731,092 | $ | 12,264 | 0.10 | % | ||||||
|
By
geographic region (2):
|
||||||||||||
|
Northwest
|
$ | 2,368,504 | $ | 6,896 | 0.29 | % | ||||||
|
Southwest
|
5,151,050 | 4,784 | 0.09 | % | ||||||||
|
Mid-North
|
2,182,291 | 18 | 0.00 | % | ||||||||
|
Mid-South
|
1,061,102 | 336 | 0.03 | % | ||||||||
|
Northeast
|
1,083,036 | 1 | 0.00 | % | ||||||||
|
Southeast
|
885,109 | 229 | 0.03 | % | ||||||||
|
Total
|
$ | 12,731,092 | $ | 12,264 | 0.10 | % | ||||||
|
By
commodity/collateral type:
|
||||||||||||
|
Crops
|
$ | 5,160,783 | $ | 11 | 0.00 | % | ||||||
|
Permanent
plantings
|
2,880,501 | 9,359 | 0.32 | % | ||||||||
|
Livestock
|
3,229,556 | 2,676 | 0.08 | % | ||||||||
|
Part-time
farm/rural housing
|
904,525 | 218 | 0.02 | % | ||||||||
|
Ag
storage and processing (including ethanol facilities)
|
416,861 | (3) | - | 0.00 | % | |||||||
|
Other
|
138,866 | - | 0.00 | % | ||||||||
|
Total
|
$ | 12,731,092 | $ | 12,264 | 0.10 | % | ||||||
| (1) | Excludes loans underlying AgVantage securities. |
|
(2)
|
Geographic
regions - Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY); Southwest (AZ,
CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South
(KS, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA,
RI, TN, VA, VT, WV); and Southeast (AL, AR, FL, GA, LA, MS,
SC).
|
|
(3)
|
Several
of the loans underlying agricultural storage and processing LTSPCs are for
facilities under construction, and as of December 31, 2007,
approximately$53.8 million of the loans were not yet disbursed by the
lender.
|
An
analysis of Farmer Mac’s historical losses and identified specific collateral
deficiencies within the portfolio (by origination year) indicates that Farmer
Mac has experienced peak loss years as loans have aged between approximately
their third and fifth years subsequent to origination, regardless of the year
the loans were added to Farmer Mac’s portfolio. While Farmer Mac
expects that there will be loans that have aged past their fifth year that will
become delinquent and possibly default, Farmer Mac does not anticipate
significant losses on such loans due to the combination of principal
amortization and collateral value appreciation.
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. 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.
Analysis
of portfolio performance by geographic distribution indicates that, while
commodities are the primary determinant of exposure to loss, within most
commodity groups certain geographic areas allow greater economies of scale or
proximity to markets than others and, consequently, result in more successful
farms within the commodity group. Likewise, certain geographic areas
offer better growing conditions than others and, consequently, result in more
versatile and more successful farms within a given commodity group – and the
ability to switch crops among commodity groups.
Farmer Mac’s methodologies for pricing
its guarantee and commitment fees, managing credit risks and providing adequate
allowances for losses consider all of the foregoing factors and
information.
Credit
Risk – Institutional. Farmer Mac is also exposed to credit
risk arising from its business relationships with other institutions
including:
|
|
·
|
issuers
of AgVantage securities and other investments held or guaranteed by Farmer
Mac;
|
|
|
·
|
sellers
and servicers; and
|
|
|
·
|
interest
rate swap contract counterparties.
|
AgVantage
securities are general obligations of the AgVantage issuers and are secured by
collateral in an amount ranging from 103 percent to 150 percent of the bond
amount. In addition to requiring collateral, Farmer Mac mitigates
credit risk related to AgVantage securities by evaluating and monitoring the
financial condition of the issuers of the AgVantage
securities. Outstanding AgVantage on-balance sheet securities totaled
$30.8 million as of December 31, 2007 and $23.5 million as of December
31, 2006. In addition, outstanding Farmer Mac-guaranteed AgVantage
off-balance sheet securities totaled $2.5 billion as of December 31, 2007
and $1.5 billion as of December 31, 2006.
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. The credit risk inherent in other investments
held by Farmer Mac is mitigated by FCA regulations and Farmer Mac’s policies of
investing in highly-rated instruments and establishing concentration limits,
which reduce exposure to any one counterparty. Farmer Mac’s policies
limit the Corporation’s total credit exposure, including uncollateralized credit
exposure resulting from financial derivatives, to a single entity by limiting
the dollar amount of investments with each individual entity to the greater of
25 percent of Farmer Mac’s regulatory capital or $25.0 million (as of
December 31, 2007, Farmer Mac’s regulatory capital was
$230.3 million). That limitation excludes exposure to agencies
of the U.S. government, GSEs and diversified investment
funds. Farmer Mac’s policies also require each investment or issuer
of an investment to be highly rated by a nationally recognized statistical
rating organization (“NRSRO”), with limited exceptions where a rating of the
investment or issuer is not required by applicable FCA regulations such as
investments in obligations of the United States or GSEs, or mission-related
investments approved by FCA. Investments in mortgage securities and
asset-backed securities are required to be rated in the highest NRSRO rating
category. Investments in money market instruments, municipal
securities and corporate debt securities are required to be rated in one of the
two highest NRSRO rating categories, except that corporate debt securities with
maturities of three years or less are required to be rated in one of the three
highest NRSRO rating categories. On a limited basis, the Farmer Mac
Board and FCA may permit temporary exceptions to one or more of these
investment criteria. As of December 31, 2007, Farmer Mac had cash
and cash equivalents and investments in commercial paper, certificates of
deposit, mortgage-backed securities, corporate debt securities, including
financial institutions, and asset-backed securities issued by 26 entities
totaling $1.8 billion.
Liquidity
and Capital Resources
Farmer
Mac has sufficient liquidity and capital resources to support its operations for
the next 12 months and for the foreseeable future and, in accordance with Farmer
Mac's commitment to FCA, has a liquidity contingency plan to manage
unanticipated disruptions in its access to the capital markets. Consistent
with FCA regulations, Farmer Mac maintains a minimum of 60 days of liquidity and
a target of 90 days of liquidity. During 2007, Farmer Mac
maintained an average of greater than 90 days of liquidity.
Debt
Issuance. Section 8.6(e) of Farmer Mac’s statutory charter (12
U.S.C. § 2279aa-6(e)) authorizes Farmer Mac to issue debt obligations to
purchase eligible mortgage loans and Farmer Mac Guaranteed Securities and to
maintain reasonable available cash and cash equivalents for business operations,
including adequate liquidity. Farmer Mac funds its purchases of
program (loans and Farmer Mac Guaranteed Securities), mission-related 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, 2007), 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, mission-related assets and non-program
investment assets in accordance with policies established by its board of
directors.
Liquidity. The
funding and liquidity needs of Farmer Mac’s business programs are driven by the
purchase and retention of eligible loans, Farmer Mac Guaranteed Securities and
mission-related assets; 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, LTSPCs and mission-related
assets;
|
|
|
·
|
principal
and interest payments received from investment securities;
and
|
|
|
·
|
the
issuance of new discount notes and medium-term
notes.
|
Farmer
Mac projects its expected cash flows from loans and securities, other earnings
and the sale of assets and matches those with its obligations to retire debt and
pay other liabilities as they come due. Farmer Mac issues discount
notes and medium-term notes to meet the needs associated with its business
operations, including liquidity, and also to increase its presence in the
capital markets in order to reduce the rates it pays on its debt, which allows
Farmer Mac to accept lower rates on mortgages to farmers, ranchers and rural
homeowners that it purchases from lenders.
During
2007, the Corporation continued its strategy of using its non-program investment
portfolio (referred to as Farmer Mac’s liquidity portfolio) to facilitate
increasing its ongoing presence in the capital markets. To meet
investor demand for daily presence in the capital markets, Farmer Mac issues
discount notes in maturities principally ranging from one day to approximately
ninety days and invests the proceeds not needed for program asset purchases in
highly-rated securities. Investments are predominantly short-term
money market securities with maturities closely matched to the discount note
maturities and floating-rate securities with reset terms of less than one year
and closely matched to the maturity of the discount notes. The
positive spread earned from these investments enhances the net interest income
Farmer Mac earns, thereby improving the net yields at which Farmer Mac can
purchase mortgages from lenders who may pass that benefit to farmers, ranchers
and rural homeowners through the Farmer Mac programs. In compliance
with regulations issued by FCA in 2005, including dollar amount, issuer
concentration and credit quality limitations, Farmer Mac’s current policies
authorize non-program investments in:
|
|
·
|
obligations
of the United States;
|
|
|
·
|
obligations
of GSEs;
|
|
|
·
|
municipal
securities;
|
|
|
·
|
international
and multilateral development bank
obligations;
|
|
|
·
|
money
market instruments;
|
|
|
·
|
diversified
investment funds;
|
|
|
·
|
asset-backed
securities;
|
|
|
·
|
corporate
debt securities; and
|
|
|
·
|
mortgage
securities.
|
As of
December 31, 2007, Farmer Mac’s portfolio of non-program investments consisted
of: $101.4 million of cash and cash equivalents; $747.1 million of
securities issued or guaranteed by GSEs or the U.S. Government and its agencies;
$66.3 million of commercial paper; $181.9 million of commercial bank
certificates of deposit; $161.6 million of asset-backed securities (principally
backed by Government guaranteed student loans); and $543.3 million of corporate
debt securities, including financial institutions. In addition,
Farmer Mac held $924.1 million of mission-related investments authorized by
FCA. Farmer Mac did not hold any investments in mortgage-backed
securities backed by sub-prime residential mortgages or commercial
mortgages.
Farmer
Mac’s asset-backed investment securities include callable, AAA-rated
auction-rate certificates (“ARCs”), the interest rates of which are reset
through an auction process, most commonly at intervals of 28
days. Farmer Mac held $131.5 million of ARCs as of December 31, 2007
and $231.6 million as of March 1, 2008. From mid-February
through mid-March 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 and there may be no efficient mechanism for
selling these securities in the near term. All ARCs held by Farmer
Mac are collateralized entirely by pools of Federal Family Education Loan
Program (“FFELP”) guaranteed student loans that are backed by the full faith and
credit of the United States. Farmer Mac continues to believe that the
credit quality of these securities is high, based on that guarantee and the
securities’ continued AAA ratings. To date, Farmer Mac has received
all interest due on ARCs it holds. Farmer Mac does not believe the
ARCs held are impaired or that the auction failures will affect the
Corporation’s liquidity or its ability to fund its operations or make dividend
payments. All ARCs held by Farmer Mac are callable by the issuers at
par at any time and Farmer Mac believes it is likely they will be called during
2008.
The
following table presents Farmer Mac’s five largest investments as of December
31, 2007:
|
Security
|
|||||||||
|
Credit
|
|||||||||
|
Investment
|
Issuer
|
Rating
|
Amount
|
||||||
|
(in
thousands)
|
|||||||||
|
Corporate
Debt
|
Nat
Rural 1
|
A1
|
$ | 500,000 | 2 | ||||
|
Mortgage-Backed
Securities
|
Nat
Rural 1
|
not
rated
|
401,309 | 2 | |||||
|
GSE
Preferred Stock
|
CoBank,
ACB 3
|
A
|
88,500 | 2 | |||||
|
GSE
Preferred Stock
|
AgFirst
Farm Credit Bank 3
|
A
|
|
88,035 | 2 | ||||
|
GSE
Subordinated Debt
|
CoBank,
ACB 3
|
A
|
70,000 | 2 | |||||
|
1
|
Nat
Rural investment is part of a mission-related program approved by the Farm
Credit Administration.
|
|
2
|
Investment
balance does not include premiums paid or unrealized gains or losses on
the securities.
|
|
3
|
CoBank,
ACB and AgFirst Farm Credit Bank are institutions of the Farm Credit
System, a government- sponsored
enterprise.
|
As a
result of Farmer Mac’s status as a federally chartered instrumentality of the
United States and its regular issuance of discount notes and medium-term notes,
Farmer Mac has had ready access to the capital markets at favorable
rates. Farmer Mac’s access to capital markets funding has remained
strong despite recent market volatility. Farmer Mac has also used
floating-to-fixed interest rate swaps, combined with discount note issuances, as
a source of fixed-rate funding. While the interest rate swap market
may provide favorable fixed rates, interest rate swap transactions expose Farmer
Mac to the risk of future widening of its own issuance spreads versus
corresponding LIBOR rates. If the 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
floating-to-fixed interest rate swaps and other LIBOR-based floating rate
assets.
Consistent
with FCA regulations, Farmer Mac maintains a minimum of 60 days of liquidity and
a target of 90 days of liquidity. During 2007, Farmer Mac
maintained an average of greater than 90 days of liquidity.
Farmer
Mac holds cash and equivalents (including commercial paper and other short-term
money market instruments) and investment securities, all of which can be drawn
upon for liquidity needs. As of December 31, 2007, Farmer Mac’s cash
and cash equivalents and investment securities were $101.4 million and
$2.6 billion, respectively.
The
principal sources of funding for Farmer Mac’s obligations under its guarantees
and LTSPCs are:
|
|
·
|
the
ongoing fees received on its guarantees and
commitments;
|
|
|
·
|
net
interest income received on loans, investments and Farmer Mac Guaranteed
Securities; and
|
|
|
·
|
the
proceeds of debt issuance.
|
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. It directs FCA to establish a
risk-based capital test for Farmer Mac, using specified stress-test
parameters. For a discussion of risk-based capital, 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, 2007 and 2006, 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, 2007 and
2006.
|
December
31, 2007
|
December
31, 2006
|
|||||||||||||||||||||||
|
Amount
|
Ratio
|
Capital
Required
|
Amount
|
Ratio
|
Capital
Required
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
On-balance
sheet assets as defined for determining statutory minimum
capital
|
$ | 4,979,147 | 2.75 | % | $ | 136,927 | $ | 4,935,181 | 2.75 | % | $ | 135,717 | ||||||||||||
|
Outstanding
balance of Farmer Mac Guaranteed Securities held by others and
LTSPCs
|
6,492,056 | 0.75 | % | 48,690 | 5,152,761 | 0.75 | % | 38,646 | ||||||||||||||||
|
Derivative
and hedging obligations
|
55,273 | 0.75 | % | 415 | 23,474 | 0.75 | % | 176 | ||||||||||||||||
|
Minimum
capital level
|
186,032 | 174,539 | ||||||||||||||||||||||
|
Actual
core capital
|
226,386 | 243,533 | ||||||||||||||||||||||
|
Capital
surplus
|
$ | 40,354 | $ | 68,994 | ||||||||||||||||||||
Based on
the statutory minimum capital requirements, Farmer Mac’s current capital surplus
would support additional guarantee growth in amounts ranging from
$1.5 billion of on-balance sheet guarantees to more than $5.4 billion
of off-balance sheet guarantees and commitments. Furthermore, Farmer
Mac could sell $2.7 billion of on-balance sheet non-program assets (cash
and cash equivalents and investment securities) and $2.1 billion of
on-balance sheet program assets in order to support further increases of on- and
off-balance sheet program guarantees and commitments. Any
transactions would be evaluated for compliance with risk-based capital
requirements and to optimize Farmer Mac’s return on equity and capital
flexibility.
Based on
the risk-based capital stress test, Farmer Mac’s risk-based capital requirement
as of December 31, 2007 was $42.8 million and Farmer Mac’s regulatory
capital of $230.3 million exceeded that amount by approximately
$187.5 million. See “—Regulatory Matters” for a discussion of
the pro forma effect of a recent proposed change to the risk-based capital
requirement.
Contractual
Obligations, Contingent Liabilities and Off-Balance Sheet
Arrangements. 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, 2007. 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)
|
$ | 2,224,391 | $ | - | $ | - | $ | - | $ | 2,224,391 | ||||||||||
|
Medium-term
notes (1)
|
1,619,000 | 409,000 | 144,275 | 192,000 | 2,364,275 | |||||||||||||||
|
Interest
payments on fixed-rate medium-term notes
|
105,348 | 63,921 | 35,250 | 29,637 | 234,156 | |||||||||||||||
|
Interest
payments on floating-rate medium-term notes (2)
|
- | - | - | - | - | |||||||||||||||
|
Operating
lease obligations (3)
|
674 | 1,344 | 594 | - | 2,612 | |||||||||||||||
|
Purchase
obligations (4)
|
487 | 136 | 2 | - | 625 | |||||||||||||||
|
(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, 2007. 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: (a) amounts due under agreements that are cancelable without
penalty or further payment as of December 31, 2007 and therefore do not
represent enforceable and legally binding obligations; (b) amounts due
under the terms of employment agreements with members of senior
management; (c) the Corporation's recorded liability for uncertain tax
positions of $0.9 million because it is not known when the liability will
be resolved or paid; or (d) 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, 2007
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.
In
conducting its loan purchase activities, Farmer Mac enters into mandatory and
optional delivery commitments to purchase agricultural mortgage loans and
corresponding optional commitments to deliver Farmer Mac Guaranteed
Securities. As of December 31, 2007 and 2006, 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 mortgage
loans at an undetermined future date. The following table presents
these significant commitments.
|
As
of December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
LTSPCs
|
$ | 1,948,941 | $ | 1,969,764 | ||||
|
Mandatory
commitments to purchase loans and USDA-guaranteed portions
|
16,994 | 12,463 | ||||||
Further
information regarding commitments to purchase and sell agricultural mortgage
loans is included in Note 12 to the consolidated financial
statements.
Farmer
Mac also may have liabilities that arise from its Farmer Mac Guaranteed
Securities. Farmer Mac Guaranteed Securities are issued through
trusts and, when sold to third-party investors, accordingly, are not included in
the consolidated balance sheets. In performing its obligations
related to LTSPCs and Farmer Mac Guaranteed Securities, Farmer Mac would have
the right to enforce the underlying agricultural mortgage loans, and in the
event of the default under the terms of those loans, would have access to the
underlying collateral.
The
following table presents the balance of outstanding LTSPCs and off-balance sheet
Farmer Mac Guaranteed Securities as of December 31, 2007 and 2006:
|
Outstanding
Balance of LTSPCs and
|
||||||||
|
Off-Balance
Sheet Farmer Mac Guaranteed Securities
|
||||||||
|
As
of December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Farmer
Mac I Post-1996 Act obligations:
|
||||||||
|
Farmer
Mac I Guaranteed Securities
|
$ | 4,518,300 | $ | 3,149,895 | ||||
|
LTSPCs
|
1,948,941 | 1,969,734 | ||||||
|
Total
Farmer Mac I Post-1996 Act obligations
|
6,467,241 | 5,119,629 | ||||||
|
Farmer
Mac II Guaranteed Securities
|
24,815 | 33,132 | ||||||
|
Total
off-balance sheet Farmer Mac I and II
|
$ | 6,492,056 | $ | 5,152,761 | ||||
See Note
2(c), Note 2(e), Note 5 and Note 12 to the consolidated financial statements for
more information on Farmer Mac Guaranteed Securities and Note 2(o) and Note 12
to the consolidated financial statements for more information on
LTSPCs.
Regulatory
Matters
In the
September 13, 2007 issue of the Federal Register, FCA published for public
comment a proposed rule that would revise certain FCA regulations governing the
risk-based capital stress test applicable to Farmer Mac. The public
comment period for that proposed rule closed October 29, 2007. Farmer
Mac has provided written comments on the proposed rule to FCA. In its
announcement of the proposed rule FCA stated that the purpose of the proposed
changes is “to more accurately reflect changes in Farmer Mac’s operations or
business practices.” In the preamble to the proposed rule, FCA noted
that had the proposed rule been in effect on March 31, 2007, Farmer Mac’s
risk-based capital requirement as of that date would have been approximately
$100.1 million, compared to the risk-based capital requirement of
approximately $80.8 million under the existing risk-based capital stress
test at that time.
Other
Matters
New
Accounting Standards.
In
February 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid
Financial Instruments – an Amendment of FASB Statements No. 133 and 140
(“SFAS 155”), which resolves issues addressed in Statement 133 Implementation
Issue No. D1, Application
of Statement 133 to Beneficial Interests in Securitized Financial Assets
(“Statement 133”). SFAS 155, among other things,
permits the fair value re-measurement of any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation;
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of Statement 133; and establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation. SFAS 155 was effective
for all financial instruments acquired or issued in a fiscal year beginning
after September 15, 2006. Farmer Mac’s adoption of SFAS 155 on
January 1, 2007 did not have a material effect on Farmer Mac’s results of
operations or financial position.
In March
2006, FASB issued Statement of Financial Accounting Standards No. 156,
Accounting for Servicing of
Financial Assets (“SFAS 156”), which requires that all separately
recognized servicing assets and servicing liabilities be initially measured at
fair value, if practicable, and permits the entities to elect either fair value
measurement with changes in fair value reflected in earnings or the amortization
and impairment requirements of SFAS 140, for subsequent
measurement. SFAS 156 was effective on January 1,
2007. Farmer Mac’s adoption of SFAS 156 on January 1, 2007 did not
have a material effect on Farmer Mac’s results of operations or financial
position.
Farmer
Mac adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”)
on January 1, 2007. As part of the implementation of FIN 48, Farmer
Mac evaluated its tax positions for its open tax years, 2003 through 2006, to
identify and recognize any liabilities related to uncertain tax positions in its
federal income tax returns. As of January 1, 2007, Farmer Mac
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, 2007, both the recorded liability for uncertain tax positions and
the corresponding deferred tax asset were reduced to $0.9
million. Farmer Mac’s policy for recording interest and penalties
associated with uncertain tax positions is to record them as a component of
income tax expense and the FIN 48 liability. Under the provisions of
FIN 48, Farmer Mac will continue to evaluate its tax positions for potential
liabilities related to unrecognized tax benefits at least quarterly, but does
not expect any significant changes to its unrecognized tax benefits during the
next 12 months. There are no income tax examinations of Farmer Mac in
process.
In
September 2006, FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value under other accounting pronouncements that
permit or require fair value measurements, and expands disclosures about fair
value measurements. In particular, disclosures are required to
provide information on the extent to which fair value is used to measure assets
and liabilities, the inputs used to develop measurements and the effects of
certain of the measurements on earnings or changes in net assets. In
February 2008, FASB issued a final FASB Staff Position ("FSP") No. FAS 157-2,
Effective Date of FASB
Statement No. 157. This FSP delays the effective date of SFAS
157, for all nonfinancial assets and nonfinancial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis. In addition, the FSP removes certain leasing
transactions from the scope of SFAS 157. The effective date of SFAS
157 for nonfinancial assets and liabilities has been delayed by one year to
fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years. SFAS 157 for financial assets and liabilities is effective
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. Early adoption, as of the beginning of an
entity’s fiscal year, is also permitted, provided interim financial statements
have not yet been issued. Further revisions to the measurement
guidance are possible and Farmer Mac is monitoring emerging interpretations and
developments.
The
principal impact of SFAS 157 to Farmer Mac will be to require expanded
disclosures regarding fair value measurements. SFAS 157 establishes a
fair value hierarchy that prioritizes inputs to valuation techniques used to
measure fair value. The hierarchy gives highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy under
SFAS 157 are described below:
Basis of
Fair Value Measurement
|
|
Level
1
|
Unadjusted
quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or
liabilities;
|
|
|
Level
2
|
Quoted
prices in markets that are not active or financial instruments for which
all significant inputs are observable, either directly or indirectly;
and
|
|
|
Level
3
|
Prices
or valuations that require inputs that are both significant to the fair
value measurement and unobservable.
|
Given the
nature of Farmer Mac’s assets and liabilities that are recorded at fair value,
the financial statements include assets valued at $1.3 billion (25% of
total assets) and $1.0 billion (19% of total assets) as of December 31,
2007 and 2006, respectively, whose fair values have been estimated by management
in the absence of readily determinable fair values (i.e., Level
3). Management’s estimates are based on analytical models that
project cash flows based on internal and external inputs including transaction
terms, yield curves, benchmark data, volatility data, prepayment assumptions and
default assumptions.
In
February 2007, FASB issued 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 permits entities to make a
one-time election to report certain financial instruments at fair value with
changes in fair value recorded in earnings as they occur. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 is effective for fiscal years
beginning after November 15, 2007.
Farmer
Mac adopted the provisions of SFAS 159 on January 1, 2008, and recorded a
cumulative effect of adoption adjustment of $12.1 million, net of tax, as an
increase to the beginning balance of retained earnings. The fair
value option election was made for certain available-for-sale investment
securities, including $184.7 million of fixed rate GSE preferred stock
and $415.8 million of fixed rate mortgage-backed securities, and $429.4
million of held-to-maturity Farmer Mac II Guaranteed
Securities. These assets were selected for the fair value option
under SFAS 159 since they were identified as economic offsets to the changes in
fair value of the financial derivatives that were used to hedge or fund the
related assets.
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. SAB 109 is not expected
to have a material effect on Farmer Mac’s results of operations or financial
position.
In April
2007, FASB issued FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation No.
39 (“FSP FIN 39-1”). This FSP 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. FSP
FIN 39-1 is not expected to have a material effect on Farmer Mac’s results
of operations or financial position.
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 its exposure to changes in
interest rates. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Risk Management—Interest Rate
Risk” for more information about Farmer Mac’s exposure to interest rate risk and
strategies to manage such risk. For information regarding Farmer
Mac’s use of and accounting policies for financial derivatives, see Note 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, 2007. 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, 2007 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, 2007, as stated in their report
appearing below.
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Federal
Agricultural Mortgage Corporation
Washington,
DC
We have
audited the internal control over financial reporting of the Federal
Agricultural Mortgage Corporation and subsidiary (“Farmer Mac”) as of December
31, 2007, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). 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, 2007, 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, 2007 of Farmer Mac and our report dated March
17, 2008 expressed an unqualified opinion on those consolidated financial
statements and included an explanatory paragraph related to Farmer Mac’s
adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”)
on January 1, 2007.
/s/
Deloitte & Touche LLP
McLean,
Virginia
March 17,
2008
To the
Board of Directors and Stockholders of
Federal
Agricultural Mortgage Corporation
Washington,
DC
We have
audited the accompanying consolidated balance sheets of the Federal Agricultural
Mortgage Corporation and subsidiary (“Farmer Mac”) as of December 31, 2007 and
2006, 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, 2007. 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, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007, 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
FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”)
on January 1, 2007.
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, 2007, 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 17, 2008 expressed an
unqualified opinion on Farmer Mac’s internal control over financial
reporting.
/s/
Deloitte & Touche LLP
McLean,
Virginia
March 17,
2008
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 101,445 | $ | 877,714 | ||||
|
Investment
securities (includes securities pledged to counterparties of $7.2 million
as of December 31, 2007)
|
2,624,366 | 1,830,904 | ||||||
|
Farmer
Mac Guaranteed Securities
|
1,298,823 | 1,330,418 | ||||||
|
Loans
held for sale
|
118,629 | 71,621 | ||||||
|
Loans
held for investment
|
649,280 | 705,745 | ||||||
|
Allowance
for loan losses
|
(1,690 | ) | (1,945 | ) | ||||
|
Loans
held for investment, net
|
647,590 | 703,800 | ||||||
|
Real
estate owned
|
590 | 2,097 | ||||||
|
Financial
derivatives
|
2,288 | 9,218 | ||||||
|
Interest
receivable
|
91,939 | 73,545 | ||||||
|
Guarantee
and commitment fees receivable
|
57,804 | 40,743 | ||||||
|
Deferred
tax asset, net
|
30,239 | 6,886 | ||||||
|
Prepaid
expenses and other assets
|
3,900 | 6,727 | ||||||
|
Total
Assets
|
$ | 4,977,613 | $ | 4,953,673 | ||||
|
Liabilities
and Stockholders' Equity:
|
||||||||
|
Liabilities:
|
||||||||
|
Notes
payable:
|
||||||||
|
Due
within one year
|
$ | 3,829,698 | $ | 3,298,097 | ||||
|
Due
after one year
|
744,649 | 1,296,691 | ||||||
|
Total
notes payable
|
4,574,347 | 4,594,788 | ||||||
|
Financial
derivatives
|
55,273 | 23,474 | ||||||
|
Accrued
interest payable
|
50,004 | 36,125 | ||||||
|
Guarantee
and commitment obligation
|
52,130 | 35,359 | ||||||
|
Accounts
payable and accrued expenses
|
20,069 | 12,828 | ||||||
|
Reserve
for losses
|
2,197 | 2,610 | ||||||
|
Total
Liabilities
|
4,754,020 | 4,705,184 | ||||||
|
Commitments
and Contingencies (Note 12)
|
||||||||
|
Stockholders'
Equity:
|
||||||||
|
Preferred
stock:
|
||||||||
|
Series
A, stated at redemption/liquidation value, $50 per share, 700,000 shares
authorized, issued and outstanding
|
35,000 | 35,000 | ||||||
|
Common
stock:
|
||||||||
|
Class
A Voting, $1 par value, no maximum authorization, 1,030,780 shares issued
and outstanding
|
1,031 | 1,031 | ||||||
|
Class
B Voting, $1 par value, no maximum authorization, 500,301 shares issued
and outstanding
|
500 | 500 | ||||||
|
Class
C Non-Voting, $1 par value, no maximum authorization, 8,363,580 and
9,075,862 shares issued and outstanding as of December 31, 2007 and 2006,
respectively
|
8,364 | 9,076 | ||||||
|
Additional
paid-in capital
|
87,134 | 85,349 | ||||||
|
Accumulated
other comprehensive (loss)/income
|
(2,793 | ) | 4,956 | |||||
|
Retained
earnings
|
94,357 | 112,577 | ||||||
|
Total
Stockholders' Equity
|
223,593 | 248,489 | ||||||
|
Total
Liabilities and Stockholders' Equity
|
$ | 4,977,613 | $ | 4,953,673 | ||||
See
accompanying notes to consolidated financial statements.
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||
|
Interest
income:
|
||||||||||||
|
Investments
and cash equivalents
|
$ | 174,196 | $ | 128,199 | $ | 70,414 | ||||||
|
Farmer
Mac Guaranteed Securities
|
77,797 | 75,437 | 73,389 | |||||||||
|
Loans
|
45,765 | 46,286 | 48,769 | |||||||||
|
Total
interest income
|
297,758 | 249,922 | 192,572 | |||||||||
|
Total
interest expense
|
253,305 | 211,632 | 141,937 | |||||||||
|
Net
interest income
|
44,453 | 38,290 | 50,635 | |||||||||
|
Recovery/(provision)
for loan losses
|
215 | 2,396 | 54 | |||||||||
|
Net
interest income after recovery/(provision) for loan losses
|
44,668 | 40,686 | 50,689 | |||||||||
|
Non-interest
(loss)/income:
|
||||||||||||
|
Guarantee
and commitment fees
|
25,232 | 21,815 | 19,554 | |||||||||
|
(Losses)/gains
on financial derivatives and trading assets
|
(40,274 | ) | 1,617 | 11,537 | ||||||||
|
Gains
on sale of available-for-sale investment securities
|
288 | 1,150 | - | |||||||||
|
Gain
on the repurchase of debt
|
- | - | 116 | |||||||||
|
Gains
on the sale of real estate owned
|
130 | 809 | 34 | |||||||||
|
Representation
and warranty claims income
|
- | 718 | 79 | |||||||||
|
Other
income
|
1,411 | 1,001 | 1,872 | |||||||||
|
Non-interest
(loss)/income
|
(13,213 | ) | 27,110 | 33,192 | ||||||||
|
Non-interest
expense:
|
||||||||||||
|
Compensation
and employee benefits
|
14,161 | 11,901 | 8,215 | |||||||||
|
General
and administrative
|
8,508 | 9,769 | 9,697 | |||||||||
|
Regulatory
fees
|
2,163 | 2,313 | 2,316 | |||||||||
|
Real
estate owned operating (income)/costs, net
|
(28 | ) | 123 | 13 | ||||||||
|
Provision/(recovery)
for losses
|
73 | (1,012 | ) | (8,723 | ) | |||||||
|
Non-interest
expense
|
24,877 | 23,094 | 11,518 | |||||||||
|
Income
before income taxes
|
6,578 | 44,702 | 72,363 | |||||||||
|
Income
tax (benefit)/expense
|
(83 | ) | 12,689 | 23,091 | ||||||||
|
Net
income
|
6,661 | 32,013 | 49,272 | |||||||||
|
Preferred
stock dividends
|
(2,240 | ) | (2,240 | ) | (2,240 | ) | ||||||
|
Net
income available to common stockholders
|
$ | 4,421 | $ | 29,773 | $ | 47,032 | ||||||
|
Earnings
per common share and dividends:
|
||||||||||||
|
Basic
earnings per common share
|
$ | 0.43 | $ | 2.74 | $ | 4.14 | ||||||
|
Diluted
earnings per common share
|
$ | 0.42 | $ | 2.68 | $ | 4.09 | ||||||
|
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
(in
thousands)
|
For
Year Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||
|
Preferred
stock:
|
||||||||||||||||||||||||
|
Balance,
beginning of year
|
700 | $ | 35,000 | 700 | $ | 35,000 | 700 | $ | 35,000 | |||||||||||||||
|
Balance,
end of year
|
700 | $ | 35,000 | 700 | $ | 35,000 | 700 | $ | 35,000 | |||||||||||||||
|
Common
stock:
|
||||||||||||||||||||||||
|
Balance,
beginning of year
|
10,607 | $ | 10,607 | 11,091 | $ | 11,091 | 11,822 | $ | 11,822 | |||||||||||||||
|
Issuance
of Class C common stock
|
2 | 2 | 3 | 3 | 3 | 3 | ||||||||||||||||||
|
Repurchase
and retirement of Class C common stock
|
(1,087 | ) | (1,087 | ) | (815 | ) | (815 | ) | (800 | ) | (800 | ) | ||||||||||||
|
Exercise
of stock options
|
373 | 373 | 328 | 328 | 66 | 66 | ||||||||||||||||||
|
Balance,
end of year
|
9,895 | $ | 9,895 | 10,607 | $ | 10,607 | 11,091 | $ | 11,091 | |||||||||||||||
|
Additional
paid-in capital:
|
||||||||||||||||||||||||
|
Balance,
beginning of year
|
$ | 85,349 | $ | 83,058 | $ | 87,777 | ||||||||||||||||||
|
Stock-based
compensation expense
|
3,681 | 2,436 | - | |||||||||||||||||||||
|
Issuance
of Class C common stock
|
50 | 70 | 57 | |||||||||||||||||||||
|
Repurchase
and retirement of Class C common stock
|
(9,357 | ) | (6,625 | ) | (5,879 | ) | ||||||||||||||||||
|
Exercise
of stock options
|
7,411 | 6,410 | 1,103 | |||||||||||||||||||||
|
Balance,
end of year
|
$ | 87,134 | $ | 85,349 | $ | 83,058 | ||||||||||||||||||
|
Retained
earnings:
|
||||||||||||||||||||||||
|
Balance,
beginning of year
|
$ | 112,577 | $ | 101,633 | $ | 69,359 | ||||||||||||||||||
|
Net
income
|
6,661 | 32,013 | 49,272 | |||||||||||||||||||||
|
Preferred
stock dividends
|
(2,240 | ) | (2,240 | ) | (2,240 | ) | ||||||||||||||||||
|
Common
stock dividends
|
(4,119 | ) | (4,334 | ) | (4,520 | ) | ||||||||||||||||||
|
Repurchase
and retirement of Class C common stock
|
(18,522 | ) | (14,495 | ) | (10,238 | ) | ||||||||||||||||||
|
Balance,
end of year
|
$ | 94,357 | $ | 112,577 | $ | 101,633 | ||||||||||||||||||
|
Accumulated
other comprehensive (loss)/income:
|
||||||||||||||||||||||||
|
Balance,
beginning of year
|
$ | 4,956 | $ | 15,247 | $ | 31,276 | ||||||||||||||||||
|
Change
in unrealized gain/(loss) on available-for-sale securities, net of tax and
reclassification adjustments
|
(8,122 | ) | (10,835 | ) | (16,722 | ) | ||||||||||||||||||
|
Change
in unrealized gain/(loss) on financial derivatives, net of tax and
reclassification adjustments
|
373 | 544 | 693 | |||||||||||||||||||||
|
Balance,
end of year
|
$ | (2,793 | ) | $ | 4,956 | $ | 15,247 | |||||||||||||||||
|
Total
Stockholders’ Equity
|
$ | 223,593 | $ | 248,489 | $ | 246,029 | ||||||||||||||||||
|
Comprehensive
(loss)/income:
|
||||||||||||||||||||||||
|
Net
income
|
$ | 6,661 | $ | 32,013 | $ | 49,272 | ||||||||||||||||||
|
Changes
in accumulated other comprehensive (loss)/ income, net of
tax
|
(7,749 | ) | (10,291 | ) | (16,029 | ) | ||||||||||||||||||
|
Comprehensive
(loss)/income
|
$ | (1,088 | ) | $ | 21,722 | $ | 33,243 | |||||||||||||||||
See
accompanying notes to consolidated financial statements.
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
For
Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 6,661 | $ | 32,013 | $ | 49,272 | ||||||
|
Adjustments
to reconcile net income to net cash provided by/(used in) operating
activities:
|
||||||||||||
|
Net
(accretion)/amortization of premiums and discounts on loans and
investments
|
(2,435 | ) | (2,459 | ) | 2,401 | |||||||
|
Amortization
of debt premiums, discounts and issuance costs
|
130,810 | 129,390 | 65,411 | |||||||||
|
Purchases
of trading investment securities
|
(9,090 | ) | - | - | ||||||||
|
Proceeds
from repayment and sale of trading investment securities
|
5,749 | 1,776 | 2,812 | |||||||||
|
Purchases
of loans held for sale
|
(55,059 | ) | (53,108 | ) | (88,375 | ) | ||||||
|
Proceeds
from repayment of loans held for sale
|
6,819 | 8,963 | 11,641 | |||||||||
|
Net
change in fair value of trading securities and financial
derivatives
|
39,045 | (6,197 | ) | (25,738 | ) | |||||||
|
Amortization
of SFAS 133 transition adjustment on financial derivatives
|
373 | 544 | 693 | |||||||||
|
Gains
on the sale of available-for-sale securities
|
(288 | ) | (1,150 | ) | - | |||||||
|
Gains
on the sale of real estate owned
|
(130 | ) | (809 | ) | (34 | ) | ||||||
|
Total
(recovery)/provision for losses
|
(142 | ) | (3,408 | ) | (8,777 | ) | ||||||
|
Deferred
income taxes
|
(17,090 | ) | 2,171 | 12,459 | ||||||||
|
Stock-based
compensation expense
|
3,680 | 2,436 | - | |||||||||
|
Increase
in interest receivable
|
(18,437 | ) | (6,036 | ) | (9,379 | ) | ||||||
|
Increase
in guarantee and commitment fees receivable
|
(17,061 | ) | (18,573 | ) | (2,299 | ) | ||||||
|
(Increase)/decrease
in other assets
|
(652 | ) | 15,418 | (19,087 | ) | |||||||
|
Increase
in accrued interest payable
|
13,879 | 6,875 | 3,739 | |||||||||
|
Increase/(decrease)
in other liabilities
|
21,052 | 8,237 | (883 | ) | ||||||||
|
Net
cash provided by/(used in) operating activities
|
107,684 | 116,083 | (6,144 | ) | ||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases
of available-for-sale investment securities (1)
|
(4,201,668 | ) | (3,983,479 | ) | (2,215,207 | ) | ||||||
|
Purchases
of Farmer Mac II Guaranteed Securities and AgVantage Farmer
Mac Guaranteed Securities
|
(227,229 | ) | (241,323 | ) | (216,436 | ) | ||||||
|
Purchases
of loans held for investment
|
(72,650 | ) | (45,565 | ) | (21,681 | ) | ||||||
|
Purchases
of defaulted loans
|
(3,911 | ) | (9,623 | ) | (10,911 | ) | ||||||
|
Proceeds
from repayment of investment securities (2)
|
3,320,077 | 3,470,455 | 1,641,143 | |||||||||
|
Proceeds
from repayment of Farmer Mac Guaranteed Securities
|
246,683 | 227,008 | 238,723 | |||||||||
|
Proceeds
from repayment of loans held for investment
|
136,296 | 120,039 | 140,761 | |||||||||
|
Proceeds
from sale of available-for-sale investment securities
|
88,563 | 308,578 | - | |||||||||
|
Proceeds
from sale of Farmer Mac Guaranteed Securities
|
6,434 | 3,994 | 53,315 | |||||||||
|
Proceeds
from sale of real estate owned
|
1,537 | 3,440 | 3,112 | |||||||||
|
Net
cash used in investing activities
|
(705,868 | ) | (146,476 | ) | (387,181 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from issuance of discount notes
|
119,707,961 | 90,259,882 | 49,707,010 | |||||||||
|
Proceeds
from issuance of medium-term notes
|
1,579,000 | 772,667 | 825,527 | |||||||||
|
Payments
to redeem discount notes
|
(120,064,662 | ) | (90,278,381 | ) | (49,226,177 | ) | ||||||
|
Payments
to redeem medium-term notes
|
(1,373,550 | ) | (283,000 | ) | (862,240 | ) | ||||||
|
Tax
benefit from tax deductions in excess of compensation cost
recognized
|
616 | 1,220 | - | |||||||||
|
Proceeds
from common stock issuance
|
7,875 | 5,376 | 1,227 | |||||||||
|
Purchases
of common stock
|
(28,966 | ) | (21,935 | ) | (16,914 | ) | ||||||
|
Dividends
paid on common and preferred stock
|
(6,359 | ) | (6,574 | ) | (6,760 | ) | ||||||
|
Net
cash (used in)/provided by financing activities
|
(178,085 | ) | 449,255 | 421,673 | ||||||||
|
Net
(decrease)/increase in cash and cash equivalents
|
(776,269 | ) | 418,862 | 28,348 | ||||||||
|
Cash
and cash equivalents at beginning of period
|
877,714 | 458,852 | 430,504 | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 101,445 | $ | 877,714 | $ | 458,852 | ||||||
|
(1)
|
Includes
purchases of $2.5 billion, $3.1 billion and $1.5 billion related to
auction rate certificates for 2007, 2006 and 2005,
respectively. See Note 15.
|
|
(2)
|
Includes
proceeds, through the normal auction process, of $2.7 billion, $3.0
billion and $1.3 billion related to auction rate certificates for 2007,
2006 and 2005, 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, 2007, 2006 and 2005
|
1.
|
ORGANIZATION
|
The
Federal Agricultural Mortgage Corporation (“Farmer Mac” or the “Corporation”)
was chartered by the U.S. Congress in the Agricultural Credit Act of 1987 (12
U.S.C. §§ 2279aa et seq.), which amended the Farm Credit Act of 1971
(collectively, as amended, the “Act”). Farmer Mac is a
stockholder-owned instrumentality of the United States of America that was
created to establish a secondary market for agricultural real estate and rural
housing mortgage loans and to increase the availability of long-term credit at
stable interest rates to American farmers, ranchers and rural
homeowners. Farmer Mac conducts these activities through two
programs—Farmer Mac I and Farmer Mac II.
To be
eligible for the Farmer Mac I program, loans must meet Farmer Mac’s credit
underwriting, collateral valuation, documentation and other
standards. Under the Farmer Mac I program, Farmer Mac creates a
secondary market for agricultural mortgage loans and accomplishes its
congressional mission of providing liquidity and lending capacity to
agricultural mortgage lenders by:
|
|
·
|
purchasing
newly originated and pre-existing (“seasoned”) eligible mortgage loans
directly from lenders;
|
|
|
·
|
guaranteeing
mortgage-backed securities backed by eligible mortgage loans (“Farmer Mac
I Guaranteed Securities”);
|
|
|
·
|
exchanging
newly issued Farmer Mac I Guaranteed Securities for eligible mortgage
loans that back those securities in “swap” transactions;
and
|
|
|
·
|
issuing
long-term standby purchase commitments (“LTSPCs”) for newly originated and
seasoned eligible mortgage loans.
|
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 may retain Farmer Mac Guaranteed Securities in its portfolio or sell them to
third parties. As of December 31, 2007, outstanding loans held by
Farmer Mac and loans that either back Farmer Mac Guaranteed Securities or are
subject to LTSPCs totaled $8.5 billion.
Securities
generated in AgVantage transactions may be retained in portfolio by Farmer Mac
or sold into the capital markets. The latter, off-balance sheet
AgVantage securities are corporate obligations of highly-rated issuing
institutions, collateralized by eligible loans in a principal amount equal to at
least 103 percent of the outstanding principal amount of the security and
guaranteed by Farmer Mac as to timely payment of principal and
interest.
Farmer
Mac’s two principal sources of revenue are:
|
|
·
|
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, mortgage loans and
investments.
|
Farmer
Mac funds its purchases of Farmer Mac Guaranteed Securities, mortgage loans and
investments primarily by issuing debt obligations of various
maturities. As of December 31, 2007, Farmer Mac had outstanding
$2.2 billion of discount notes and $2.4 billion of medium-term
notes. To the extent the proceeds of the debt issuances exceed Farmer
Mac’s need to fund program assets, those proceeds are invested in high quality
non-program liquid assets.
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”). 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, and valuation of Farmer Mac Guaranteed Securities and
certain investment securities) as of the date of the consolidated financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those
estimates. The following are the significant accounting policies that
Farmer Mac follows in preparing and presenting its consolidated financial
statements:
|
(a)
|
Principles
of Consolidation
|
The
consolidated financial statements include the accounts of Farmer Mac and its
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, 2007, 2006
and 2005.
|
For
the Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cash
paid during the year for:
|
||||||||||||
|
Interest
|
$ | 119,700 | $ | 80,211 | $ | 74,701 | ||||||
|
Income
taxes
|
7,809 | 10,500 | 10,500 | |||||||||
|
Non-cash
activity:
|
||||||||||||
|
Real
estate owned acquired through foreclosure
|
- | 1,384 | 2,992 | |||||||||
|
Loans
acquired and securitized as Farmer Mac Guaranteed
Securities
|
1,324 | 3,994 | 53,315 | |||||||||
|
Loans
previously under LTSPCs exchanged for Farmer Mac Guaranteed
Securities
|
681,732 | 1,034,860 | - | |||||||||
|
(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, 2007 and 2006 were
$4.4 million and $5.8 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 transfers agricultural mortgage 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 may either retain the securities issued
by the trusts or sell the securities issued by the trusts to 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 agricultural mortgage 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. In 2007, 2006 and 2005, Farmer Mac did not
realize any gains or losses upon the sale of loans accounted for as sales under
SFAS 140.
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.
|
(g)
|
Real
Estate Owned
|
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 and trading assets 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
|
As of
December 31, 2007, Farmer Mac maintained an allowance for losses to cover
estimated probable losses on loans held, real estate owned and loans underlying
LTSPCs and Farmer Mac I Guaranteed Securities issued after the Farm Credit
System Reform Act of 1996 (the “1996 Act”) in accordance with Statement of
Financial Accounting Standards No. 5, Accounting for Contingencies
(“SFAS 5”) and Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for
Impairment of a Loan, as amended (“SFAS 114”).
The
allowance for losses is increased through periodic provisions for loan losses
that are charged against net interest income and provisions for losses that are
charged to non-interest expense and is reduced by charge-offs for actual losses,
net of recoveries. Negative provisions for loan losses or negative
provisions for losses are recorded in the event that the estimate of probable
losses as of the end of a period is lower than the estimate at the beginning of
the period.
Farmer
Mac’s methodology for determining its allowance for losses incorporates the
Corporation’s proprietary automated loan classification system. That
system scores loans based on criteria such as historical repayment performance,
loan seasoning, loan size and loan-to-value ratio. For the purposes
of the loss allowance methodology, the loans in Farmer Mac’s portfolio of loans
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs
have been scored and classified for each calendar quarter since first quarter
2000. The allowance methodology captures the migration of loan scores
across concurrent and overlapping three-year time horizons and calculates loss
rates separately within each loan classification for (1) loans underlying
LTSPCs and (2) loans held and loans underlying post-1996 Act Farmer
Mac I Guaranteed Securities. The calculated loss rates are
applied to the current classification distribution of Farmer Mac’s portfolio to
estimate inherent losses, on the assumption that the historical credit losses
and trends used to calculate loss rates will continue in the
future. Management evaluates this assumption by taking into
consideration factors, including:
|
|
·
|
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 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 post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs, in accordance with SFAS 5 and SFAS 114.
Prior to
third quarter 2007, no allowance for losses had been made for loans underlying
Farmer Mac I Guaranteed Securities issued prior to the 1996 Act (“Pre-1996 Act
Farmer Mac I Guaranteed Securities”), AgVantage securities or securities issued
under the Farmer Mac II program (“Farmer Mac II Guaranteed
Securities”). Pre-1996 Act Farmer Mac I Guaranteed Securities
are supported by unguaranteed first loss subordinated interests, which had been
expected to exceed the estimated credit losses on those
loans. Through June 30, 2007, Farmer Mac had not experienced any
credit losses on any Pre-1996 Act Farmer Mac I Guaranteed
Securities. In third quarter 2007, Farmer Mac charged off $0.4
million related to one loan underlying Pre-1996 Act Farmer Mac I Guaranteed
Securities. The remaining $3.2 million of Pre-1996 Act Farmer
Mac I Guaranteed Securities represent interests in seasoned performing loans
with low loan-to-value ratios. Farmer Mac does not expect to incur
any further losses on the remaining Pre-1996 Act Farmer Mac I Guaranteed
Securities in the future. Each AgVantage security is a general
obligation of an issuing institution approved by Farmer Mac and is
collateralized by eligible mortgage loans. As of December 31, 2007,
there were no probable losses inherent in Farmer Mac’s AgVantage securities due
to the high credit quality of the obligors, as well as the underlying
collateral. As of December 31, 2007, Farmer Mac had not experienced
any credit losses on any AgVantage Securities and does not expect to incur any
such losses in the future. The guaranteed portions collateralizing
Farmer Mac II Guaranteed Securities are guaranteed by the United States
Department of Agriculture (“USDA”). Each USDA guarantee is an
obligation backed by the full faith and credit of the United
States. As of December 31, 2007, 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.
|
(k)
|
Earnings
Per Common Share
|
Basic
earnings per common share are based on the weighted-average number of shares of
common stock outstanding. Diluted earnings per common share are based
on the weighted-average number of shares of common stock outstanding adjusted to
include all potentially dilutive common stock options. The following
schedule reconciles basic and diluted earnings per share of common stock (“EPS”)
for the years ended December 31, 2007, 2006 and 2005.
|
For
the Year Ended December 31,
|
||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||
|
Income
|
Shares
|
$
per Share
|
Income
|
Shares
|
$
per Share
|
Income
|
Shares
|
$
per Share
|
||||||||||||||||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||||||||||||||||||
|
Basic
EPS
|
||||||||||||||||||||||||||||||||||||
|
Net
income available to common stockholders
|
$ | 4,421 | 10,369 | $ | 0.43 | $ | 29,773 | 10,868 | $ | 2.74 | $ | 47,032 | 11,352 | $ | 4.14 | |||||||||||||||||||||
|
Effect
of dilutive securities:
|
||||||||||||||||||||||||||||||||||||
|
Stock
options (1)
|
- | 222 | (0.01 | ) | - | 253 | (0.06 | ) | - | 149 | (0.05 | ) | ||||||||||||||||||||||||
|
Diluted
EPS
|
$ | 4,421 | 10,591 | $ | 0.42 | $ | 29,773 | 11,121 | $ | 2.68 | $ | 47,032 | 11,501 | $ | 4.09 | |||||||||||||||||||||
|
(1)
|
For
the years ended December 31, 2007, 2006 and 2005, stock options of
380,506, 452,506 and 879,857 respectively, were outstanding but not
included in the computation of diluted 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.
|
(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 recordation 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 recordation 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 $1.4 million and $1.7 million of
compensation expense during 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 $2.2 million and $0.7 million of compensation expense related to
stock options awarded subsequent to December 31, 2005, for 2007 and 2006,
respectively. Prior to the adoption of SFAS 123(R), Farmer Mac
accounted for its stock-based employee compensation plans under the intrinsic
value method of accounting for employee stock options pursuant to Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and had adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, as amended. Accordingly, no compensation expense
was recognized in 2005 for employee stock option plans. Had Farmer
Mac elected to use the fair value method of accounting for employee stock
options, net income available to common stockholders and earnings per common
share for 2005 would have been reduced to the pro forma amounts indicated in the
following table:
|
2005
|
||||
|
Net
income available to common stockholders, as reported
|
$ | 47,032 | ||
|
Deduct: Total
stock-based compensation expense determined under fair value-based method
for all awards, net of tax
|
(2,132 | ) | ||
|
Pro
forma net income available to common stockholders
|
$ | 44,900 | ||
|
Earnings
per common share:
|
||||
|
Basic
- as reported
|
$ | 4.14 | ||
|
Basic
- pro forma
|
3.96 | |||
|
Diluted
- as reported
|
$ | 4.09 | ||
|
Diluted
- pro forma
|
3.90 | |||
The
underlying assumptions to these fair value calculations are presented in Note
9.
As of
December 31, 2007, Farmer Mac had $0.5 million of total unrecognized
compensation cost related to stock options outstanding and unvested as of
December 31, 2005, which is expected to be recognized in 2008.
(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,
2007, 2006 and 2005:
|
For Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Net
income
|
$ | 6,661 | $ | 32,013 | $ | 49,272 | ||||||
|
Available-for-sale
securities, net of tax:
|
||||||||||||
|
Net
unrealized holding losses
|
(7,935 | ) | (10,087 | ) | (16,722 | ) | ||||||
|
Reclassification
adjustment for realized gains
|
(187 | ) | (748 | ) | - | |||||||
|
Net
change from available-for-sale securities (1)
|
(8,122 | ) | (10,835 | ) | (16,722 | ) | ||||||
|
Financial
derivatives, net of tax:
|
||||||||||||
|
Reclassification
for amortization of SFAS 133 transition adjustment
(2)
|
373 | 544 | 693 | |||||||||
|
Other
comprehensive loss, net of tax
|
(7,749 | ) | (10,291 | ) | (16,029 | ) | ||||||
|
Comprehensive
(loss)/income
|
$ | (1,088 | ) | $ | 21,722 | $ | 33,243 | |||||
|
(1)
|
Unrealized
losses on available for sale securities is shown net of income tax benefit
of $4.4 million, $5.8 million and $9.0 million in 2007, 2006 and 2005,
respectively.
|
|
(2)
|
Amortization
of SFAS 133 transition adjustment is shown net of income tax expense of
$0.2 million, $0.3 million and $0.4 million in 2007, 2006 and 2005,
respectively.
|
The
following table presents Farmer Mac’s accumulated other comprehensive
(loss)/income as of December 31, 2007, 2006 and 2005 and changes in the
components of accumulated other comprehensive (loss)/income for the years ended
December 31, 2007, 2006 and 2005.
|
As
of December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Available-for-sale
securities:
|
||||||||||||
|
Beginning
balance
|
$ | 5,802 | $ | 16,637 | $ | 33,359 | ||||||
|
Net
unrealized losses, net of tax
|
(8,122 | ) | (10,835 | ) | (16,722 | ) | ||||||
|
Ending
balance
|
$ | (2,320 | ) | $ | 5,802 | $ | 16,637 | |||||
| Financial derivatives: | ||||||||||||
|
Beginning
balance
|
$ | (846 | ) | $ | (1,390 | ) | $ | (2,083 | ) | |||
|
Amortization
of SFAS 133 transition adjustment on financial derivatives, net of
tax
|
373 | 544 | 693 | |||||||||
|
Ending
balance
|
$ | (473 | ) | $ | (846 | ) | $ | (1,390 | ) | |||
|
Accumulated
other comprehensive (loss)/income, net of tax
|
$ | (2,793 | ) | $ | 4,956 | $ | 15,247 | |||||
(o)
Long-Term
Standby Purchase Commitments (LTSPCs)
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)
New
Accounting Standards
In
February 2006, FASB issued Statement of Financial Accounting
Standards No. 155, Accounting for Certain Hybrid
Financial Instruments – an Amendment of FASB Statements No. 133 and
140 (“SFAS 155”), which resolves issues addressed in Statement 133
Implementation Issue No. D1, Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets
(“Statement 133”). SFAS 155, among other things,
permits the fair value re-measurement of any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation;
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of Statement 133; and establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation. SFAS 155 was effective
for all financial instruments acquired or issued in a fiscal year beginning
after September 15, 2006. Farmer Mac’s adoption of SFAS 155 on
January 1, 2007 did not have a material effect on Farmer Mac’s results of
operations or financial position.
In March
2006, FASB issued Statement of Financial Accounting Standards No. 156,
Accounting for Servicing of
Financial Assets (“SFAS 156”), which requires that all separately
recognized servicing assets and servicing liabilities be initially measured at
fair value, if practicable, and permits the entities to elect either fair value
measurement with changes in fair value reflected in earnings or the amortization
and impairment requirements of SFAS 140, for subsequent
measurement. SFAS 156 was effective on January 1,
2007. Farmer Mac’s adoption of SFAS 156 on January 1, 2007 did
not have a material effect on Farmer Mac’s results of operations or financial
position.
Farmer
Mac adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”)
on January 1, 2007. As part of the implementation of FIN 48, Farmer
Mac evaluated its tax positions for its open tax years, 2003 through 2006, to
identify and recognize any liabilities related to uncertain tax positions in its
federal income tax returns. As of January 1, 2007, Farmer Mac
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, 2007, both the recorded liability for uncertain tax positions and
the corresponding deferred tax asset were reduced to $0.9
million. Farmer Mac’s policy for recording interest and penalties
associated with uncertain tax positions is to record them as a component of
income tax expense and the FIN 48 liability. Under the provisions of
FIN 48, Farmer Mac will continue to evaluate its tax positions for potential
liabilities related to unrecognized tax benefits at least quarterly, but does
not expect any significant changes to its unrecognized tax benefits during the
next 12 months. There are no income tax examinations of Farmer Mac in
process.
In
September 2006, FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value under other accounting pronouncements that
permit or require fair value measurements, and expands disclosures about fair
value measurements. In particular, disclosures are required to
provide information on the extent to which fair value is used to measure assets
and liabilities, the inputs used to develop measurements and the effects of
certain of the measurements on earnings or changes in net assets. In
February 2008, FASB issued a final FASB Staff Position ("FSP") No. FAS 157-2,
Effective Date of FASB
Statement No. 157. This FSP delays the effective date of SFAS
157, for all nonfinancial assets and nonfinancial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis. In addition, the FSP removes certain leasing
transactions from the scope of SFAS 157. The effective date of SFAS
157 for nonfinancial assets and liabilities has been delayed by one year to
fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years. SFAS 157 for financial assets and liabilities is effective
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. Early adoption, as of the beginning of an
entity’s fiscal year, is also permitted, provided interim financial statements
have not yet been issued. Further revisions to the measurement
guidance are possible and Farmer Mac is monitoring emerging interpretations and
developments. Farmer Mac’s adoption of SFAS 157 on January 1, 2008 is
not expected to result in a material difference to its fair value
measurements.
The
principal impact of SFAS 157 to Farmer Mac will be to require expanded
disclosures regarding fair value measurements. SFAS 157 establishes a
fair value hierarchy that prioritizes inputs to valuation techniques used to
measure fair value. The hierarchy gives highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy under
SFAS 157 are described below:
Basis of
Fair Value Measurement
|
|
Level
1
|
Unadjusted
quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or
liabilities;
|
|
|
Level
2
|
Quoted
prices in markets that are not active or financial instruments for which
all significant inputs are observable, either directly or indirectly;
and
|
|
|
Level
3
|
Prices
or valuations that require inputs that are both significant to the fair
value measurement and unobservable.
|
Given the
nature of Farmer Mac’s assets and liabilities that are recorded at fair value,
the financial statements include assets valued at $1.3 billion (25 percent
of total assets) and $1.0 billion (19 percent of total assets) as of
December 31, 2007 and 2006, respectively, whose fair values have been estimated
by management in the absence of readily determinable fair values (i.e., Level
3). Management’s estimates are based on analytical models that
project cash flows based on internal and external inputs including transaction
terms, yield curves, benchmark data, volatility data, prepayment assumptions and
default assumptions.
In
February 2007, FASB issued 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 permits entities to make a
one-time election to report certain financial instruments at fair value with
changes in fair value recorded in earnings as they occur. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 is effective for fiscal years
beginning after November 15, 2007.
Farmer
Mac adopted the provisions of SFAS 159 on January 1, 2008, and recorded a
cumulative effect of adoption adjustment of $12.1 million, net of tax, as an
increase to the beginning balance of retained earnings. The fair
value option election was made for certain available-for-sale investment
securities, including $184.7 million of fixed rate government-sponsored
enterprise (“GSE”) preferred stock and $415.8 million of fixed rate
mortgage-backed securities, and $429.4 million of held-to-maturity Farmer
Mac II Guaranteed Securities. These assets were selected for the fair
value option under SFAS 159 since they were identified as economic offsets to
the changes in fair value of the financial derivatives that were used to hedge
or fund the related assets.
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. SAB 109 is not expected
to have a material effect on Farmer Mac’s results of operations or financial
position.
In April
2007, FASB issued FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation No.
39 (“FSP FIN 39-1”). This FSP 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. FSP
FIN 39-1 is not expected to have a material effect on Farmer Mac’s results
of operations or financial position.
(q)
Reclassifications
Certain
reclassifications of prior year information were made to conform to the 2007
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 2007 and 2006
with Farm Credit West, ACA, information about those transactions is not included
below because that institution was not a related party during those
years. Likewise, Farmer Mac conducted business during 2006 and 2005
with Farm Credit of Western New York, ACA; however, information about those
transactions is not included below because that institution was not a related
party during those years.
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. During 2006, Farmer Mac purchased newly originated and
current seasoned eligible loans from 53 entities (the top ten institutions
generated 74.6 percent of the purchase volume), placed loans under LTSPCs
with 22 entities and conducted Farmer Mac II transactions with 181 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 2007, 2006 and 2005 is presented
below:
|
For
the Year Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Aggregate
|
Aggregate
|
Aggregate
|
||||||||||||||||||||||
|
Number
|
Principal
|
Number
|
Principal
|
Number
|
Principal
|
|||||||||||||||||||
|
of
Loans
|
Balance
|
of
Loans
|
Balance
|
of
Loans
|
Balance
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
New
extensions:
|
||||||||||||||||||||||||
|
AgFirst
Farm Credit Bank
|
709 | $ | 124,605 | 53 | $ | 26,467 | 54 | $ | 32,635 | |||||||||||||||
|
AgStar
Financial Services, ACA
|
1,837 | 369,347 | 1,437 | 232,317 | 1,166 | 193,078 | ||||||||||||||||||
|
Farm
Credit Bank of Texas
|
742 | 284,198 | 354 | 179,880 | 106 | 45,941 | ||||||||||||||||||
|
Farm
Credit of Western New York, ACA
|
1 | 545 | - | - | - | - | ||||||||||||||||||
|
Sacramento Valley
Farm Credit, ACA
|
6 | 8,457 | 2 | 7,151 | 6 | 6,622 | ||||||||||||||||||
|
As
of December 31,
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
Aggregate
|
Aggregate
|
|||||||||||||||
|
Number
of
|
Principal
|
Number
of
|
Principal
|
|||||||||||||
|
Loans
|
Balance
|
Loans
|
Balance
|
|||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Aggregate
LTSPCs outstanding:
|
||||||||||||||||
|
AgFirst
Farm Credit Bank
|
2,898 | $ | 421,333 | 2,617 | $ | 376,230 | ||||||||||
|
AgStar
Financial Services, ACA *
|
258 | 152,056 | 1,469 | 220,555 | ||||||||||||
|
Farm
Credit Bank of Texas
|
1,408 | 466,734 | 819 | 263,065 | ||||||||||||
|
Farm
Credit of Western New York, ACA
|
128 | 44,836 | - | - | ||||||||||||
|
Sacramento Valley
Farm Credit, ACA **
|
11 | 13,582 | 6 | 7,044 | ||||||||||||
|
*
|
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, 2007 and 2006 was $639.1 million
and $320.1 million,
respectively.
|
|
**
|
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, 2007 and 2006 was $113.1 million and $125.6 million,
respectively.
|
|
For
the Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Commitment
fees earned by Farmer Mac:
|
||||||||||||
|
AgFirst
Farm Credit Bank
|
$ | 1,586 | $ | 1,836 | $ | 2,164 | ||||||
|
AgStar
Financial Services, ACA
|
865 | 964 | 1,096 | |||||||||
|
Farm
Credit Bank of Texas
|
1,349 | 698 | 512 | |||||||||
|
Farm
Credit West, ACA or its affiliates
|
- | - | 801 | |||||||||
|
Farm
Credit of Western New York, ACA
|
244 | - | - | |||||||||
|
Sacramento Valley
Farm Credit, ACA
|
27 | 631 | 736 | |||||||||
As of
December 31, 2007 and 2006, Farmer Mac had the following commitment fees
receivable from related parties:
|
As
of December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
AgFirst
Farm Credit Bank
|
$ | 271 | $ | 278 | ||||
|
AgStar
Financial Services, ACA
|
85 | 64 | ||||||
|
Farm
Credit Bank of Texas
|
149 | 77 | ||||||
|
Farm
Credit of Western New York, ACA
|
19 | - | ||||||
|
Sacramento
Valley Farm Credit, ACA
|
3 | 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 2007, 2006 and 2005:
|
For
the Year Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Aggregate
|
Aggregate
|
Aggregate
|
||||||||||||||||||||||
|
Number
|
Principal
|
Number
|
Principal
|
Number
|
Principal
|
|||||||||||||||||||
|
of
Loans
|
Balance
|
of
Loans
|
Balance
|
of
Loans
|
Balance
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Purchases:
|
||||||||||||||||||||||||
|
Loans
|
80 | $ | 45,723 | 65 | $ | 26,195 | 68 | $ | 24,532 | |||||||||||||||
|
USDA-guaranteed
portions
|
11 | 2,333 | 25 | 6,143 | 52 | 11,131 | ||||||||||||||||||
|
Sales
of Farmer Mac Guaranteed Securities
|
- | - | 46,720 | |||||||||||||||||||||
The
purchases of loans from Zions under the Farmer Mac I program represented
approximately 35.8 percent,
26.6 percent and 22.3 percent of Farmer Mac I loan purchase volume for the
years ended December 31, 2007, 2006 and 2005, respectively. Those
purchases represented 2.0 percent,
0.9 percent, and 3.2 percent of total program volume,
respectively. The purchases of USDA-guaranteed portions under the
Farmer Mac II program from Zions represented approximately 1.1 percent,
2.6 percent and 5.6 percent of that program’s volume for the years ended
December 31, 2007, 2006 and 2005, respectively.
Farmer
Mac or Zions received the applicable amounts shown below with respect to
transactions between the two parties in 2007, 2006 and 2005:
|
For
the Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Guarantee
fees received by Farmer Mac
|
$ | 2,016 | $ | 2,260 | $ | 2,406 | ||||||
|
Servicing
fees received by Zions
|
1,558 | 1,594 | 1,496 | |||||||||
|
Underwriting
and loan file review fees received by Zions
|
15 | 16 | 10 | |||||||||
|
Audit
fees for review of servicing reimbursed to Zions
|
- | - | 7 | |||||||||
|
Litigation
expenses reimbursed to Zions
|
- | 5 | 6 | |||||||||
|
Discount
note commissions received by Zions
|
17 | 19 | 40 | |||||||||
|
Commercial
paper interest earned by Farmer Mac
|
245 | - | - | |||||||||
Zions
received commissions for acting as dealer with respect to approximately $730.0 million,
$737.5 million and $1.6 billion par value of Farmer Mac discount notes
during 2007, 2006 and 2005, respectively. Farmer Mac earned interest
with respect to approximately $765.0 million par value of commercial paper
issued by Zions during 2007.
Farmer Mac and Zions were
parties to interest rate swap contracts having an aggregate outstanding notional
principal amount of approximately $162.0 million and $193.0 million
as of December 31, 2007 and 2006, respectively. As of
December 31, 2007 and 2006, Farmer Mac had net interest payable to Zions under
those contracts of approximately $1.5 million and $1.6 million,
respectively. As of December 31, 2007 and 2006, 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 2007, 2006 and 2005, Farmer Mac paid Zions $22,338,
$18,901 and $11,169, respectively, under that lease agreement.
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 and 1 percent of
Class C non-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 2007,
2006 and 2005, AgFirst received $32,000, $39,000 and $0.3 million,
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, 2007 and 2006, the outstanding balance of those securities owned
by AgFirst was $532.2 million
and $601.0 million, respectively. Farmer Mac received guarantee fees
of $0.3 million
and $0.3 million for each of 2007 and 2006, respectively, with respect to
those securities.
In 2007
and 2006, Farmer Mac paid AgFirst $2,000 and $1,000, respectively, for marketing
expenses related to Farmer Mac programs.
In 2007,
2006 and 2005, Farmer Mac received guarantee fees of $70,000, $87,000 and
$147,000, 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, 2007,
2006 and 2005.
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 2007 and 2006,
Farmer Mac paid AgStar $5,000 and $3,000, respectively, for marketing expenses
related to Farmer Mac programs.
In 2007,
2006 and 2005, AgStar received $1.9 million,
$0.8 million and $0.3 million, respectively in servicing fees for its
work as a Farmer Mac central servicer.
In 2007,
2006 and 2005, Farmer Mac purchased $0.7 million,
$3.6 million and $2.1 million principal amount of loans, respectively,
from AgStar under the Farmer Mac I program.
During
2007, 2006 and 2005, Farmer Mac sold Farmer Mac I Guaranteed Securities to
AgStar in the amount of $1.3 million, $4.0 million and $6.6 million,
respectively. Those sales did not result in a gain or loss to Farmer
Mac.
During
2007 and 2006, AgStar 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,
2007 and 2006 was $639.1 million and $320.1 million,
respectively. Farmer Mac received $2.3 million and $0.7 million in
guarantee fees on those securities during 2007 and 2006,
respectively.
Other Related Party
Transactions:
For all
of the 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.
The
following is a summary of purchases of loans and USDA-guaranteed portions from
other related parties during 2007, 2006 and 2005:
|
For
the Year Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Aggregate
|
Aggregate
|
Aggregate
|
||||||||||||||||||||||
|
Number
|
Principal
|
Number
|
Principal
|
Number
|
Principal
|
|||||||||||||||||||
|
of
Loans
|
Balance
|
of
Loans
|
Balance
|
of
Loans
|
Balance
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Purchases:
|
||||||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
First
Dakota National Bank
|
14 | $ | 5,943 | 4 | $ | 918 | 1 | $ | 725 | |||||||||||||||
|
USDA-guaranteed
portions:
|
||||||||||||||||||||||||
|
Bath
State Bank
|
22 | 5,405 | 28 | 5,535 | 39 | 7,688 | ||||||||||||||||||
|
First
Dakota National Bank
|
8 | 2,364 | 24 | 4,613 | 18 | 3,419 | ||||||||||||||||||
Farmer
Mac received the following guarantee fees with respect to transactions with
other related parties:
|
For
the Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Farm
Credit West, ACA or its affiliates
|
$ | - | $ | - | $ | 2,623 | ||||||
|
Bath
State Bank
|
65 | 71 | 50 | |||||||||
|
First
Dakota National Bank
|
271 | 276 | 183 | |||||||||
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, 2007 and 2006
was $113.1 million and $125.6 million, respectively. Farmer Mac
received $0.6 million and $53,000 in guarantee fees on those securities during
2007 and 2006, respectively.
In 2007
and 2006, Sacramento Valley Farm Credit, ACA received $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, 2005, the aggregate
outstanding balance of those Farmer Mac Guaranteed Securities was $497.7
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 2005, Farm Credit West,
ACA received $1.7 million in servicing fees for its work as a Farmer Mac
central servicer. In 2005, Farmer Mac paid $21,825 to Farm Credit
West, ACA as reimbursement for expenses related to a meeting of Farmer Mac’s
board of directors.
In
addition, as of December 31, 2007, 2006 and 2005, Farmer Mac owned $88.5 million
of preferred stock and, as of December 31, 2007, $70 million of subordinated
debt issued by CoBank, ACB. CoBank, ACB is a major holder of Farmer
Mac Class B voting common stock.
|
4.
|
INVESTMENT
SECURITIES
|
Farmer
Mac’s investment portfolio as of December 31, 2007 and 2006 was comprised of the
following investment securities:
|
As
of December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Available-for-sale
|
$ | 2,616,187 | $ | 1,825,751 | ||||
|
Trading
|
8,179 | 5,153 | ||||||
|
Total
investment securities
|
$ | 2,624,366 | $ | 1,830,904 | ||||
The
following tables present the amortized cost and estimated fair values of Farmer
Mac’s investments as of December 31, 2007 and 2006.
|
As
of December 31, 2007
|
||||||||||||||||
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||
|
Fixed
rate certificates of deposit
|
$ | 181,864 | $ | - | $ | - | $ | 181,864 | ||||||||
|
Fixed
rate commercial paper
|
66,339 | - | - | 66,339 | ||||||||||||
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans (1)
|
131,544 | - | - | 131,544 | ||||||||||||
|
Floating
rate asset-backed securities
|
30,000 | 13 | - | 30,013 | ||||||||||||
|
Floating
rate corporate debt securities
|
561,193 | 1 | (19,345 | ) | 541,849 | |||||||||||
|
Fixed
rate corporate debt securities (2)
|
501,490 | 138 | (3 | ) | 501,625 | |||||||||||
|
Fixed
rate mortgage-backed securities (3)
|
401,309 | 14,504 | - | 415,813 | ||||||||||||
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
(4)
|
437,680 | 5,016 | (192 | ) | 442,504 | |||||||||||
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
8,330 | 1 | (47 | ) | 8,284 | |||||||||||
|
Floating
rate GSE subordinated debt
|
70,000 | - | (4,397 | ) | 65,603 | |||||||||||
|
Floating
rate GSE preferred stock
|
52,500 | - | (6,406 | ) | 46,094 | |||||||||||
|
Fixed
rate GSE preferred stock
|
181,873 | 4,206 | (1,424 | ) | 184,655 | |||||||||||
|
Total
available-for-sale
|
2,624,122 | 23,879 | (31,814 | ) | 2,616,187 | |||||||||||
|
Trading:
|
||||||||||||||||
|
Floating
rate asset-backed securities (5)
|
8,432 | - | (253 | ) | 8,179 | |||||||||||
|
Total
trading
|
8,432 | - | (253 | ) | 8,179 | |||||||||||
|
Total
investment securities
|
$ | 2,632,554 | $ | 23,879 | $ | (32,067 | ) | $ | 2,624,366 | |||||||
|
(1)
|
AAA-rated
callable auction-rate certificates collateralized by pools of Federal
Family Education Loan Program ("FFELP") guaranteed student loans that are
backed by the full faith and credit of the United States, the interest
rates of which are reset through an auction process, most commonly at
intervals of 28 days. 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.
|
|
(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.
|
|
(5)
|
Floating
rate asset-backed securities is comprised of mission-related
investments.
|
|
As
of December 31, 2006
|
||||||||||||||||
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||
|
Fixed
rate commercial paper
|
$ | 73,371 | $ | - | $ | - | $ | 73,371 | ||||||||
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans (1)
|
361,822 | - | - | 361,822 | ||||||||||||
|
Floating
rate corporate debt securities
|
406,374 | 527 | (6 | ) | 406,895 | |||||||||||
|
Fixed
rate corporate debt securities (2)
|
579,389 | 17 | (4,153 | ) | 575,253 | |||||||||||
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
158,521 | 552 | (45 | ) | 159,028 | |||||||||||
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
9,444 | - | (177 | ) | 9,267 | |||||||||||
|
Floating
rate GSE preferred stock
|
53,691 | - | (284 | ) | 53,407 | |||||||||||
|
Fixed
rate GSE preferred stock
|
183,080 | 3,628 | - | 186,708 | ||||||||||||
|
Total
available-for-sale
|
1,825,692 | 4,724 | (4,665 | ) | 1,825,751 | |||||||||||
|
Trading:
|
||||||||||||||||
|
Adjustable
rate Government guaranteed mortgage-backed securities
|
5,091 | 62 | - | 5,153 | ||||||||||||
|
Total
trading
|
5,091 | 62 | - | 5,153 | ||||||||||||
|
Total
investment securities
|
$ | 1,830,783 | $ | 4,786 | $ | (4,665 | ) | $ | 1,830,904 | |||||||
|
(1)
|
AAA-rated
callable auction-rate certificates collateralized by pools of 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.
|
|
|
|
During
2007 and 2006, Farmer Mac realized gains from the sale of securities from its
available-for-sale portfolio of $0.3 million and $1.2 million,
respectively. No gains or losses were realized in 2005.
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, 2006, Farmer Mac's trading securities had a fair value of $5.2 million,
which reflects an unrealized gain of $0.1 million. As of December 31, 2007
and 2006, unrealized losses on available-for-sale securities were as
follows:
|
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 | ) | ||||||
|
As
of December 31, 2006
|
||||||||||||||||
|
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
|
$ | 55,046 | $ | (6 | ) | $ | - | $ | - | |||||||
|
Fixed
rate corporate debt securities
|
34,148 | (8 | ) | 515,986 | (4,145 | ) | ||||||||||
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
13,516 | (37 | ) | 612 | (8 | ) | ||||||||||
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
9,267 | (177 | ) | - | - | |||||||||||
|
Floating
rate GSE preferred stock
|
- | - | 53,407 | (284 | ) | |||||||||||
|
Total
|
$ | 111,977 | $ | (228 | ) | $ | 570,005 | $ | (4,437 | ) | ||||||
The
temporary unrealized losses presented above are principally due to changes
in market interest rates or a general widening of credit spreads from the
dates of acquisition to December 31, 2007 and 2006, as
applicable. As of December 31, 2007 and December 31, 2006, all of the
investment securities in an unrealized loss position were at least “A” rated,
except two that were rated “BBB” as of December 31, 2007. None of
those investments had experienced a significant decline in credit rating during
2007 or 2006. The unrealized losses were on 65 and 21 individual
investment securities as of December 31, 2007 and 2006,
respectively.
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. As of December 31, 2006, six of the securities in
loss positions had been in loss positions for more than 12 months and had a
total unrealized loss of $4.4 million. The unrealized losses on those
securities are principally due to changes in market interest rates or a
general widening of credit spreads from the dates of acquisition and not due to
any significant underlying credit deterioration of the
issuers. Securities with unrealized losses aged 12 months or more
have a market value as of December 31, 2007 that is on average within 96 percent
of their amortized cost basis. All aged unrealized losses may be
recoverable within a reasonable period of time by way of changes in market
interest rates, spreads, or maturity. Accordingly, Farmer Mac has
concluded that none of the unrealized losses on its investment securities
represent other-than-temporary impairment as of December 31,
2007. Farmer Mac has the intent and ability to hold its investment
securities in loss positions until either the market value recovers or the
securities mature.
As of
December 31, 2007, Farmer Mac did not own any held-to-maturity investments and
owned trading investment securities that mature after 10 years with an
amortized cost of $8.4 million, a fair value of $8.2 million, and a
weighted average yield of 8.74 percent. As of December 31, 2006,
Farmer Mac did not own any held-to-maturity investments and owned trading
investment securities that mature after 10 years with an amortized cost of $5.1
million, a fair value of $5.2 million, and a weighted average yield of
5.38 percent. The amortized cost, fair value and yield of
investments by remaining contractual maturity for available-for-sale investment
securities as of December 31, 2007 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, 2007
|
||||||||||||
|
Available-for-Sale
Securities
|
||||||||||||
|
Amortized
Cost
|
Fair
Value
|
Yield
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Due
within one year
|
$ | 770,714 | $ | 767,203 | 4.75 | % | ||||||
|
Due
after one year through five years
|
560,471 | 544,778 | 5.06 | % | ||||||||
|
Due
after five years through ten years
|
524,492 | 541,718 | 6.17 | % | ||||||||
|
Due
after ten years
|
768,445 | 762,488 | 6.61 | % | ||||||||
|
Total
|
$ | 2,624,122 | $ | 2,616,187 | 5.64 | % | ||||||
5. FARMER
MAC GUARANTEED SECURITIES
As of
December 31, 2007 and 2006, Farmer Mac on-balance sheet Guaranteed Securities
included the following:
|
As
of December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||||
|
Held-to-Maturity
|
Available-for-Sale
|
Total
|
Held-to-Maturity
|
Available-for-Sale
|
Total
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Farmer
Mac I
|
$ | 33,961 | $ | 338,958 | $ | 372,919 | $ | 28,489 | $ | 404,938 | $ | 433,427 | ||||||||||||
|
Farmer
Mac II
|
925,904 | - | 925,904 | 896,991 | - | 896,991 | ||||||||||||||||||
|
Total
|
$ | 959,865 | $ | 338,958 | $ | 1,298,823 | $ | 925,480 | $ | 404,938 | $ | 1,330,418 | ||||||||||||
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, 2007 and 2006.
|
As
of December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||||
|
Held-to-Maturity
|
Available-for-Sale
|
Total
|
Held-to-Maturity
|
Available-for-Sale
|
Total
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Amortized
cost
|
$ | 959,865 | $ | 334,592 | $ | 1,294,457 | $ | 925,480 | $ | 395,786 | $ | 1,321,266 | ||||||||||||
|
Unrealized
gains
|
628 | 5,412 | 6,040 | 214 | 11,980 | 12,194 | ||||||||||||||||||
|
Unrealized
losses
|
(1,562 | ) | (1,046 | ) | (2,608 | ) | (6,715 | ) | (2,828 | ) | (9,543 | ) | ||||||||||||
|
Fair
value
|
$ | 958,931 | $ | 338,958 | $ | 1,297,889 | $ | 918,979 | $ | 404,938 | $ | 1,323,917 | ||||||||||||
The
temporary unrealized losses presented above are principally due to changes in
interest rates from the date of acquisition to December 31, 2007 and December
31, 2006, as applicable. The available-for-sale unrealized losses
were on 9 and 12 individual securities as of both of those dates.
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. As of December 31,
2006, six 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 $2.8 million. The unrealized losses on those
securities are due to overall increases in market interest rates. As
of December 31, 2007, all of the available-for-sale securities with unrealized
losses aged greater than 12 months have losses that are less than
two 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, 2007. Farmer Mac has the intent and ability to hold its
on-balance sheet Farmer Mac Guaranteed Securities until either the market value
recovers or the securities mature.
Of the
total of Farmer Mac’s on-balance sheet Guaranteed Securities held by Farmer Mac
as of December 31, 2007, $982.4 million 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, 2007.
|
As
of December 31, 2007
|
||||
|
(dollars
in thousands)
|
||||
|
Fair
value of beneficial interests retained in Farmer Mac Guaranteed
Securities
|
$ | 1,297,889 | ||
|
Weighted-average
remaining life (in years)
|
4.5 | |||
|
Weighted-average
prepayment speed (annual rate)
|
11.1 | % | ||
|
Effect
on fair value of a 10% adverse change
|
$ | (103 | ) | |
|
Effect
on fair value of a 20% adverse change
|
$ | (186 | ) | |
|
Weighted-average
discount rate
|
5.7 | % | ||
|
Effect
on fair value of a 10% adverse change
|
$ | (20,254 | ) | |
|
Effect
on fair value of a 20% adverse change
|
$ | (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 two types of assets: agricultural mortgage loans and
USDA-guaranteed portions. Farmer Mac manages the credit risk of its
securitized agricultural mortgage loans, both on- and off-balance sheet,
together with its on-balance sheet agricultural mortgage loans and the
agricultural mortgage 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
agricultural mortgage loans and USDA-guaranteed portions held and securitized
differently from its off-balance sheet securitized agricultural mortgage loans
and USDA-guaranteed portions and off-balance sheet agricultural mortgage loans
underlying LTSPCs.
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 table
below presents the outstanding principal balances as of the periods indicated
for Farmer Mac Guaranteed Securities, loans, and LTSPCs.
|
As
of December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
On-balance
sheet assets:
|
||||||||
|
Farmer
Mac I:
|
||||||||
|
Loans
|
$ | 762,319 | $ | 770,236 | ||||
|
Guaranteed
Securities
|
367,578 | 423,624 | ||||||
|
Farmer
Mac II:
|
||||||||
|
Guaranteed
Securities
|
921,802 | 892,667 | ||||||
|
Total
on-balance sheet
|
$ | 2,051,699 | $ | 2,086,527 | ||||
|
Off-balance
sheet assets:
|
||||||||
|
Farmer
Mac I:
|
||||||||
|
LTSPCs
|
$ | 1,948,941 | $ | 1,969,734 | ||||
|
AgVantange
|
2,500,000 | 1,500,000 | ||||||
|
Guaranteed
Securities
|
2,018,300 | 1,649,895 | ||||||
|
Farmer
Mac II:
|
||||||||
|
Guaranteed
Securities
|
24,815 | 33,132 | ||||||
|
Total
off-balance sheet
|
$ | 6,492,056 | $ | 5,152,761 | ||||
|
Total
|
$ | 8,543,755 | $ | 7,239,288 | ||||
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 table presents information related to
Farmer Mac’s acquisition of defaulted loans for the years ended
December 31, 2007, 2006 and 2005 and the outstanding balances and carrying
amounts of all such loans as of December 31, 2007 and 2006,
respectively.
|
For
the Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Fair
value at acquistion date
|
$ | 3,911 | $ | 9,623 | $ | 10,911 | ||||||
|
Contractually
required payments receivable
|
4,065 | 9,729 | 11,323 | |||||||||
|
Impairment
recognized subsequent to acquisition
|
- | - | 80 | |||||||||
|
As
of December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Outstanding
balance
|
$ | 38,621 | $ | 45,330 | ||||
|
Carrying
amount
|
34,541 | 42,687 | ||||||
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 Pre-1996 Act
Farmer Mac I Guaranteed Securities, AgVantage securities or Farmer Mac II
Guaranteed Securities. Pre-1996 Act Farmer Mac I Guaranteed
Securities are supported by unguaranteed first loss subordinated interests,
which had been expected to exceed the estimated credit losses on those
loans. Through second quarter 2007, Farmer Mac had not experienced
any credit losses on any Pre-1996 Act Farmer Mac I Guaranteed
Securities. In third quarter 2007, Farmer Mac charged off $0.4
million related to one loan underlying Pre-1996 Act Farmer Mac I Guaranteed
Securities. The remaining $3.2 million of Pre-1996 Act Farmer
Mac I Guaranteed Securities represent interests in seasoned performing loans
with low loan-to-value ratios. Farmer Mac does not expect to incur
any further losses on the remaining Pre-1996 Act Farmer Mac I Guaranteed
Securities in the future. Each AgVantage security is a general
obligation of an issuing institution approved by Farmer Mac and is
collateralized by eligible mortgage loans. As of December 31, 2007,
there were no probable losses inherent in Farmer Mac’s AgVantage securities due
to the high credit quality of the obligors, as well as the underlying
collateral. As of December 31, 2007, Farmer Mac had not experienced
any credit losses on any AgVantage Securities and does not expect to incur any
such losses in the future. The guaranteed portions collateralizing
Farmer Mac II Guaranteed Securities are guaranteed by the USDA. Each
USDA guarantee is an obligation backed by the full faith and credit of the
United States. As of December 31, 2007, Farmer Mac has not
experienced any credit losses on any Farmer Mac II Guaranteed Securities and
does not expect to incur any such losses in the future.
|
90-Day
|
||||||||||||||||||||
|
Delinquencies
(1)
|
Net
Credit Losses (2)
|
|||||||||||||||||||
|
As
of December 31,
|
For
the Year Ended December 31,
|
|||||||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
On-balance
sheet assets:
|
||||||||||||||||||||
|
Farmer
Mac I:
|
||||||||||||||||||||
|
Loans
|
$ | 10,024 | $ | 18,457 | $ | 39 | $ | 535 | $ | (535 | ) | |||||||||
|
Guaranteed
Securities
|
- | - | - | - | - | |||||||||||||||
|
Total
on-balance sheet
|
$ | 10,024 | $ | 18,457 | $ | 39 | $ | 535 | $ | (535 | ) | |||||||||
|
Off-balance
sheet assets:
|
||||||||||||||||||||
|
Farmer
Mac I:
|
||||||||||||||||||||
|
LTSPCs
|
$ | 560 | $ | 1,198 | $ | - | $ | - | $ | - | ||||||||||
|
Guaranteed
Securities
|
- | - | - | - | - | |||||||||||||||
|
Total
off-balance sheet
|
$ | 560 | $ | 1,198 | $ | - | $ | - | $ | - | ||||||||||
|
Total
|
$ | 10,584 | $ | 19,655 | $ | 39 | $ | 535 | $ | (535 | ) | |||||||||
|
|
(1)
|
Includes
loans and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs that are 90 days or more past due, in foreclosure,
restructured after delinquency, and in bankruptcy, excluding loans
performing under either their original loan terms or a court-approved
bankruptcy plan.
|
|
|
(2)
|
Includes
loans and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs.
|
|
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. 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 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, 2007 and 2006, Farmer Mac’s credit
exposure to interest rate swap counterparties, excluding netting arrangements,
was $12.7 million and $8.3 million, respectively; however, including
netting arrangements, Farmer Mac’s credit exposure was $3.3 million and
$1.3 million as of December 31, 2007 and 2006,
respectively. 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. Farmer Mac had not pledged any securities as collateral as
of December 31, 2006.
Interest Rate
Risk:
Farmer
Mac uses financial derivatives to provide a cost- and capital-efficient way 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 variable 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 variable 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 and trading assets in the consolidated
statements of operations.
The
Corporation accounts for its financial derivatives as undesignated financial
derivatives. As of December 31, 2007 and 2006, the net fair value of
the Corporation’s financial derivatives totaled $(53.0) million and $(14.3)
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 and trading assets
totaled $(40.3) million, $1.6 million, and $11.5 million for the years
ended December 31, 2007, 2006 and 2005, respectively.
The
following table summarizes information related to Farmer Mac’s financial
derivatives as of December 31, 2007:
|
Weighted-
|
||||||||||||||||||||||||||||
|
Weighted-
|
Weighted-
|
Average
|
||||||||||||||||||||||||||
|
Average
|
Average
|
Weighted-
|
Remaining
|
|||||||||||||||||||||||||
|
Notional
|
Fair
Value
|
Pay
|
Receive
|
Average
|
Life
|
|||||||||||||||||||||||
|
Amount
|
Asset
|
(Liability)
|
Rate
|
Rate
|
Price
|
(in
Years)
|
||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||
|
Interest
rate swaps:
|
||||||||||||||||||||||||||||
|
Pay
fixed callable
|
$ | 233,052 | $ | 50 | $ | (2,812 | ) | 5.71 | % | 4.54 | % | 7.44 | ||||||||||||||||
|
Pay
fixed non-callable
|
1,178,720 | 184 | (50,363 | ) | 5.40 | % | 4.55 | % | 5.82 | |||||||||||||||||||
|
Receive
fixed callable
|
843,000 | 766 | (76 | ) | 4.77 | % | 5.13 | % | 0.85 | |||||||||||||||||||
|
Receive
fixed non-callable
|
255,000 | 1,288 | (913 | ) | 6.17 | % | 5.92 | % | 4.03 | |||||||||||||||||||
|
Basis
swaps
|
161,967 | - | (1,106 | ) | 4.73 | % | 5.53 | % | 7.69 | |||||||||||||||||||
|
Agency
forwards
|
4,233 | - | (2 | ) | 101.48 | |||||||||||||||||||||||
|
Treasury
futures
|
1,000 | - | (1 | ) | 113.30 | |||||||||||||||||||||||
|
Total
financial derivatives
|
$ | 2,676,972 | $ | 2,288 | $ | (55,273 | ) | 5.26 | % | 4.92 | % | |||||||||||||||||
As of
December 31, 2007 and 2006, Farmer Mac had approximately $0.5 million and
$0.8 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 $0.3 million of the amount currently reported in accumulated
other comprehensive (loss)/ income will be reclassified into
earnings.
As of
December 31, 2007, Farmer Mac had outstanding basis swaps with a related party
with a notional amount of $162.0 million and a fair value of $(1.1)
million. As of December 31, 2006, these swaps had an outstanding
notional amount of $193.0 million and a fair value of
$2.8 million. Under the terms of those basis swaps, which are
not in designated hedge relationships, Farmer Mac pays Constant Maturity
Treasury-based rates and receives 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 an
unrealized loss on those outstanding basis swaps of $3.9 million, $0.9
million for 2007 and 2006, respectively, and an unrealized gain of
$4.5 million for 2005. 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, 2007 and 2006:
|
2007
|
2006
|
|||||||||||||||||||||||||||||||
|
Average
|
Average
|
|||||||||||||||||||||||||||||||
|
Outstanding
as of
|
Outstanding
During
|
Outstanding
as of
|
Outstanding
During
|
|||||||||||||||||||||||||||||
|
December
31, 2007
|
the
Year
|
December
31, 2006
|
the
Year
|
|||||||||||||||||||||||||||||
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||
|
Due
within one year:
|
||||||||||||||||||||||||||||||||
|
Discount
notes
|
$ | 2,212,030 | 4.28 | % | $ | 2,533,660 | 5.00 | % | $ | 2,441,947 | 5.09 | % | $ | 2,568,869 | 4.89 | % | ||||||||||||||||
|
Medium-term
notes
|
896,000 | 5.04 | % | 959,387 | 5.21 | % | ||||||||||||||||||||||||||
|
Current
portion of long-term notes
|
721,668 | 3.76 | % | 856,150 | 5.02 | % | ||||||||||||||||||||||||||
| $ | 3,829,698 | 4.36 | % | $ | 3,298,097 | 5.07 | % | |||||||||||||||||||||||||
|
Due
after one year:
|
||||||||||||||||||||||||||||||||
|
Medium-term
notes due in:
|
||||||||||||||||||||||||||||||||
|
2009
|
$ | 284,905 | 5.29 | % | ||||||||||||||||||||||||||||
|
2010
|
124,000 | 4.91 | % | |||||||||||||||||||||||||||||
|
2011
|
67,207 | 5.42 | % | |||||||||||||||||||||||||||||
|
2012
|
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, 2007 and 2006 was $2.9 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 2008 as of December 31,
2007.
|
Debt
Callable in 2008 as of
|
||||||||
|
December
31, 2007
|
||||||||
|
Maturity
|
Amount
|
Rate
|
||||||
|
(dollars
in thousands)
|
||||||||
|
2008
|
$ | 565,000 | 4.95 | % | ||||
|
2009
|
- | - | ||||||
|
2010
|
55,000 | 5.06 | % | |||||
|
2011
|
- | - | ||||||
|
2012
|
57,000 | 5.58 | % | |||||
| $ | 677,000 | 5.02 | % | |||||
The
following schedule summarizes the earliest interest rate reset date of total
borrowings outstanding as of December 31, 2007, including callable and
non-callable medium-term notes, assuming callable notes are redeemed at the
initial call date.
|
Earliest
Interest Rate Reset Date of Borrowings Outstanding
|
||||||||
|
Weighted-
|
||||||||
|
Average
|
||||||||
|
Amount
|
Rate
|
|||||||
|
(dollars
in thousands)
|
||||||||
|
Debt
with interest rate resets in:
|
||||||||
|
2008
|
$ | 3,916,698 | 4.39 | % | ||||
|
2009
|
309,905 | 5.43 | % | |||||
|
2010
|
106,000 | 4.82 | % | |||||
|
2011
|
67,207 | 5.42 | % | |||||
|
2012
|
20,000 | 4.95 | % | |||||
|
Thereafter
|
154,537 | 6.67 | % | |||||
|
Total
|
$ | 4,574,347 | 4.56 | % | ||||
During
2007 and 2006, Farmer Mac called $677.4 million and $30.0 million of
callable medium-term notes, respectively.
Authority
to Borrow from the U.S. Treasury
Farmer
Mac’s statutory charter authorizes Farmer Mac to borrow, in extreme
circumstances, 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, 2007, 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
2007 and 2006, Farmer Mac did not repurchase any of its outstanding
debt. During 2005, Farmer Mac recognized a gain of $0.1 million
on the repurchase of $21.0 million of its outstanding debt that had a maturity
date of April 20, 2007 and an interest rate of 4.025 percent.
|
8.
|
ALLOWANCE
FOR LOSSES AND CONCENTRATIONS OF CREDIT RISK
|
Allowance
for Losses
As of
December 31, 2007, Farmer Mac maintained an allowance for losses to cover
estimated probable principal and interest losses on loans held, real estate
owned and loans underlying LTSPCs and post-1996 Act Farmer Mac I Guaranteed
Securities in accordance with SFAS 5 and SFAS 114. As of December 31,
2007 and 2006, Farmer Mac had not recorded any specific allowances for losses
under SFAS 114. No allowance for losses has been provided for Farmer
Mac I Guaranteed Securities issued prior to the 1996 Act or for Farmer
Mac II Guaranteed Securities as of December 31, 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 post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs, 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, 2007:
|
Allowance
|
REO
|
Total
|
||||||||||||||
|
for
Loan
|
Valuation
|
Reserve
|
Allowance
|
|||||||||||||
|
Losses
|
Allowance
|
for
Losses
|
for
Losses
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Balance
as of January 1, 2003
|
$ | 2,662 | $ | 592 | $ | 16,757 | $ | 20,011 | ||||||||
|
Provision/(recovery)
for losses
|
6,524 | 1,230 | (469 | ) | 7,285 | |||||||||||
|
Charge-offs
|
(3,220 | ) | (1,814 | ) | (440 | ) | (5,474 | ) | ||||||||
|
Recoveries
|
1 | 230 | - | 231 | ||||||||||||
|
Balance
as of December 31, 2003
|
$ | 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 | ||||||||
All loans
that Farmer Mac purchases, issues guarantees with respect to, or commits to
purchase under an LTSPC in the Farmer Mac I program 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 all post-1996 Act
Farmer Mac I Guaranteed Securities and LTSPCs as of December 31, 2007 and
2006.
|
Reserve
for Losses on LTSPCs and Post-1996 Act
|
||||||||
|
Farmer
Mac I Guaranteed Securities
|
||||||||
|
As
of December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
On-balance
sheet Farmer Mac I Guaranteed Securities
|
$ | 857 | $ | 982 | ||||
|
Off-balance
sheet Farmer Mac I Guaranteed Securities
|
655 | 679 | ||||||
|
LTSPCs
|
685 | 949 | ||||||
|
Total
reserve for losses
|
$ | 2,197 | $ | 2,610 | ||||
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 $3.8 million, $4.0 million and
$4.8 million on impaired loans during the years ended December 31,
2007, 2006 and 2005, respectively. During 2007, 2006 and 2005, Farmer
Mac’s average investment in impaired loans was $45.2 million, $63.6 million
and $88.4 million, respectively.
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 specific trust 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 2007, Farmer Mac purchased 12 defaulted loans
having a principal balance of $3.9 million from pools underlying Farmer Mac
Guaranteed Securities and LTSPCs. During 2006, Farmer Mac made
14 such purchases for a total of $9.6 million. 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,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Defaulted
loans purchased underlying off-balance sheet Farmer Mac I Guaranteed
Securities
|
$ | 1,562 | $ | 707 | $ | 2,191 | ||||||
|
Defaulted
loans underlying on-balance sheet Farmer Mac I Guaranteed Securities
transferred to loans
|
1,316 | 1,467 | 7,483 | |||||||||
|
Defaulted
loans purchased underlying LTSPCs
|
1,033 | 7,449 | 1,237 | |||||||||
|
Total
|
$ | 3,911 | $ | 9,623 | $ | 10,911 | ||||||
Concentrations
of Credit Risk
The
following table sets forth the geographic and commodity/collateral
diversification, as well as the range of original loan-to-value ratios, for all
loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities
(excluding AgVantage securities) and LTSPCs as of December 31, 2007 and
2006:
|
As
of December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
By
geographic region (1):
|
||||||||
|
Northwest
|
$ | 824,054 | $ | 845,833 | ||||
|
Southwest
|
1,975,118 | 2,141,618 | ||||||
|
Mid-North
|
1,112,281 | 880,206 | ||||||
|
Mid-South
|
561,930 | 378,866 | ||||||
|
Northeast
|
398,335 | 340,208 | ||||||
|
Southeast
|
191,446 | 198,252 | ||||||
|
Total
|
$ | 5,063,164 | $ | 4,784,983 | ||||
|
By
commodity/collateral type:
|
||||||||
|
Crops
|
$ | 2,084,819 | $ | 1,977,557 | ||||
|
Permanent
plantings
|
993,893 | 1,139,782 | ||||||
|
Livestock
|
1,328,874 | 1,193,158 | ||||||
|
Part-time
farm/rural housing
|
368,585 | 292,179 | ||||||
|
Ag
storage and processing (including ethanol facilities)
|
245,753 | 122,038 | ||||||
|
Other
|
41,240 | 60,269 | ||||||
|
Total
|
$ | 5,063,164 | $ | 4,784,983 | ||||
|
By
original loan-to-value ratio:
|
||||||||
|
0.00%
to 40.00%
|
$ | 1,295,670 | $ | 1,188,980 | ||||
|
40.01%
to 50.00%
|
971,088 | 934,688 | ||||||
|
50.01%
to 60.00%
|
1,397,736 | 1,358,315 | ||||||
|
60.01%
to 70.00%
|
1,205,018 | 1,159,928 | ||||||
|
70.01%
to 80.00%
|
179,072 | 127,630 | ||||||
|
80.01%
to 90.00%
|
14,580 | 15,442 | ||||||
|
Total
|
$ | 5,063,164 | $ | 4,784,983 | ||||
|
|
(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
|
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.
|
Since
fourth quarter 2004, Farmer Mac has paid a quarterly dividend of $0.10 per share
on all classes of the Corporation’s common stock pursuant to a resolution
adopted by the Corporation’s board of directors. Farmer Mac’s ability
to declare and pay a dividend could be restricted if it failed to comply with
regulatory capital requirements.
During
fourth quarter 2005, Farmer Mac established a program to repurchase up to
10 percent, or 958,632 shares, of the Corporation’s outstanding Class C
Non-Voting Common Stock. The aggregate number of shares repurchased
by Farmer Mac under that program reached the maximum number of authorized shares
during first quarter 2007, thereby terminating the program according to its
terms. At that time, Farmer Mac announced the establishment of an
additional program to repurchase up to one million additional shares of the
Corporation’s outstanding Class C Non-Voting Common
Stock. During 2007 and 2006, Farmer Mac repurchased 1,086,541 shares
and 796,450 shares, respectively, of its Class C non-voting common stock at
an average price of $26.61 and $26.82 per share, respectively, pursuant to both
of the Corporation’s previously announced stock repurchase
programs. These repurchases reduced the Corporation’s stockholders’
equity by approximately $29.0 million and $22.0 million,
respectively. The aggregate number of shares purchased by Farmer Mac
under the stock repurchase program announced in 2007 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
The
Corporation has outstanding 700,000 shares of 6.40 percent cumulative preferred
stock, Series A, which has a redemption price and liquidation preference of
$50.00 per share, plus accrued and unpaid dividends. The preferred
stock does not have a maturity date. Beginning on June 30, 2012,
Farmer Mac has the option to redeem the preferred stock at any time, in whole or
in part, at the redemption price of $50.00 per share, plus accrued and unpaid
dividends through and including the redemption date. Farmer Mac pays
cumulative dividends on the preferred stock quarterly in arrears, when and if
declared by the board of directors. Farmer Mac’s ability to declare
and pay a dividend could be restricted if it failed to comply with regulatory
capital requirements. The costs of issuing the preferred stock were
charged to additional paid-in capital.
Stock
Option Plan
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. Of the 3,750,000 shares authorized to be issued under the
plan, 3,745,999 have been issued, net of cancellations as of December 31, 2007,
effectively exhausting options available under the plan. Options
granted during 2007 have exercise prices ranging from $27.77 to $32.77 per
share. 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.
The
following table summarizes stock option activity for 2007, 2006 and
2005:
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Weighted-
|
Weighted-
|
Weighted-
|
||||||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||||||
|
Exercise
|
Exercise
|
Exercise
|
||||||||||||||||||||||
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
|||||||||||||||||||
|
Outstanding,
beginning of year
|
2,145,705 | $ | 23.83 | 2,153,008 | $ | 22.41 | 1,812,222 | $ | 22.67 | |||||||||||||||
|
Granted
|
486,427 | 29.48 | 407,678 | 26.25 | 490,561 | 21.10 | ||||||||||||||||||
|
Exercised
|
(377,596 | ) | 21.14 | (327,972 | ) | 16.16 | (67,253 | ) | 15.63 | |||||||||||||||
|
Canceled
|
(36,337 | ) | 26.62 | (87,009 | ) | 28.60 | (82,522 | ) | 25.94 | |||||||||||||||
|
Outstanding,
end of year
|
2,218,199 | 25.48 | 2,145,705 | 23.83 | 2,153,008 | 22.41 | ||||||||||||||||||
|
Options
exercisable at year end
|
1,360,222 | $ | 24.46 | 1,343,374 | $ | 24.01 | 1,452,274 | $ | 23.14 | |||||||||||||||
The
cancellations of stock options during 2007, 2006 and 2005 were due either to
unvested options terminating in accordance with the provisions of the applicable
stock option plans upon directors’ or employees’ departures from Farmer Mac or
vested options terminating unexercised on their expiration date. Of
the 36,337 options canceled in 2007, 12,337 were a result of employee departures
from Farmer Mac and 24,000 were a result of options terminating unexercised on
their expiration date.
Farmer
Mac received $8.0 million, $5.3 million and $1.1 million from the exercise of
stock options during 2007, 2006 and 2005, respectively. During 2007,
2006 and 2005, the reduction of income tax payable as a result of the deduction
for the exercise of stock options was $0.7 million, $0.7 million and
$0.2 million, respectively. In total, the additional paid-in
capital received from the exercise of stock options was $7.4 million,
$6.4 million and $1.1 million for 2007, 2006 and 2005,
respectively.
During
the year ended December 31, 2007, 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
1,720 of share-based payments for $52,000 to 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 outstanding as of
December 31, 2007:
|
Options
Vested
|
||||||||||||||||||||||||||
|
Options
Outstanding
|
Options
Exercisable
|
or
Expected to Vest
|
||||||||||||||||||||||||
|
Weighted-
|
Weighted-
|
Weighted-
|
||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||||||||
|
Range
of
|
Remaining
|
Remaining
|
Remaining
|
|||||||||||||||||||||||
|
Exercise
|
Number
of
|
Contractual
|
Number
of
|
Contractual
|
Number
of
|
Contractual
|
||||||||||||||||||||
|
Prices
|
Shares
|
Life
|
Shares
|
Life
|
Shares
|
Life
|
||||||||||||||||||||
| $10.00 - $19.99 | 126,077 |
6.4
years
|
125,409 |
6.4
years
|
125,877 |
6.4
years
|
||||||||||||||||||||
| 20.00 - 24.99 | 864,928 |
5.2
years
|
703,574 |
4.7
years
|
840,584 |
5.1
years
|
||||||||||||||||||||
| 25.00 - 29.99 | 1,013,026 |
7.3
years
|
341,071 |
5.9
years
|
929,830 |
7.3
years
|
||||||||||||||||||||
| 30.00 - 34.99 | 213,668 |
4.1
years
|
189,668 |
3.4
years
|
206,468 |
4.0
years
|
||||||||||||||||||||
| 35.00 - 39.99 |
-
|
-
|
|
- |
-
|
- |
-
|
|||||||||||||||||||
| 40.00 - 44.99 | - | - | - | - | - |
-
|
||||||||||||||||||||
| 45.00 - 50.00 | 500 |
4.2
years
|
500 |
4.2
years
|
500 |
4.2
years
|
||||||||||||||||||||
| 2,218,199 | 1,360,222 | 2,103,259 | ||||||||||||||||||||||||
The
weighted average exercise price of the 2,103,529 options vested or expected to
vest as of December 31, 2007 was $25.39.
The
following table summarizes information regarding the aggregate intrinsic value
(the excess of the price on the date of exercise over the grant date exercise
price) of outstanding options, options exercisable and options vested and
expected to vest as of December 31, 2007:
|
Aggregate
|
||||
|
Intrinsic
|
||||
|
Value
|
||||
|
(in
thousands)
|
||||
|
Options
as of December 31, 2007:
|
||||
|
Outstanding
|
$ | 4,844 | ||
|
Exercisable
|
4,047 | |||
|
Vested
and expected to vest
|
4,742 | |||
During
2007, 2006 and 2005, the total intrinsic value of options exercised was $3.8
million, $4.1 million and $0.5 million, respectively.
The
weighted-average grant date fair values of options granted in 2007, 2006 and
2005 were $11.24, $9.91 and $6.69, respectively. Under the fair
value-based method of accounting for stock-based compensation cost, Farmer Mac
recognized compensation cost of $3.7 million and $2.4 million during 2007
and 2006, respectively, and would have recognized compensation cost of
$2.1 million for 2005. The fair values were estimated using the
Black-Scholes option pricing model based on the following
assumptions:
|
2007
|
2006
|
2005
|
|||
|
Risk-free
interest rate
|
4.8%
|
5.0%
|
3.9%
|
||
|
Expected
years until exercise
|
6
years
|
6
years
|
7
years
|
||
|
Expected
stock volatility
|
36.0%
|
36.9%
|
46.3%
|
||
|
Dividend
yield
|
1.4%
|
1.6%
|
1.9%
|
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:
|
|
·
|
Minimum
capital – Farmer Mac’s minimum capital level is an amount of core capital
(stockholders’ equity less accumulated other comprehensive (loss)/income)
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.
|
|
|
·
|
Critical
capital – 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 the Farm Credit Administration (“FCA”) to
establish a risk-based capital stress test for Farmer Mac, using specified
stress-test parameters. While the Act does not specify the
required level of risk-based capital, that level is permitted to exceed
the statutory minimum capital requirement applicable to Farmer Mac, if so
indicated by the risk-based capital stress
test.
|
Farmer
Mac is required to comply with the higher of the minimum capital requirement or
the risk-based 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. As of December 31, 2006, Farmer Mac’s minimum and
critical capital requirements were $174.5 million and $87.3 million,
respectively, and its actual core capital level was $243.5 million,
$69.0 million above the minimum capital requirement and $156.2 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, 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. Farmer Mac’s risk-based
capital requirement as of December 31, 2006 was $42.9 million and Farmer
Mac’s regulatory capital of $248.1 million exceeded that amount by
approximately $205.2 million.
10.
INCOME
TAXES
The
components of the provision for federal income taxes for the years ended
December 31, 2007, 2006 and 2005 were as follows:
|
For
the Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Current
|
$ | 17,007 | $ | 10,518 | $ | 10,632 | ||||||
|
Deferred:
|
||||||||||||
|
Allowances
for losses
|
234 | 1,434 | 2,957 | |||||||||
|
Financial
derivatives
|
(14,839 | ) | 1,736 | 9,551 | ||||||||
|
Stock
option expense
|
(1,288 | ) | (852 | ) | - | |||||||
|
Premium
amortization
|
(1,286 | ) | - | - | ||||||||
|
Other
|
89 | (147 | ) | (49 | ) | |||||||
|
Total
deferred
|
(17,090 | ) | 2,171 | 12,459 | ||||||||
|
Income
tax (benefit)/expense
|
$ | (83 | ) | $ | 12,689 | $ | 23,091 | |||||
A
reconciliation of tax at the statutory federal tax rate to the income tax
provision for the years ended December 31, 2007, 2006 and 2005 is as
follows:
|
For
the Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Tax
expense at statutory rate
|
$ | 2,302 | $ | 15,646 | $ | 25,327 | ||||||
|
Effect
of non-taxable dividend income
|
(2,584 | ) | (2,576 | ) | (2,337 | ) | ||||||
|
Other
|
199 | (381 | ) | 101 | ||||||||
|
Income
tax (benefit)/expense
|
$ | (83 | ) | $ | 12,689 | $ | 23,091 | |||||
|
Statutory
tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Effective
tax rate
|
-1.3 | % | 28.4 | % | 31.9 | % | ||||||
The
components of the deferred tax assets and liabilities as of December 31, 2007
and 2006 were as follows:
|
As
of December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Deferred
tax assets:
|
||||||||
|
Basis
differences related to financial derivatives
|
$ | 21,529 | $ | 6,690 | ||||
|
Allowance
for losses
|
1,360 | 1,594 | ||||||
|
Unrealized
losses on available-for-sale securities
|
1,249 | - | ||||||
|
Stock-based
compensation
|
2,141 | 852 | ||||||
|
Amortization
of premiums on investments
|
2,526 | - | ||||||
|
Other
|
1,634 | 874 | ||||||
|
Total
deferred tax assets
|
30,439 | 10,010 | ||||||
|
Deferred
tax liability:
|
||||||||
|
Unrealized
gains on available-for-sale securities
|
- | 3,124 | ||||||
|
Other
|
200 | - | ||||||
|
Total
deferred tax liability
|
200 | 3,124 | ||||||
|
Net
deferred tax asset
|
$ | 30,239 | $ | 6,886 | ||||
A
valuation allowance is required to reduce the net deferred tax asset to an
amount that is more likely than not to be realized. No valuation
allowance was considered necessary as of
December
31, 2007 and 2006.
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, 2007, both the
recorded liability for uncertain tax positions and the corresponding deferred
tax asset were reduced to $0.9 million. The following table presents
the changes in unrecognized tax benefits for the year ended December 31,
2007.
|
For
the Year Ended
|
||||
|
December
31, 2007
|
||||
|
(in
thousands)
|
||||
|
Beginning
balance
|
$ | 1,474 | ||
|
Reductions
based on tax positions related to current year
|
(441 | ) | ||
|
Reductions
for tax positions of prior years
|
(182 | ) | ||
|
Ending
balance
|
$ | 851 | ||
The
resolution of the unrecognized tax benefits presented above would represent
temporary differences between Farmer Mac’s net income and taxable income and,
therefore, would not result in a change to the Corporation’s effective tax
rate. As of January 1, 2007 and December 31, 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 2004 through 2007 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”) ($225,000 for 2007,
$220,000 for 2006 and $210,000 for 2005), 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 three years. Expense for
this plan for the years ended December 31, 2007, 2006 and 2005 was $0.7 million,
$0.7 million and $0.6 million, respectively.
|
12.
|
OFF-BALANCE
SHEET GUARANTEES AND LTSPCs, COMMITMENTS AND
CONTINGENCIES
|
Farmer
Mac offers approved agricultural and rural residential mortgage lenders two
credit enhancement alternatives to increase their liquidity or lending capacity
while retaining the cash flow benefits of their loans: (1) Farmer Mac
Guaranteed Securities, which are available through either the Farmer Mac I
program or the Farmer Mac II program; and (2) LTSPCs, which are available only
through the Farmer Mac I program. Both of these alternatives result
in the creation of off-balance sheet obligations for Farmer Mac in the ordinary
course of its business. Farmer Mac accounts for these transactions
and other financial guarantees in accordance with 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 32
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 $5.9 billion and $4.3
billion as of December 31, 2007 and 2006, 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 $529.5 million and $849.8 million as of December 31, 2007 and 2006,
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,
2007, 2006 and 2005.
|
For
the Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Beginning
balance, January 1
|
$ | 35,359 | $ | 17,625 | $ | 14,892 | ||||||
|
Additions
to the guarantee and commitment obligation (1)
|
24,117 | 22,074 | 4,776 | |||||||||
|
Amortization
of the guarantee and commitment obligation
|
(7,346 | ) | (4,340 | ) | (2,043 | ) | ||||||
|
Ending
balance, December 31
|
$ | 52,130 | $ | 35,359 | $ | 17,625 | ||||||
(1)
Represents the fair value of the guarantee and commitment obligation at
inception.
Off-Balance
Sheet Farmer Mac Guaranteed Securities
Agricultural
mortgage loans and other mortgage 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 liable 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 mortgage pass-through certificates,
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, 2007 and 2006,
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,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Post-1996
Act Farmer Mac I Guaranteed Securities
|
$ | 4,518,300 | $ | 3,149,895 | ||||
|
Farmer
Mac II Guaranteed Securities
|
24,815 | 33,132 | ||||||
|
Total
off-balance sheet Farmer Mac I and II
|
$ | 4,543,115 | $ | 3,183,027 | ||||
If Farmer
Mac repurchases a loan that is collateral for a Farmer Mac I 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 mortgage loans in off-balance sheet Farmer Mac I Guaranteed
Securities.
|
For
the Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Proceeds
from new securitizations
|
$ | 1,324 | $ | 3,994 | $ | 53,315 | ||||||
|
Guarantee
fees received
|
11,647 | 5,775 | 4,170 | |||||||||
|
Purchases
of assets from the trusts
|
1,562 | 707 | 2,191 | |||||||||
|
Servicing
advances
|
31 | 19 | 18 | |||||||||
|
Repayments
of servicing advances
|
39 | 4 | 30 | |||||||||
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 $36.4 million as of December 31,
2007 and $13.6 million as of December 31, 2006. As of
December 31, 2007 and 2006, the weighted-average remaining maturity of all loans
underlying off-balance sheet Farmer Mac Guaranteed Securities, excluding
AgVantage securities, was 15.5 years and 10.7 years,
respectively. As of December 31, 2007 and 2006, 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 acceptance 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 generally purchases loans subject to an LTSPC at:
|
|
·
|
par
plus accrued interest (if the loans become delinquent for at least four
months);
|
|
|
·
|
a
mark-to-market price or in exchange for Farmer Mac I Guaranteed Securities
(if the loans are not delinquent and are standard cash purchase Farmer Mac
loan products); or
|
|
|
·
|
either
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 in exchange for Farmer Mac I
Guaranteed Securities (if the loans are not four months
delinquent).
|
As of
December 31, 2007 and 2006, the maximum principal amount of potential
undiscounted future payments that Farmer Mac could be requested to make under
all LTSPCs, not including offsets provided by any recourse
provisions, recoveries from third parties or collateral for the underlying
loans, was $1.9 billion and $2.0 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, 2007 and 2006, the weighted-average remaining maturity of all loans
underlying LTSPCs was 14.2 years and 15.3 years, respectively. For
those LTSPCs issued or modified on or after January 1, 2003, Farmer Mac has
recorded a liability for its obligation to stand ready under the commitment in
the guarantee and commitment obligation on the consolidated balance
sheet. This liability approximated $15.7 million as of
December 31, 2007 and $21.8 million as of December 31,
2006. 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, 2007 and 2006, commitments to
purchase Farmer Mac I and II loans totaled $17.0 million and $12.5 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, 2007 and 2006. 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,
2007, 2006 and 2005 was $0.7 million, $0.6 million and $0.7 million,
respectively. The future minimum lease payments under Farmer Mac’s
non-cancelable leases for its office space and other contractual obligations are
as follows:
|
Other
|
||||||||
|
Future
Minimum
|
Contractual
|
|||||||
|
Lease
Payments
|
Obligations
|
|||||||
|
(in
thousands)
|
||||||||
|
2008
|
$ | 674 | $ | 487 | ||||
|
2009
|
675 | 91 | ||||||
|
2010
|
669 | 45 | ||||||
|
2011
|
594 | 2 | ||||||
|
2012
|
- | - | ||||||
|
Thereafter
|
- | - | ||||||
|
Total
|
$ | 2,612 | $ | 625 | ||||
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
|
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,
2007 and 2006.
|
As
of December 31,
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 101,445 | $ | 101,445 | $ | 877,714 | $ | 877,714 | ||||||||
|
Investment
securities
|
2,624,366 | 2,624,366 | 1,830,904 | 1,830,904 | ||||||||||||
|
Farmer
Mac Guaranteed Securities
|
1,297,889 | 1,298,823 | 1,323,917 | 1,330,418 | ||||||||||||
|
Loans
|
778,896 | 766,219 | 781,078 | 775,421 | ||||||||||||
|
Financial
derivatives
|
2,288 | 2,288 | 9,218 | 9,218 | ||||||||||||
|
Interest
receivable
|
91,939 | 91,939 | 73,545 | 73,545 | ||||||||||||
|
Guarantee
and commitment fees receivable:
|
||||||||||||||||
|
LTSPCs
|
15,598 | 17,095 | 22,364 | 23,265 | ||||||||||||
|
Farmer
Mac Guaranteed Securities
|
35,292 | 40,709 | 16,783 | 17,478 | ||||||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Notes
payable:
|
||||||||||||||||
|
Due
within one year
|
3,828,899 | 3,829,698 | 3,296,441 | 3,298,097 | ||||||||||||
|
Due
after one year
|
777,052 | 744,649 | 1,305,014 | 1,296,691 | ||||||||||||
|
Financial
derivatives
|
55,273 | 55,273 | 23,474 | 23,474 | ||||||||||||
|
Accrued
interest payable
|
50,004 | 50,004 | 36,125 | 36,125 | ||||||||||||
|
Guarantee
and commitment obligation:
|
||||||||||||||||
|
LTSPCs
|
14,193 | 15,691 | 20,891 | 21,791 | ||||||||||||
|
Farmer
Mac Guaranteed Securities
|
31,022 | 36,439 | 12,873 | 13,568 | ||||||||||||
The
carrying value of cash and cash equivalents and certain investment securities
approximates fair value. When available, Farmer Mac determines the
fair values of investment securities and financial derivatives, including
interest rate swaps, futures contracts and commitments to purchase and sell
government-sponsored enterprise debt and mortgage-backed securities, using
quoted market prices. For investment securities and financial
derivatives for which quoted market prices are not available, Farmer Mac
determines the fair value based on the present value of the associated expected
future cash flows. Farmer Mac estimates the fair value of its loans,
Farmer Mac Guaranteed Securities, 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.
|
14.
|
QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)
|
|
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
income/(loss):
|
||||||||||||||||
|
Guarantee
and commitment fees
|
6,599 | 6,421 | 6,354 | 5,858 | ||||||||||||
|
(Losses)/gains
on financial derivatives and trading assets
|
(31,160 | ) | (24,906 | ) | 19,825 | (4,033 | ) | |||||||||
|
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 | ||||||||
|
2006
Quarter Ended
|
||||||||||||||||
|
Dec.
31
|
Sept.
30
|
June
30
|
Mar.
31
|
|||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||
|
Interest
income:
|
||||||||||||||||
|
Interest
income
|
$ | 66,759 | $ | 65,947 | $ | 61,098 | $ | 56,118 | ||||||||
|
Interest
expense
|
58,321 | 56,840 | 51,020 | 45,451 | ||||||||||||
|
Net
interest income
|
8,438 | 9,107 | 10,078 | 10,667 | ||||||||||||
|
Recovery/(provision)
for loan losses
|
264 | 525 | 594 | 1,013 | ||||||||||||
|
Net
interest income after provision for loan losses
|
8,702 | 9,632 | 10,672 | 11,680 | ||||||||||||
|
Non-interest
income/(loss):
|
||||||||||||||||
|
Guarantee
and commitment fees
|
5,930 | 5,548 | 5,288 | 5,049 | ||||||||||||
|
Gains/(losses)
on financial derivatives and trading assets
|
329 | (20,320 | ) | 9,908 | 11,700 | |||||||||||
|
Gains
on sale of available-for-sale investment securities
|
911 | 239 | - | - | ||||||||||||
|
Gains
on the sale of real estate owned
|
295 | - | 304 | 210 | ||||||||||||
|
Representation
and warranty claims income
|
- | - | 718 | - | ||||||||||||
|
Other
income
|
167 | 607 | 58 | 169 | ||||||||||||
|
Non-interest
income/(loss)
|
7,632 | (13,926 | ) | 16,276 | 17,128 | |||||||||||
|
Non-interest
expense
|
5,497 | 5,476 | 6,452 | 5,669 | ||||||||||||
|
Income/(loss)
before income taxes
|
10,837 | (9,770 | ) | 20,496 | 23,139 | |||||||||||
|
Income
tax expense/(benefit)
|
2,714 | (4,072 | ) | 6,559 | 7,488 | |||||||||||
|
Net
income/(loss)
|
8,123 | (5,698 | ) | 13,937 | 15,651 | |||||||||||
|
Preferred
stock dividends
|
(560 | ) | (560 | ) | (560 | ) | (560 | ) | ||||||||
|
Net
income/(loss) available to common stockholders
|
$ | 7,563 | $ | (6,258 | ) | $ | 13,377 | $ | 15,091 | |||||||
|
Earnings
per common share:
|
||||||||||||||||
|
Basic
earnings/(loss) per common share
|
$ | 0.71 | $ | (0.58 | ) | $ | 1.21 | $ | 1.36 | |||||||
|
Diluted
earnings/(loss) per common share
|
$ | 0.70 | $ | (0.58 | ) | $ | 1.18 | $ | 1.32 | |||||||
|
Common
stock dividends per common share
|
$ | 0.10 | $ | 0.10 | $ | 0.10 | $ | 0.10 | ||||||||
|
15.
|
SUBSEQUENT
EVENT
|
As
discussed in Note 4, Farmer Mac’s asset-backed investment securities include
callable, AAA-rated auction-rate certificates (“ARCs”), the interest rates of
which are reset through an auction process, most commonly at intervals of 28
days. Farmer Mac held $131.5 million of ARCs as of December 31, 2007
and $231.6 million as of March 1, 2008. From mid-February
through mid-March 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 and there may be no efficient mechanism for
selling these securities in the near term. All ARCs held by Farmer
Mac are collateralized entirely by pools of Federal Family Education Loan
Program (“FFELP”) guaranteed student loans that are backed by the full faith and
credit of the United States. Farmer Mac continues to believe that the
credit quality of these securities is high, based on that guarantee and the
securities’ continued AAA ratings. To date, Farmer Mac has received
all interest due on ARCs it holds. Farmer Mac does not believe the
ARCs held are impaired or that the auction failures will affect the
Corporation’s liquidity or its ability to fund its operations or make dividend
payments. All ARCs held by Farmer Mac are callable by the issuers at
par at any time and Farmer Mac believes it is likely they will be called during
2008.
|
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, 2007. 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,
2007.
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, 2007 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.
Fred L.
Dailey, Chairman of the Board of Directors of Farmer Mac, at the December 5,
2007 meeting of the Farmer Mac Board advised that, were he to file on January 4,
2008 as a Republican candidate for U.S. Representative in Congress for the
18th
District of Ohio (where the incumbent, a Democrat sits on the House Committee on
Agriculture and that committee’s Subcommittee on Credit, both of which have
oversight jurisdiction over Farmer Mac) and win the Republican nomination for
that seat in the primary election on March 4, 2008, he would resign from the
Farmer Mac Board upon certification of the results of that primary
election. Mr. Dailey did, in fact, file as a candidate on
January 4, 2008 and unofficial results published by the Ohio Secretary of State
show that Mr. Dailey won the March 4, 2008 primary with 39.13 percent of
the vote, compared to 30.90 percent for the next-closest
candidate. Farmer Mac expects the results to be certified by the Ohio
Secretary of State in the near future, although it is not currently known when
formal certification will be made.
Additional
information required by this item is incorporated by reference to the
Corporation’s definitive proxy statement to be filed on or about April 23,
2008.
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 23,
2008.
|
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 23,
2008.
Item
13. Certain Relationships and
Related Transactions, and Director Independence
The
information required by this item is incorporated by reference to the
Corporation’s definitive proxy statement to be filed on or about April 23,
2008.
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 23,
2008.
PART IV
Item
15. Exhibits and Financial
Statement Schedules
(a) (1) Financial
Statements.
Refer to
Item 8 above.
(2) Financial
Statement Schedules.
All
schedules are omitted since they are not applicable, not required or the
information required to be set forth therein is included in the consolidated
financial statements or in notes thereto.
(3) Exhibits.
|
*
|
3.1
|
-
|
Title
VIII of the Farm Credit Act of 1971, as most recently amended by the Farm
Credit System Reform Act of 1996, P.L. 104-105 (Form 10-K filed March 29,
1996).
|
|
|
**
|
-
|
Amended
and Restated By-Laws of the Registrant.
|
||
|
*
|
4.1
|
-
|
Specimen
Certificate for Farmer Mac Class A Voting Common Stock (Form 10-Q
filed May 15, 2003).
|
|
|
*
|
4.2
|
-
|
Specimen
Certificate for Farmer Mac Class B Voting Common Stock (Form 10-Q
filed May 15, 2003).
|
|
|
*
|
4.3
|
-
|
Specimen
Certificate for Farmer Mac Class C Non-Voting Common Stock (Form 10-Q
filed May 15, 2003).
|
|
|
*
|
4.4
|
-
|
Certificate
of Designation of Terms and Conditions of Farmer Mac 6.40% Cumulative
Preferred Stock, Series A (Form 10-Q filed May 15,
2003).
|
|
|
*
|
4.5.1
|
-
|
Master
Terms Agreement for Farmer Mac’s Universal Debt Facility dated as of July
28, 2005 (Previously filed as Exhibit 4.3 to Form 8-A filed
August 4, 2005).
|
|
|
*
|
4.5.2
|
-
|
Supplemental
Agreement for 4.25% Fixed Rate Global Notes Due July 29, 2008
(Previously filed as Exhibit 4.4 to Form 8-A filed August 4,
2005).
|
|
|
†*
|
10.1
|
-
|
Amended
and Restated 1997 Incentive Plan (Previously filed as Exhibit 10.1.3 to
Form 10-Q filed
November 14, 2003).
|
|
*
|
Incorporated
by reference to the indicated prior
filing.
|
|
**
|
Filed
with this report.
|
|
†
|
Management
contract or compensatory
plan.
|
|
#
|
Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment.
|
|
†*
|
10.1.1
|
-
|
Form
of stock option award agreement under 1997 Incentive Plan (Previously
filed as Exhibit 10.1.4 to Form 10-K filed
March 16 2005).
|
|
|
†*
|
10.2
|
-
|
Employment
Agreement dated May 5, 1989 between Henry D. Edelman and the Registrant
(Previously filed as Exhibit 10.4 to Form 10-K filed
February 14, 1990).
|
|
|
†*
|
10.2.1
|
-
|
Amendment
No. 1 dated as of January 10, 1991 to Employment Contract between Henry D.
Edelman and the Registrant (Previously filed as Exhibit 10.4 to Form 10-K
filed April 1, 1991).
|
|
|
†*
|
10.2.2
|
-
|
Amendment
to Employment Contract dated as of June 1, 1993 between Henry D. Edelman
and the Registrant (Previously filed as Exhibit 10.5 to Form 10-Q filed
November 15, 1993).
|
|
|
†*
|
10.2.3
|
-
|
Amendment
No. 3 dated as of June 1, 1994 to Employment Contract between Henry D.
Edelman and the Registrant (Previously filed as Exhibit 10.6 to Form 10-Q
filed August 15, 1994).
|
|
|
†*
|
10.2.4
|
-
|
Amendment
No. 4 dated as of February 8, 1996 to Employment Contract between Henry D.
Edelman and the Registrant (Form 10-K filed
March 29, 1996).
|
|
|
†*
|
10.2.5
|
-
|
Amendment
No. 5 dated as of June 13, 1996 to Employment Contract between Henry D.
Edelman and the Registrant (Form 10-Q filed
August 14, 1996).
|
|
|
†*
|
10.2.6
|
-
|
Amendment
No. 6 dated as of August 7, 1997 to Employment Contract between Henry D.
Edelman and the Registrant (Form 10-Q filed November 14,
1997).
|
|
|
†*
|
10.2.7
|
-
|
Amendment
No. 7 dated as of June 4, 1998 to Employment Contract between Henry D.
Edelman and the Registrant (Form 10-Q filed
August 14, 1998).
|
|
|
†*
|
10.2.8
|
-
|
Amendment
No. 8 dated as of June 3, 1999 to Employment Contract between Henry D.
Edelman and the Registrant (Form 10-Q filed
August 12, 1999).
|
|
|
†*
|
10.2.9
|
-
|
Amendment
No. 9 dated as of June 1, 2000 to Employment Contract between Henry D.
Edelman and the Registrant (Form 10-Q filed
August 14, 2000).
|
|
*
|
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.
|
|
†*
|
10.2.10
|
-
|
Amendment
No. 10 dated as of June 7, 2001 to Employment Contract between Henry D.
Edelman and the Registrant (Form 10-Q filed
August 14, 2001).
|
|
|
†*
|
10.2.11
|
-
|
Amendment
No. 11 dated as of June 6, 2002 to Employment Contract between Henry D.
Edelman and the Registrant (Form 10-Q filed
August 14, 2002).
|
|
|
†*
|
10.2.12
|
-
|
Amendment
No. 12 dated as of June 5, 2003 to Employment Contract between Henry D.
Edelman and the Registrant (Form 10-Q filed
August 14, 2003).
|
|
|
†*
|
10.2.13
|
-
|
Amendment
No. 13 dated as of August 3, 2004 to Employment Contract between
Henry D. Edelman and the Registrant (Form 10-Q filed
November 9, 2004).
|
|
|
†*
|
10.2.14
|
-
|
Amendment
No. 14 dated as of June 16, 2005 to Employment Contract between Henry
D. Edelman and the Registrant (Form 10-Q filed
August 9, 2005).
|
|
|
†*
|
10.2.15
|
-
|
Amendment
No. 15 dated as of June 1, 2006 to Employment Contract between Henry
D. Edelman and the Registrant (Form 10-Q filed
August 9, 2006).
|
|
|
†*
|
10.2.16
|
-
|
Amendment
No. 16 dated as of June 7, 2007 to Employment Contract between Henry
D. Edelman and the Registrant (Form 10-Q filed August 9,
2007).
|
|
|
†*
|
10.3
|
-
|
Employment
Agreement dated May 11, 1989 between Nancy E. Corsiglia and the
Registrant (Previously filed as Exhibit 10.5 to Form 10-K filed
February 14, 1990).
|
|
|
†*
|
10.3.1
|
-
|
Amendment
dated December 14, 1989 to Employment Agreement between
Nancy E. Corsiglia and the Registrant (Previously filed as
Exhibit 10.5 to Form 10-K filed February 14, 1990).
|
|
|
†*
|
10.3.2
|
-
|
Amendment
No. 2 dated February 14, 1991 to Employment Agreement between Nancy E.
Corsiglia and the Registrant (Previously filed as Exhibit 10.7 to Form
10-K filed April 1, 1991).
|
|
|
|
*
|
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.
|
|
†*
|
10.3.3
|
-
|
Amendment
to Employment Contract dated as of June 1, 1993 between Nancy E. Corsiglia
and the Registrant (Previously filed as Exhibit 10.9 to Form 10-Q filed
November 15, 1993).
|
|
|
†*
|
10.3.4
|
-
|
Amendment
No. 4 dated June 1, 1993 to Employment Contract between Nancy E. Corsiglia
and the Registrant (Previously filed as Exhibit 10.10 to Form 10-K filed
March 31, 1994).
|
|
|
†*
|
10.3.5
|
-
|
Amendment
No. 5 dated as of June 1, 1994 to Employment Contract between Nancy E.
Corsiglia and the Registrant (Previously filed as Exhibit 10.12 to
Form 10-Q filed August 15, 1994).
|
|
|
†*
|
10.3.6
|
-
|
Amendment
No. 6 dated as of June 1, 1995 to Employment Contract between Nancy E.
Corsiglia and the Registrant (Form 10-Q filed
August 14, 1995).
|
|
|
†*
|
10.3.7
|
-
|
Amendment
No. 7 dated as of February 8, 1996 to Employment Contract between Nancy E.
Corsiglia and the Registrant (Form 10-K filed
March 29, 1996).
|
|
|
†*
|
10.3.8
|
-
|
Amendment
No. 8 dated as of June 13, 1996 to Employment Contract between Nancy E.
Corsiglia and the Registrant (Form 10-Q filed
August 14, 1996).
|
|
|
†*
|
10.3.9
|
-
|
Amendment
No. 9 dated as of August 7, 1997 to Employment Contract between Nancy E.
Corsiglia and the Registrant (Form 10-Q filed November 14,
1997).
|
|
|
†*
|
10.3.10
|
-
|
Amendment
No. 10 dated as of June 4, 1998 to Employment Contract between Nancy E.
Corsiglia and the Registrant (Form 10-Q filed
August 14, 1998).
|
|
|
†*
|
10.3.11
|
-
|
Amendment
No. 11 dated as of June 3, 1999 to Employment Contract between Nancy E.
Corsiglia and the Registrant (Form 10-Q filed
August 12, 1999).
|
|
|
†*
|
10.3.12
|
-
|
Amendment
No. 12 dated as of June 1, 2000 to Employment Contract between Nancy E.
Corsiglia and the Registrant (Form 10-Q filed
August 14, 2000).
|
|
|
†*
|
10.3.13
|
-
|
Amendment
No. 13 dated as of June 7, 2001 to Employment Contract between Nancy E.
Corsiglia and the Registrant (Form 10-Q filed
August 14, 2001).
|
|
*
|
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.
|
|
†*
|
10.3.14
|
-
|
Amendment
No. 14 dated as of June 6, 2002 to Employment Contract between Nancy E.
Corsiglia and the Registrant (Form 10-Q filed
August 14, 2002).
|
|
|
†*
|
10.3.15
|
-
|
Amendment
No. 15 dated as of June 5, 2003 to Employment Contract between Nancy E.
Corsiglia and the Registrant (Form 10-Q filed
August 14, 2003).
|
|
|
†*
|
10.3.16
|
-
|
Amendment
No. 16 dated as of August 3, 2004 to Employment Contract between
Nancy E. Corsiglia and the Registrant (Form 10-Q filed
November 9, 2004).
|
|
|
†*
|
10.3.17
|
-
|
Amendment
No. 17 dated as of June 16, 2005 to Employment Contract between Nancy
E. Corsiglia and the Registrant (Form 10-Q filed
August 9, 2005).
|
|
|
†*
|
10.3.18
|
-
|
Amendment
No. 18 dated as of June 1, 2006 to Employment Contract between Nancy
E. Corsiglia and the Registrant (Form 10-Q filed
August 9, 2006).
|
|
|
†*
|
10.3.19
|
-
|
Amendment
No. 19 dated as of June 7, 2007 to Employment Contract between Nancy
E. Corsiglia and the Registrant (Form 10-Q filed August 9,
2007).
|
|
|
†*
|
10.4
|
-
|
Employment
Contract dated as of September 1, 1997 between Tom D. Stenson and the
Registrant (Previously filed as Exhibit 10.8 to Form 10-Q filed November
14, 1997).
|
|
|
†*
|
10.4.1
|
-
|
Amendment
No. 1 dated as of June 4, 1998 to Employment Contract between Tom D.
Stenson and the Registrant (Previously filed as Exhibit 10.8.1 to Form
10-Q filed August 14, 1998).
|
|
|
†*
|
10.4.2
|
-
|
Amendment
No. 2 dated as of June 3, 1999 to Employment Contract between Tom D.
Stenson and the Registrant (Form 10-Q filed
August 12, 1999).
|
|
|
†*
|
10.4.3
|
-
|
Amendment
No. 3 dated as of June 1, 2000 to Employment Contract between Tom D.
Stenson and the Registrant (Form 10-Q filed
August 14, 2000).
|
|
*
|
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.
|
|
†*
|
10.4.4
|
-
|
Amendment
No. 4 dated as of June 7, 2001 to Employment Contract between Tom D.
Stenson and the Registrant (Form 10-Q filed
August 14, 2001).
|
|
|
†*
|
10.4.5
|
-
|
Amendment
No. 5 dated as of June 6, 2002 to Employment Contract between Tom D.
Stenson and the Registrant (Form 10-Q filed
August 14, 2002).
|
|
|
†*
|
10.4.6
|
-
|
Amendment
No. 6 dated as of June 5, 2003 to Employment Contract between Tom D.
Stenson and the Registrant (Form 10-Q filed
August 14, 2003).
|
|
|
†*
|
10.4.7
|
-
|
Amendment
No. 7 dated as of August 3, 2004 to Employment Contract between Tom D.
Stenson and the Registrant (Form 10-Q filed
November 9, 2004).
|
|
|
†*
|
10.4.8
|
-
|
Amendment
No. 8 dated as of June 16, 2005 to Employment Contract between
Tom D. Stenson and the Registrant (Form 10-Q filed
August 9, 2005).
|
|
|
†*
|
10.4.9
|
-
|
Amendment
No. 9 dated as of June 1, 2006 to Employment Contract between
Tom D. Stenson and the Registrant (Form 10-Q filed
August 9, 2006).
|
|
|
†*
|
10.4.10
|
-
|
Amendment
No. 10 dated as of June 7, 2007 to Employment Contract between
Tom D. Stenson and the Registrant (Form 10-Q filed August 9,
2007).
|
|
|
†*
|
10.5
|
-
|
Employment
Contract dated February 1, 2000 between Jerome G. Oslick and the
Registrant (Previously filed as Exhibit 10.6 to Form 10-Q filed
May 11, 2000).
|
|
|
†*
|
10.5.1
|
-
|
Amendment
No. 1 dated as of June 1, 2000 to Employment Contract between Jerome G.
Oslick and the Registrant (Previously filed as Exhibit 10.6.1 to Form 10-Q
filed August 14, 2000).
|
|
|
†*
|
10.5.2
|
-
|
Amendment
No. 2 dated as of June 7, 2001 to Employment Contract between Jerome G.
Oslick and the Registrant (Previously filed as Exhibit 10.6.2 to Form
10-Q filed August 14, 2001).
|
|
|
†*
|
10.5.3
|
-
|
Amendment
No. 3 dated as of June 6, 2002 to Employment Contract between Jerome G.
Oslick and the Registrant (Form 10-Q filed
August 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.
|
|
†*
|
10.5.4
|
-
|
Amendment
No. 4 dated as of June 5, 2003 to Employment Contract between Jerome G.
Oslick and the Registrant (Form 10-Q filed
August 14, 2003).
|
|
|
†*
|
10.5.5
|
-
|
Amendment
No. 5 dated as of June 16, 2005 to Employment Contract between Jerome
G. Oslick and the Registrant (Form 10-Q filed
August 9, 2005).
|
|
|
†*
|
10.5.6
|
-
|
Amendment
No. 6 dated as of June 1, 2006 to Employment Contract between Jerome
G. Oslick and the Registrant (Form 10-Q filed
August 9, 2006).
|
|
|
†*
|
10.6
|
-
|
Employment
Contract dated June 5, 2003 between Timothy L. Buzby and the Registrant
(Form 10-Q filed August 14, 2003).
|
|
|
†*
|
10.6.1
|
-
|
Amendment
No. 1 dated as of August 3, 2004 to Employment Contract between Timothy L.
Buzby and the Registrant (Form 10-Q filed
November 9, 2004).
|
|
|
†*
|
10.6.2
|
-
|
Amendment
No. 2 dated as of June 16, 2005 to Employment Contract between
Timothy L. Buzby and the Registrant (Form 10-Q filed
August 9, 2005).
|
|
|
†*
|
10.6.3
|
-
|
Amendment
No. 3 dated as of June 1, 2006 to Employment Contract between Timothy
L. Buzby and the Registrant (Form 10-Q filed
August 9, 2006).
|
|
|
†*
|
10.6.4
|
-
|
Amendment
No. 4 dated as of June 7, 2007 to Employment Contract between Timothy
L. Buzby and the Registrant (Form 10-Q filed August 9,
2007).
|
|
|
*
|
10.7
|
-
|
Farmer
Mac I Seller/Servicer Agreement dated as of August 7, 1996 between Zions
First National Bank and the Registrant (Form 10-Q filed November 14,
2002).
|
|
|
*
|
10.8
|
-
|
Medium-Term
Notes U.S. Selling Agency Agreement dated as of October 1, 1998 between
Zions First National Bank and the Registrant (Form 10-Q filed
November 14, 2002).
|
|
|
*
|
10.9
|
-
|
Discount
Note Dealer Agreement dated as of September 18, 1996 between Zions First
National Bank and the Registrant (Form 10-Q filed November 14,
2002).
|
|
*
|
Incorporated
by reference to the indicated prior
filing.
|
|
**
|
Filed
with this report.
|
|
†
|
Management
contract or compensatory
plan.
|
|
#
|
Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment.
|
|
|
|
*#
|
10.10
|
-
|
ISDA
Master Agreement and Credit Support Annex dated as of June 26, 1997
between Zions First National Bank and the Registrant (Form 10-Q filed
November 14, 2002).
|
|
|
*#
|
10.11
|
-
|
Amended
and Restated Master Central Servicing Agreement dated as of May 1,
2004 between Zions First National Bank and the Registrant (Previously
filed as Exhibit 10.11.2 to Form 10-Q filed August 9,
2004).
|
|
|
*#
|
10.12
|
-
|
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
|
-
|
Lease
Agreement dated May 26, 2005 between Zions First National Bank and
the Registrant (Previously filed as Exhibit 10.19 to Form 10-Q filed
August 9, 2005).
|
|
|
*#
|
10.16
|
-
|
Long-Term
Standby Commitment to Purchase dated as of June 1, 2003 between Farm
Credit Bank of Texas and the Registrant (Form 10-Q filed
November 9, 2004).
|
|
|
*#
|
10.16.1
|
-
|
Amendment
No. 1 dated as of December 8, 2006 to Long-Term Standby Commitment to
Purchase dated as of June 1, 2003 between Farm Credit Bank of Texas
and the Registrant (Form 10-K filed March 15,
2007).
|
|
*
|
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.
|
|
*#
|
10.17
|
-
|
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
|
-
|
Employment
Contract dated June 20, 2005 between Mary K. Waters and the
Registrant (Form 10-Q filed
August 9, 2005).
|
|
|
†*
|
10.18.1
|
-
|
Amendment
No. 1 dated as of dated June 1, 2006 to Employment Contract between
Mary K. Waters and the Registrant (Form 10-Q filed
August 9, 2006).
|
|
|
†*
|
10.18.2
|
-
|
Amendment
No. 2 dated as of June 7, 2007 to Employment Contract between
Mary K. Waters and the Registrant (Form 10-Q filed
August 9, 2007).
|
|
|
†*
|
10.19
|
-
|
Description
of compensation agreement between the Registrant and its directors
(Form 10-Q filed August 9, 2007).
|
|
|
*#
|
10.20
|
-
|
Long
Term Standby Commitment to Purchase dated as of August 1, 2007
between Farm Credit Bank of Texas and the Registrant (Form 10-Q filed
November 8, 2007).
|
|
|
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 fiscal year ended December 31, 2007, 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 fiscal year ended December 31, 2007, 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 fiscal year ended December
31, 2007, 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/
Henry D. Edelman
|
March
17, 2008
|
|
|
By: Henry
D. Edelman
|
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/
Fred L. Dailey
|
Chairman
of the Board and
|
March
17, 2008
|
||
|
Fred
L. Dailey
|
Director
|
|||
|
/s/
Henry D. Edelman
|
President
and Chief Executive
|
March
17, 2008
|
||
|
Henry
D. Edelman
|
Officer
(Principal Executive Officer)
|
|||
|
/s/
Nancy E. Corsiglia
|
Executive
Vice President,
|
March
17, 2008
|
||
|
Nancy
E. Corsiglia
|
Chief
Financial Officer and
Treasurer
|
|||
|
(Principal
Financial Officer)
|
||||
|
/s/
Timothy L. Buzby
|
Vice
President – Controller
|
March
17, 2008
|
||
|
Timothy
L. Buzby
|
(Principal
Accounting Officer)
|
|||
|
Name
|
Title
|
Date
|
||
|
/s/
Julia Bartling
|
Director
|
March
17, 2008
|
||
|
Julia
Bartling
|
||||
|
/s/
Dennis L. Brack
|
Director
|
March
17, 2008
|
||
|
Dennis
L. Brack
|
||||
|
/s/
Ralph W. Cortese
|
Director
|
March
17, 2008
|
||
|
Ralph
W. Cortese
|
||||
|
/s/
Grace T. Daniel
|
Director
|
March
17, 2008
|
||
|
Grace
T. Daniel
|
||||
|
/s/
Paul A. DeBriyn
|
Director
|
March
17, 2008
|
||
|
Paul
A. DeBriyn
|
||||
|
/s/
Dennis A. Everson
|
Director
|
March
17, 2008
|
||
|
Dennis
A. Everson
|
||||
|
/s/
Michael A. Gerber
|
Director
|
March
17, 2008
|
||
|
Michael
A. Gerber
|
||||
|
/s/
Ernest M. Hodges
|
Director
|
March
17, 2008
|
||
|
Ernest
M. Hodges
|
||||
|
/s/
Mitchell A. Johnson
|
Director
|
March
17, 2008
|
||
|
Mitchell
A. Johnson
|
||||
|
/s/
Lowell L. Junkins
|
Vice
Chairman
|
March
17, 2008
|
||
|
Lowell
L. Junkins
|
and
Director
|
|||
|
/s/
Timothy F. Kenny
|
Director
|
March
17, 2008
|
||
|
Timothy
F. Kenny
|
||||
|
/s/
Glen O. Klippenstein
|
Director
|
March
17, 2008
|
||
|
Glen
O. Klippenstein
|
||||
|
/s/
Charles E. Kruse
|
Director
|
March
17, 2008
|
||
|
Charles
E. Kruse
|
||||
|
/s/
John Dan Raines, Jr.
|
Director
|
March
17, 2008
|
||
|
John
Dan Raines, Jr.
|
||||
148