As
filed
with the Securities and Exchange Commission on
March
15,
2007
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, 2006.
or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
transition period from _____ to _____.
Commission
File Number 0-17440
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FEDERAL
AGRICULTURAL MORTGAGE CORPORATION
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(Exact
name of registrant as specified in its charter)
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Federally
chartered instrumentality
of
the United States
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52-1578738
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
employer identification number)
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1133
Twenty-First Street, N.W., Suite 600,
Washington,
D.C.
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20036
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(Address
of principal executive offices)
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(Zip
code)
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(202)
872-7700
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(Registrant’s
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Exchange
on which registered
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Class
A voting common stock
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New
York Stock Exchange
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Class
C non-voting common stock
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: Class B voting common
stock
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (17 C.F.R. §229.405) is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x
The
aggregate market values of the Class A voting common stock and Class C
non-voting common stock held by non-affiliates of the registrant were
$19,069,430 and $258,750,714, respectively, as of June 30, 2006, based upon
the
closing prices for the respective classes on June 30, 2006 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, 2007, the registrant had outstanding 1,030,780 shares
of
Class A voting common stock, 500,301 shares of Class B voting common stock
and 8,901,002 shares of Class C non-voting common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
The
definitive proxy statement relating to the registrant’s 2007 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
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Item
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Item
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Item
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Item
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PART
I
| Item 1. |
Business
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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, 2006, total volume in these two
programs was $7.2 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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·
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purchasing
newly originated and pre-existing (“seasoned”) eligible mortgage loans
directly from lenders;
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·
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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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·
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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, 2006, 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 $6.3 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, 2006, outstanding Farmer Mac II Guaranteed Securities totaled
$925.8 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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·
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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, 2006, Farmer Mac had $2.4 billion of discount notes and
$2.2 billion of medium-term notes outstanding. During 2006, the Corporation
continued its strategy of regularly issuing debt 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. 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, 2006, Farmer Mac employed 45 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 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 Long-Term Standby Purchase Commitments (LTSPCs)
to
acquire designated mortgages to accomplish the same result. In a limited volume
of transactions (approximately 3 percent of 2006 Farmer Mac I program volume
and
10 percent of 2005 Farmer Mac I program volume), Farmer Mac assumes the
credit risk on eligible mortgage loans by purchasing and retaining them.
Loan
Eligibility
A
loan is
eligible for the Farmer Mac I program if it is:
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·
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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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·
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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
$24.4 million for those loans. 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 $7.9 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, 2006,
rural housing loans did not represent a significant part of Farmer Mac’s
business.
Purchases
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 2006, Farmer Mac
purchased $98.7 million of loans in the Farmer Mac I program, which represented
3.6 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. By comparison, during 2005, Farmer
Mac
purchased $110.1 million of loans under the Farmer Mac I program, which
represented 19.3 percent of 2005 Farmer Mac I program volume. Of the loans
purchased during 2005, 60 percent included balloon payments and 3 percent
included yield maintenance prepayment protection.
During
2006, Farmer Mac’s top ten sellers generated 74.6 percent
of the total Farmer Mac I loan purchase volume (2.7 percent of 2006 Farmer
Mac I program volume), of which Zions First National Bank, Farmer Mac’s
largest combined Class A and Class C stockholder, accounted for
26.6 percent of loan purchase volume (1.0 percent of 2006 Farmer
Mac I program volume). The top ten sellers in 2005 generated 85.7 percent
of the total Farmer Mac I loan purchase volume (16.5 percent of 2005 Farmer
Mac I program volume), of which Zions First National Bank accounted for
22.3 percent (4.3 percent of 2005 Farmer Mac I program
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 a form of 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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·
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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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·
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other
highly-rated securities.
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During
2006, Farmer Mac purchased three AgVantage securities for $5.2 million with
maturities ranging from one month to ten years from three
institutions.
During
2005, Farmer Mac purchased ten AgVantage securities for $15.7 million with
maturities ranging from one to ten years from three institutions. As of December
31, 2006 and 2005, the outstanding principal amount of AgVantage securities
held
by Farmer Mac was $23.5 million and $28.6 million, respectively. As of
December 31, 2006, Farmer Mac had experienced no losses, nor had it been
called upon to make a guarantee payment, on any of its AgVantage securities.
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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·
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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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·
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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 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.
An
LTSPC can be converted to 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 and documentation 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 underwriting standards at the time the loans first became subject
to the LTSPC and Farmer Mac assumed the credit risk on loans.
Farmer
Mac generally purchases loans subject to an LTSPC at:
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·
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par
plus accrued interest (if the loans become delinquent for at least
four
months);
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·
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a
mark-to-market price or in exchange for Farmer Mac I Guaranteed Securities
(if the loans are not delinquent and are standard cash purchase Farmer
Mac
loan products); or
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·
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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
2006,
Farmer Mac entered into $1.1 billion of LTSPCs, compared to $461.4 million
in
2005. LTSPCs remained the preferred credit enhancement alternative for new
non-cash transactions and were a significant portion of the Farmer Mac I
program. During 2006, three sellers converted $1.0 billion of LTSPCs into swap
transactions. Taking account of those conversions, as of December 31, 2006,
Farmer Mac’s outstanding LTSPCs covered 8,232 mortgage loans with an aggregate
principal balance of $2.0 billion and outstanding off-balance sheet Farmer
Mac I Guaranteed Securities were backed by 5,768 mortgage loans having an
aggregate principal balance of $1.6 billion. Additionally, as of December
31, 2006, Farmer Mac’s outstanding off-balance sheet AgVantage securities
totaled $1.5 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 in portfolio 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
January 2006, Farmer Mac guaranteed $500.0 million principal amount of AgVantage
securities supported by a five-year mortgage-backed obligation of Metropolitan
Life Insurance Company (“MetLife”) collateralized by eligible loans. In July
2006, Farmer Mac guaranteed an additional $1.0 billion of AgVantage securities
supported by a five-year mortgage-backed obligation of MetLife collateralized
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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Ÿ
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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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Ÿ
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require
each borrower to demonstrate sufficient cash-flow to adequately service
the agricultural mortgage loan;
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Ÿ
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protect
the integrity of the appraisal process with respect to any agricultural
mortgage loans; and
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Ÿ
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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.
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.
In
fourth
quarter 2005, Farmer Mac began accepting into its programs agricultural mortgage
loans that meet the minimum underwriting requirements in the Act and are either:
(1) highly-rated loans; or (2) loans collateralizing AgVantage securities
issued by highly-rated financial institutions. Highly-rated loans are loans
rated “5” or better under the 14-point Uniform Classification System used by FCS
institutions and other financial institutions, or loans evidencing comparable
credit quality that are originated or held by financial institutions, including
loans that are secured by eligible collateral with LTVs not greater than 55
percent and made to borrowers with high credit scores. For the latter type
of
highly-rated loans, processing has been simplified and documentation of the
underwriting ratios described below may not be necessary.
For
all
other loans, Farmer Mac I credit underwriting standards require that the LTV
of
any loan not exceed 70 percent, except that 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, a part-time farm loan supported by private mortgage
insurance may have an LTV of up to 90 percent and 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 that are not highly-rated loans described
above, 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 traditional residential
lending guidelines, with fully documented income and assets and liabilities.
Borrowers' credit scores are obtained and used in the underwriting
process.
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 have not demonstrated a significantly
different rate of default than loans that were approved on the basis of
conformance with all of the standard underwriting ratios. As of December 31,
2006, a total of $1.5 billion (31.9 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 ($44.2 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 2006, $49.0 million (4.0 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), as compared to 2005 when $111.2 million
(19.5 percent) of the loans purchased or added under LTSPCs were approved
based upon compensating strengths ($2.6 million of which had original LTVs
of greater than 70 percent).
In
the
case of a seasoned loan, other than the highly-rated loans described above,
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.
|
All
of
the foregoing 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 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 the valuation function to 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.
|
The
collateral valuation standards also require uniform reporting of reliable and
credible opinions of the market value and relevant market rent and property
net
income characteristics of the mortgaged property, along with the relative market
forces.
For
seasoned loans, Farmer Mac obtains collateral valuation updates as considered
necessary by 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.
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 upon 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.
Sellers
As
of
December 31, 2006, Farmer Mac had 177 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 137 as of December 31, 2005
is principally the result of two factors: (1) an increase in the number of
new
Farmer Mac sellers precipitated largely by the new American Bankers
Association/Farmer Mac Alliance; and (2) a new, customized seller
recertification process that is conducted quarterly instead of annually. In
addition to participating directly in the Farmer Mac I program, some of the
approved loan sellers enable other lenders to participate indirectly 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, 2006,
approximately 100 lenders were participating in those networks. As of
December 31, 2006, more than 300 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, 2006 and 2005, Farmer Mac sold Farmer Mac I
Guaranteed Securities in the amounts of $4.0 million and
$53.3 million, respectively, to related parties. In 2006 and 2005, 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 2006, during
January and July 2006 Farmer Mac guaranteed $500.0 million and $1.0
billion, respectively, principal amount of AgVantage securities supported by
five-year mortgage-backed obligations of MetLife that is backed by eligible
agricultural mortgage loans. 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, 2006, Farmer Mac purchased or placed under guarantee
or LTSPC $2.7 billion of loans under the Farmer Mac I program.
As of
December 31, 2006, loans held and loans underlying Farmer Mac I Guaranteed
Securities and LTSPCs totaled $6.3 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, 2006,
$5.1 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,
2006, 2005 and 2004.
|
|
For
the Year Ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
||||||||||
|
|
||||||||||
|
Loans
and Guaranteed Securities
|
$
|
1,598,673
|
$
|
110,056
|
$
|
104,404
|
||||
|
LTSPCs
|
1,139,699
|
461,441
|
392,559
|
|||||||
|
Total
|
$
|
2,738,372
|
$
|
571,497
|
$
|
496,963
|
||||
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,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
|
(in
thousands)
|
|||||||||
|
|
||||||||||
|
Post-1996
Act:
|
||||||||||
|
Loans
and Guaranteed Securities
|
$
|
4,338,698
|
$
|
2,094,410
|
$
|
2,367,460
|
||||
|
LTSPCs
|
1,969,734
|
2,329,798
|
2,295,103
|
|||||||
|
Pre-1996
Act
|
5,057
|
13,046
|
18,640
|
|||||||
|
Total
Farmer Mac I program
|
$
|
6,313,489
|
$
|
4,437,254
|
$
|
4,681,203
|
||||
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 2006, Farmer Mac’s net charge-offs were
$0.7 million, compared to $0.3 million in net recoveries during 2005.
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
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, 2006, there were 181
active sellers in the Farmer Mac II program, consisting mostly of community
and
regional banks, compared to 120 sellers as of December 31, 2005, for an increase
of 61 active sellers. In the aggregate, more than 300 sellers were participating
either directly or indirectly in one or both of the Farmer Mac I or Farmer
Mac
II programs during 2006.
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, 2006 and 2005, Farmer Mac issued
$234.7 million and $200.2 million of Farmer Mac II Guaranteed
Securities, respectively. As of December 31, 2006 and 2005,
$925.8 million and $835.7 million of Farmer Mac II Guaranteed
Securities were outstanding, respectively. 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,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
thousands)
|
||||||||||
|
Purchased
and retained
|
$
|
234,666
|
$
|
199,843
|
$
|
162,286
|
||||
|
Swaps
(issued to third parties)
|
-
|
325
|
11,788
|
|||||||
|
Total
|
$
|
234,666
|
$
|
200,168
|
$
|
174,074
|
||||
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 Securites
|
||||||||||
|
as
of December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
thousands)
|
||||||||||
|
On-balance
sheet
|
$
|
892,667
|
$
|
796,224
|
$
|
712,653
|
||||
|
Off-balance
sheet
|
33,132
|
39,508
|
55,889
|
|||||||
|
Total
|
$
|
925,799
|
$
|
835,732
|
$
|
768,542
|
||||
As
of
December 31, 2006, Farmer Mac had experienced no credit losses on any of its
Farmer Mac II transactions. As of December 31, 2006, Farmer Mac had outstanding
$0.1 million of principal and interest advances on Farmer Mac II Guaranteed
Securities, compared to $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 government-sponsored enterprises
(“GSEs”);
|
|
·
|
municipal
securities;
|
|
·
|
international
and multilateral development bank
obligations;
|
|
·
|
money
market instruments;
|
|
·
|
diversified
investment funds;
|
|
·
|
asset-backed
securities;
|
|
·
|
corporate
debt securities; and
|
|
·
|
mortgage
securities.
|
For
more
information about Farmer Mac’s outstanding investments and indebtedness, see
Note 4 and Note 7 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, 2006, 1,030,780 shares of Class A voting common stock,
500,301 shares of Class B voting common stock, 9,075,862
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 2006:
|
Date
|
|
Per
|
|
For
|
|
For
|
|
|
|
Dividend
|
|
Share
|
|
Period
|
|
Period
|
|
Date
|
|
Declared
|
|
Amount
|
|
Beginning
|
|
Ending
|
|
Paid
|
|
|
|
|
|
|
|
|
|
|
|
February
2, 2006
|
|
$
0.10
|
|
January
1, 2006
|
|
March
31, 2006
|
|
March
31, 2006
|
|
April
6, 2006
|
|
0.10
|
|
April
1, 2006
|
|
June
30, 2006
|
|
June
30, 2006
|
|
August
2, 2006
|
|
0.10
|
|
July
1, 2006
|
|
September
30, 2006
|
|
September
29, 2006
|
|
October
4, 2006
|
|
0.10
|
|
October
1, 2006
|
|
December
31, 2006
|
|
December
29, 2006
|
|
February
5, 2007
|
|
0.10
|
|
January
1, 2007
|
|
March
31, 2007
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
The dividend declared on February 5, 2007 is scheduled to be paid
on March
30, 2007.
|
||||||||
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 2006:
|
Date
|
|
Per
|
|
For
|
|
For
|
|
|
|
Dividend
|
|
Share
|
|
Period
|
|
Period
|
|
Date
|
|
Declared
|
|
Amount
|
|
Beginning
|
|
Ending
|
|
Paid
|
|
|
|
|
|
|
|
|
|
|
|
February
2, 2006
|
|
$
0.80
|
|
January
1, 2006
|
|
March
31, 2006
|
|
March
31, 2006
|
|
April
6, 2006
|
|
0.80
|
|
April
1, 2006
|
|
June
30, 2006
|
|
June
30, 2006
|
|
August
2, 2006
|
|
0.80
|
|
July
1, 2006
|
|
September
30, 2006
|
|
October
2, 2006
|
|
October
4, 2006
|
|
0.80
|
|
October
1, 2006
|
|
December
31, 2006
|
|
January
2, 2007
|
|
February
5, 2007
|
|
0.80
|
|
January
1, 2007
|
|
March
31, 2007
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
The dividend declared on February 5, 2007 is scheduled to be paid
on April
2, 2007.
|
||||||||
During
third
quarter 2004, Farmer Mac established a program to repurchase up to
10 percent, or 1,055,500 shares, of the Corporation’s outstanding Class C
non-voting common stock. During third quarter 2005, the
aggregate number of shares repurchased by Farmer Mac under that program, at
an
average purchase price of $20.73 per share, reached the maximum number of
authorized shares, thereby terminating the program according to its terms.
During
fourth quarter 2005, Farmer Mac established a program to repurchase up to an
additional 10 percent, or 958,632 shares, of the Corporation’s outstanding Class
C non-voting common stock. During 2006 and 2005, Farmer Mac repurchased 796,450
shares and 43,950 shares, respectively, of its Class C non-voting common
stock under the second repurchase program at an average price of $26.82 and
$27.97 per share, respectively. During first quarter 2007, the aggregate number
of shares repurchased by Farmer Mac under that program reached the maximum
number of authorized shares, thereby terminating the program according to its
terms. At that time, Farmer Mac announced the establishment of a third program
to repurchase up to 1 million additional shares of the Corporation’s
outstanding Class C non-voting common stock. The authority for this new
stock repurchase program expires in November 2008. Repurchases under that
program commenced in accordance with its terms, upon termination of the previous
program.
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 December
16, 2006, FCA published a final rule that revises certain FCA regulations
governing the risk-based capital stress test applicable to Farmer Mac. For
a
discussion of that regulation, which will become effective March 31, 2007,
see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Regulatory Matters.”
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, 2006 was $42.9 million and Farmer Mac’s
regulatory capital of $248.1 million exceeded that amount by approximately
$205.2 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, 2006, 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. These risks
are not exhaustive. 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, 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 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 purchases of quality 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 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 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 415 Clark Avenue, Ames,
Iowa 50010, under the terms of a lease that expires on June 15, 2008 (Farmer
Mac
has the option to renew the lease for an additional three-year term) and covers
approximately 1,750 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 2006.
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)
|
||||||||||||
|
|
|
|
|
|
|||||||||
|
2007
|
|
|
|
||||||||||
|
First
quarter (through March 1, 2007)
|
$
|
19.30
|
$
|
18.12
|
$
|
28.25
|
$
|
25.18
|
|||||
|
|
|
|
|
|
|||||||||
|
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
|
|||||||||
|
|
|
|
|
|
|||||||||
|
2005
|
|||||||||||||
|
Fourth
quarter
|
23.15
|
17.51
|
32.21
|
22.75
|
|||||||||
|
Third
quarter
|
20.35
|
16.56
|
26.65
|
22.60
|
|||||||||
|
Second
quarter
|
16.40
|
12.89
|
22.05
|
15.67
|
|||||||||
|
First
quarter
|
17.20
|
14.00
|
23.36
|
16.80
|
|||||||||
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, 2001 to December 31, 2006. The graph assumes that
$100 was invested on December 31, 2001 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, 2007, Farmer Mac estimates that there were 1,269 registered owners
of
the Class A voting common stock, 98 registered owners of the Class B voting
common stock and 1,183 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 5, 2007, Farmer Mac’s board
of directors declared a quarterly dividend of $0.10 per share on the
Corporation’s common stock payable on March 30, 2007. 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 27, 2007. 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 4, 2006, 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 562
shares of its Class C non-voting common stock, at an issue price of $26.47
per
share, to the seven directors who elected to receive such stock in lieu of
their
cash retainers. On October
3, 2006, Farmer Mac granted options under its 1997 Incentive Plan to purchase
an
aggregate of 33,000 shares of Class C non-voting common stock, at an exercise
price of $24.98 per share, to 11 non-officer employees as incentive
compensation. On
December 6, 2006, Farmer Mac granted options under
its
1997 Incentive Plan
to
purchase 750 shares of Class C non-voting common stock, at an exercise
price of $26.65 per share, to a non-officer employee in connection with the
employee’s commencement of employment.
|
(b)
|
Not
applicable.
|
(c) As
shown
in the table below, Farmer Mac repurchased 90,100 shares of its Class C
non-voting common stock during fourth quarter 2006 at an average price of $26.57
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, 2006 - October 31, 2006
|
22,050
|
$
|
25.55
|
22,050
|
186,282
|
||||||||
|
November
1, 2006 - November 30, 2006
|
14,500
|
26.28
|
14,500
|
171,782
|
|||||||||
|
December
1, 2006 - December 31, 2006
|
53,550
|
27.06
|
53,550
|
118,232
|
|||||||||
|
Total
|
90,100
|
26.57
|
90,100
|
118,232
|
|||||||||
|
*
|
On
November 17, 2005, Farmer Mac publicly announced the establishment
of a
program to repurchase up to 10 percent of the Corporation’s outstanding
Class C non-voting common stock (958,632 shares). During first quarter
2007, the aggregate number of shares repurchased by Farmer Mac under
that
program reached the maximum number of authorized shares, thereby
terminating the program according to its terms. On February 5, 2007,
Farmer Mac announced the establishment of a new program to repurchase
up
to 1 million additional shares of the Corporation’s outstanding Class C
non-voting common stock. The authority for this new stock repurchase
program expires in November 2008. Repurchases under that program
commenced
in accordance with its terms, upon termination of the previous
program.
|
| Item 6. |
Selected
Financial Data
|
|
As
of December 31,
|
||||||||||||||||
|
Summary
of Financial Condition:
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
877,714
|
$
|
458,852
|
$
|
430,504
|
$
|
623,674
|
$
|
723,800
|
||||||
|
Investment
securities
|
1,830,904
|
1,621,941
|
1,056,143
|
1,064,782
|
830,409
|
|||||||||||
|
Farmer
Mac Guaranteed Securities
|
1,330,418
|
1,330,976
|
1,376,847
|
1,508,134
|
1,608,507
|
|||||||||||
|
Loans,
net
|
775,421
|
799,516
|
882,874
|
982,446
|
962,355
|
|||||||||||
|
Total
assets
|
4,953,673
|
4,341,445
|
3,847,410
|
4,299,670
|
4,222,003
|
|||||||||||
|
Notes
payable:
|
||||||||||||||||
|
Due
within one year
|
3,298,097
|
2,587,704
|
2,620,172
|
2,799,384
|
2,895,746
|
|||||||||||
|
Due
after one year
|
1,296,691
|
1,406,527
|
864,412
|
1,138,892
|
985,318
|
|||||||||||
|
Total
liabilities
|
4,705,184
|
4,095,416
|
3,612,176
|
4,089,178
|
4,039,344
|
|||||||||||
|
Stockholders'
equity
|
248,489
|
246,029
|
235,234
|
210,492
|
182,659
|
|||||||||||
|
Selected
Financial Ratios:
|
||||||||||||||||
|
Return
on average assets
|
0.64
|
%
|
1.15
|
%
|
0.96
|
%
|
0.92
|
%
|
-0.60
|
%
|
||||||
|
Return
on average common equity
|
14.03
|
%
|
22.87
|
%
|
20.76
|
%
|
24.16
|
%
|
-16.65
|
%
|
||||||
|
Average
equity to assets
|
5.32
|
%
|
5.88
|
%
|
5.47
|
%
|
4.61
|
%
|
4.08
|
%
|
||||||
|
For
the Year Ended December 31,
|
||||||||||||||||
|
Summary
of Operations:
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||
|
Interest
Income:
|
||||||||||||||||
|
Net
interest income after recovery/
|
||||||||||||||||
|
(provision)
for loan losses
|
$
|
40,686
|
$
|
50,689
|
$
|
65,763
|
$
|
72,278
|
$
|
71,993
|
||||||
|
Non-interest
income/(loss):
|
||||||||||||||||
|
Guarantee
and commitment fees
|
21,815
|
19,554
|
20,977
|
20,685
|
19,277
|
|||||||||||
|
Gains/(losses)
on financial derivatives
|
||||||||||||||||
|
and
trading assets
|
1,617
|
11,537
|
(14,687
|
)
|
(17,653
|
)
|
(110,860
|
)
|
||||||||
|
Gains
on sale of available-for-sale investment
|
||||||||||||||||
|
securities
|
1,150
|
-
|
200
|
-
|
-
|
|||||||||||
|
Gain
on sale of Farmer Mac Guaranteed
|
||||||||||||||||
|
Securities
|
-
|
-
|
367
|
-
|
-
|
|||||||||||
|
Gains
on the repurchase of debt
|
-
|
116
|
-
|
-
|
1,368
|
|||||||||||
|
Gains
on the sale of real estate owned
|
809
|
34
|
523
|
178
|
24
|
|||||||||||
|
Representation
and warranty claims income
|
718
|
79
|
2,816
|
-
|
-
|
|||||||||||
|
Other
income
|
1,001
|
1,872
|
1,295
|
812
|
1,332
|
|||||||||||
|
Non-interest
income/(loss)
|
27,110
|
33,192
|
11,491
|
4,022
|
(88,859
|
)
|
||||||||||
|
Non-interest
expense
|
23,094
|
11,518
|
16,263
|
15,182
|
18,767
|
|||||||||||
|
Income/(loss)
before income taxes and cumulative
|
||||||||||||||||
|
effect
of change in accounting principles
|
44,702
|
72,363
|
60,991
|
61,118
|
(35,633
|
)
|
||||||||||
|
Income
tax expense/(benefit)
|
12,689
|
23,091
|
19,751
|
19,847
|
(14,059
|
)
|
||||||||||
|
Net
income/(loss)
|
32,013
|
49,272
|
41,240
|
41,271
|
(21,574
|
)
|
||||||||||
|
Preferred
stock dividends
|
(2,240
|
)
|
(2,240
|
)
|
(2,240
|
)
|
(2,240
|
)
|
(1,456
|
)
|
||||||
|
Net
income/(loss) available to common
|
||||||||||||||||
|
stockholders
|
$
|
29,773
|
$
|
47,032
|
$
|
39,000
|
$
|
39,031
|
$
|
(23,030
|
)
|
|||||
|
Allowance
for Losses Activity:
|
||||||||||||||||
|
(Recovery)/provision
for losses
|
$
|
(3,408
|
)
|
$
|
(8,777
|
)
|
$
|
(412
|
)
|
$
|
7,285
|
$
|
8,247
|
|||
|
Net
charge-offs/(recoveries)
|
690
|
(329
|
)
|
4,540
|
5,243
|
4,120
|
||||||||||
|
Ending
balance
|
4,555
|
8,653
|
17,101
|
22,053
|
20,011
|
|||||||||||
|
Earnings
Per Common Share and Dividends:
|
||||||||||||||||
|
Basic
earnings/(loss) per common share
|
$
|
2.74
|
$
|
4.14
|
$
|
3.24
|
$
|
3.32
|
$
|
(1.98
|
)
|
|||||
|
Diluted
earnings/(loss) per common share
|
$
|
2.68
|
$
|
4.09
|
$
|
3.20
|
$
|
3.24
|
$
|
(1.98
|
)
|
|||||
|
Common
stock dividends per common share
|
$
|
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, 2006, 2005 and
2004 is consolidated to include the accounts of Farmer Mac and its wholly-owned
subsidiary, Farmer Mac Mortgage Securities Corporation.
This
discussion and analysis of financial condition and results of operations should
be read together with: (1) our consolidated financial statements and the related
notes to the consolidated financial statements for the fiscal year ended
December 31, 2006; and (2) our consolidated financial statements and the related
notes to the consolidated financial statements for the fiscal year ended
December 31, 2005 and 2004.
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 provisions for losses;
|
|
·
|
trends
in expenses;
|
|
·
|
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:
|
·
|
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;
|
|
·
|
lender
interest in Farmer Mac credit products and the Farmer Mac secondary
market;
|
|
·
|
borrower
preferences for fixed-rate agricultural mortgage
indebtedness;
|
|
·
|
the
willingness of investors to invest in Farmer Mac Guaranteed Securities;
and
|
|
·
|
possible
reaction in the financial markets 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 for
investment;
|
|
·
|
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 for investment; 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 probable losses on
loans held for investment, real estate owned and loans underlying post-1996
Act
Farmer Mac I Guaranteed Securities and LTSPCs. Prior
to
September 30, 2005, Farmer Mac estimated its inherent probable losses using
a
systematic process that began with management’s evaluation of the results of a
proprietary loan pool simulation and guarantee fee model. That model drew upon
historical information from a data set of agricultural mortgage loans screened
to include only those loans with credit characteristics similar to those
eligible for Farmer Mac’s programs. The model offered historical loss experience
on agricultural mortgage loans similar to those on which Farmer Mac had assumed
credit risk, but over a longer term than Farmer Mac’s own experience. The
results generated by that model were then modified, as necessary, by the
application of management’s judgment. Prior to September 30, 2005, Farmer Mac
did not believe that its own historical portfolio lending and loss experience
was statistically sufficient to estimate the inherent probable losses in its
portfolio.
As
of
September 30, 2005, Farmer Mac believed it had accumulated and analyzed
sufficient data from its own historical portfolio lending, loss experience,
and
credit trends to estimate its inherent probable losses based upon its own
historical experience. Farmer Mac believes that estimating its allowance for
losses based on data derived from its own portfolio reflects the characteristics
of credit trends within the portfolio. Farmer Mac recorded the effects of that
change as a change in accounting estimate, which resulted in a $4.8 million
decrease in the allowance for losses as of September 30, 2005.
Farmer
Mac’s current 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 (“LTV”). 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 current 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; and
|
|
·
|
historical
charge-off and recovery activities of the
portfolio.
|
If,
based
on that evaluation, management concludes that the assumption is not valid due
to
other more compelling indicators, the loss allowance calculation is modified
by
the addition of further assumptions to capture current portfolio trends and
characteristics that differ from historical experience.
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.
No
allowance for losses has been made for loans underlying Farmer Mac I Guaranteed
Securities issued prior to the 1996 Act, AgVantage securities or Farmer Mac
II
Guaranteed Securities. Farmer Mac I Guaranteed Securities issued prior to
the 1996 Act are supported by unguaranteed first loss subordinated interests,
which are expected to exceed the estimated credit losses on those loans. 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,
2006, 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. 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, 2006, Farmer Mac had not experienced any credit losses on any
Farmer Mac I Guaranteed Securities issued prior to the 1996 Act, AgVantage
securities or 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 2006 was $29.8 million or $2.68
per diluted common share, compared to $47.0 million or $4.09 per diluted
common share in 2005 and $39.0 million or $3.20 per diluted common share in
2004. The effects of Farmer Mac’s stock repurchases of 796,450 shares, 800,202
and 299,248 shares during 2006, 2005 and 2004 respectively, on diluted earnings
per share for 2006, 2005 and 2004 were increases of $0.39, $0.21 and $0.02,
respectively.
During
2006, Farmer Mac’s program volume totaled $3.0 billion, compared to 2005 volume
of $771.7 million. In addition to its program volume during 2005, Farmer Mac
added $500.0 million of mission-related investments during that year.
Farmer Mac’s outstanding program volume as of December 31, 2006 was $7.2
billion, compared to $5.3 billion as of December 31, 2005. For 2006, Farmer
Mac’s new business volume included the:
|
·
|
addition
of $1.1 billion of Farmer Mac I eligible loans under
LTSPCs;
|
|
·
|
purchase
of $98.7 million of newly originated Farmer Mac I eligible
loans;
|
|
·
|
guarantee
of $1.5 billion of AgVantage
securities;
|
|
·
|
purchase
of $234.7 million of Farmer Mac II USDA-guaranteed portions;
and
|
|
·
|
conversion
of $1.0 billion of pre-existing LTSPCs into Farmer Mac I Guaranteed
Securities in swap transactions.
|
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 recent 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, 2006 was $4.6 million. This resulted in the
release of approximately $3.4 million from the allowance for losses during
2006, compared to the release of $8.8 million and $0.4 million from its
allowance for losses in 2005 and 2004, respectively. During 2005, the release
from the allowance for losses included $4.8 million recorded as a change in
accounting estimate in third quarter 2005. As of December 31, 2006, the
allowance for losses of $4.6 million was 10 basis points relative to
the outstanding post-1996 Act Farmer Mac I portfolio (excluding AgVantage
securities), compared to $8.7 million and 20 basis points as of
December 31, 2005. 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, 2006, the percentage of 90-day delinquencies (Farmer Mac I loans
purchased or placed under Farmer Mac I Guaranteed Securities or LTSPCs after
changes to Farmer Mac’s statutory charter in 1996 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) was 0.41 percent of the principal balance of the
outstanding post-1996 Act Farmer Mac I portfolio (excluding AgVantage
securities), compared to 0.58 percent as of December 31, 2005 and 0.55 percent
as of December 31, 2004.
The
following table presents Farmer Mac’s non-performing assets, which represents
the aggregate of 90-day delinquencies, loans performing in bankruptcy and real
estate owned.
|
|
As
of December 31,
|
||||||
|
|
2006
|
2005
|
|||||
|
|
(in
thousands)
|
||||||
|
90-day
delinquencies (including loans in
|
$
|
19,655
|
$
|
25,461
|
|||
|
foreclosure
and loans restructured
|
|
|
|||||
|
after
delinquency)
|
|
|
|||||
|
Loans
performing in bankruptcy
|
17,480
|
19,771
|
|||||
|
Real
estate owned
|
2,097
|
3,532
|
|||||
|
Non-performing
assets
|
$
|
39,232
|
$
|
48,764
|
|||
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, 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%
|
|
|||||||||||
|
September
30, 2004
|
4,756,839
|
75,022
|
1.58%
|
|
27,438
|
47,584
|
1.01%
|
|
|||||||||||
|
June
30, 2004
|
4,882,505
|
69,751
|
1.43%
|
|
36,978
|
32,773
|
0.68%
|
|
|||||||||||
|
March
31, 2004
|
4,922,759
|
91,326
|
1.86%
|
|
33,951
|
57,375
|
1.17%
|
|
|||||||||||
|
December
31, 2003
|
5,020,032
|
69,964
|
1.39%
|
|
39,908
|
30,056
|
0.60%
|
|
|||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
|
(1)
Excludes loans underlying AgVantage securities.
|
|
|
|
|
|||||||||||||||
Farmer
Mac experienced $0.7 million in net charge-offs in 2006, compared with
$0.3 million in net recoveries in 2005 and $4.5 million in net
charge-offs for 2004. During
2006, 2005 and 2004, Farmer Mac recovered approximately $0.7 million,
$0.1 million and $2.8 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. Additionally, Farmer Mac recorded gains on the sale of
real estate owned of $0.8 million, $0.1 million and $0.5 million in
2006, 2005 and 2004, respectively.
As
of
December 31, 2006, approximately $1.5 billion (31 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 $1.3
billion (29 percent) as of December 31, 2005 and $1.4 billion (31 percent)
as of December 31, 2004. Notwithstanding the recent historical trends in
delinquency rates and the overall agricultural economy during 2006, the level
of
90-day delinquencies could increase and higher charge-offs could follow.
Outlook
for 2007.
USDA’s
most recent publications (as available on USDA’s website as of March 1, 2007)
forecast:
|
·
|
2007
net cash farm income to be $67.2 billion, an increase of $0.5 billion
from
2006, and an increase of $2.6 billion over the ten-year
average;
|
|
·
|
2007
net farm income to be $66.6 billion, which is 16.2 percent above its
ten-year average, and an increase of $6.0 billion over
2006;
|
|
·
|
Total
direct U.S. government payments to be $12.4 billion in 2007, down
from
$16.3 billion for 2006, and 24.7 percent below the five-year
average;
|
|
·
|
Countercyclical
payments to decrease to $1.6 billion in 2007 from $4.1 billion in
2006;
|
|
·
|
Marketing
loan benefits to be down to $0.8 billion in 2007 from $2.0 billion in
2006;
|
|
·
|
The
value of U.S. farm real estate to increase 4.5 percent in 2007 to
$1.7 trillion from the current projection of $1.6 trillion for 2006,
and the general economy to continue improvement supporting further
growth
in farmland values; and
|
|
·
|
The
amount of farm real estate debt to increase by 3.7 percent in 2007
to
$124.5 billion, compared to the current projection of $119.9 billion
in 2006.
|
The
USDA
forecasts referenced above relate to U.S. agriculture generally, but should
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 generally increased values in U.S. farm real estate.
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 2006
Farmer Mac:
|
·
|
in
two AgVantage transactions with MetLife, guaranteed an aggregate
$1.5 billion principal amount of securities supported by five-year
general obligations of MetLife collateralized by eligible loans;
and
|
|
·
|
in
LTSPC transactions with several counterparties, issued standby purchase
commitments aggregating
$1.1 billion.
|
In
addition, Farmer Mac purchased $234.7 million of guaranteed portions of
USDA-guaranteed loans. This brought new business volume in 2006 to a record
$3.0 billion, and total volume in both Farmer Mac programs to
$7.2 billion, another new record.
While
Farmer Mac achieved a dramatic increase in new business volume in 2006, its
future business with agricultural mortgage lenders may still 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 and credit enhancement for agricultural lenders;
and
|
|
·
|
increased
competition in the secondary market for agricultural mortgage
loans.
|
Looking
ahead, Farmer Mac remains confident of opportunities for increased business
volume and income growth as a result of the Corporation’s product development
and customer service efforts. Farmer Mac’s marketing initiatives are generating
business opportunities for 2007 and, it believes, beyond. Current initiatives
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;
and
|
|
·
|
an
ongoing alliance with the American Bankers Association (“ABA”), under
which Farmer Mac facilitates access and offers improved pricing to
ABA
member institutions and the ABA promotes member participation in
the
Farmer Mac I program.
|
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. While Farmer Mac is seeking to expand its mix of loan types within
the scope of its Congressional charter, it is too early to assess the
probability of success of these efforts. Farmer Mac believes that prospects
for
large portfolio transactions, similar to those that have accounted for a
significant portion of Farmer Mac’s previous growth, continue to exist. No
assurance can be given at this time as to the certainty or timing of similar
transactions in the future.
In
first
quarter 2007, Farmer Mac purchased, as a mission-related non-program investment
consistent with parameters approved by FCA, $365.6 million of
mortgage-backed securities representing beneficial ownership interests in
distribution cooperative mortgage loans made by the National Rural Utilities
Cooperative Finance Corporation (“CFC”). The transaction improves CFC’s pricing
to its rural electric cooperative members and advances Farmer Mac’s role in
financing rural America.
A
detailed presentation of Farmer Mac’s financial results for the years ended
December 31, 2006, 2005 and 2004 follows.
Net
Interest Income.
Net
interest income was $38.3 million for 2006, $50.6 million for 2005 and
$67.4 million for 2004. The net interest yield was 85 basis points for
the year ended December 31, 2006, compared to 131 basis points for the
year ended December 31, 2005 and 175 basis points for the year ended
December 31, 2004. 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. For the years ended December 31,
2006,
2005 and 2004, this classification resulted in increases in the net interest
yield of 7 basis points, 43 basis points, and 84 basis points,
respectively.
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 $3.4 million (8 basis
points) of guarantee fee income as interest income for the year ended December
31, 2006, compared to $3.7 million (10 basis points) for the year
ended December 31, 2005 and $4.1 million (10 basis points) for the year
ended December 31, 2004.
The
net
interest yields for the years ended December 31, 2006, 2005 and 2004 included
the benefits of yield maintenance payments of 9 basis points, 12 basis
points and 13 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, 2006, 2005 and 2004, the after-tax
effects of yield maintenance payments on net income and diluted earnings per
share were $2.5 million or $0.23 per diluted share, $3.1 million or
$0.27 per diluted share and $3.4 million or $0.28 per diluted share,
respectively.
The
following table provides information regarding interest-earning assets and
funding for the years ended December 31, 2006, 2005 and 2004. The
balance of non-accruing loans is included in the average balance of
interest-earning loans presented, though no related income is included in the
income figures presented. Therefore, as the balance of non-accruing loans
increases or decreases, the net interest yield will decrease or increase
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 cash equivalents reflects the increase in the level
of
short-term interest rates in 2006 and 2005, compared to 2004, and an increase
in
short-term market rates in 2006 compared to 2005. The increase in the average
rate for investments reflects the floating rate nature of most investments
acquired and outstanding during 2006. 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. 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 issuance of new debt at higher market rates during
2006.
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||
|
Average
|
Income/
|
Average
|
Average
|
Income/
|
Average
|
Average
|
Income/
|
Average
|
||||||||||||||||||||
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
||||||||||||||||||||
|
Interest-earning
assets:
|
(dollars
in thousands)
|
|||||||||||||||||||||||||||
|
Cash
and cash
|
||||||||||||||||||||||||||||
|
equivalents
|
$
|
758,544
|
$
|
38,318
|
5.05%
|
|
$
|
483,966
|
$
|
15,746
|
3.25%
|
|
$
|
600,964
|
$
|
8,429
|
1.40%
|
|
||||||||||
|
Investments
|
1,716,356
|
89,881
|
5.24%
|
|
1,269,769
|
54,668
|
4.31%
|
|
973,230
|
27,957
|
2.87%
|
|
||||||||||||||||
|
Loans
and Farmer
|
|
|||||||||||||||||||||||||||
|
Mac
Guaranteed
|
|
|||||||||||||||||||||||||||
|
Securities
|
2,055,657
|
121,723
|
5.92%
|
|
2,120,508
|
122,158
|
5.76%
|
|
2,274,046
|
126,515
|
5.56%
|
|
||||||||||||||||
|
Total
interest-
|
|
|||||||||||||||||||||||||||
|
earning
assets
|
4,530,557
|
249,922
|
5.52%
|
|
3,874,243
|
192,572
|
4.97%
|
|
3,848,240
|
162,901
|
4.23%
|
|
||||||||||||||||
|
Funding:
|
||||||||||||||||||||||||||||
|
Notes
payable due
|
||||||||||||||||||||||||||||
|
within
one year
|
2,568,869
|
125,741
|
4.89%
|
|
1,920,390
|
61,939
|
3.23%
|
|
2,050,934
|
27,708
|
1.35%
|
|
||||||||||||||||
|
Notes
payable due
|
||||||||||||||||||||||||||||
|
after
one year
|
1,745,968
|
85,891
|
4.92%
|
|
1,750,436
|
79,998
|
4.57%
|
|
1,609,236
|
67,841
|
4.22%
|
|
||||||||||||||||
|
Total
interest-
|
|
|||||||||||||||||||||||||||
|
bearing
liabilities
|
4,314,837
|
211,632
|
4.90%
|
|
3,670,826
|
141,937
|
3.87%
|
|
3,660,170
|
95,549
|
2.61%
|
|
||||||||||||||||
|
Net
non-interest-
|
||||||||||||||||||||||||||||
|
bearing
funding
|
215,720
|
-
|
0.00%
|
|
203,417
|
-
|
0.00%
|
|
188,070
|
-
|
0.00%
|
|
||||||||||||||||
|
Total
funding
|
$
|
4,530,557
|
211,632
|
4.67%
|
|
$
|
3,874,243
|
141,937
|
3.66%
|
|
$
|
3,848,240
|
95,549
|
2.48%
|
|
|||||||||||||
|
|
||||||||||||||||||||||||||||
|
Net
interest income/yield
|
$
|
38,290
|
0.85%
|
|
$
|
50,635
|
1.31%
|
|
$
|
67,352
|
1.75%
|
|
||||||||||||||||
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.
|
2006
vs. 2005
|
2005
vs. 2004
|
||||||||||||||||||
|
Increase/(Decrease)
Due to
|
Increase/(Decrease)
Due to
|
||||||||||||||||||
|
Rate
|
Volume
|
Total
|
Rate
|
Volume
|
Total
|
||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
Income
from interest-earning assets:
|
|||||||||||||||||||
|
Cash
and cash equivalents
|
$
|
11,137
|
$
|
11,435
|
$
|
22,572
|
$
|
9,237
|
$
|
(1,919
|
)
|
$
|
7,318
|
||||||
|
Investments
|
13,411
|
21,802
|
35,213
|
16,582
|
10,129
|
26,711
|
|||||||||||||
|
Loans
and Farmer Mac Guaranteed Securities
|
3,356
|
(3,791
|
)
|
(435
|
)
|
4,384
|
(8,742
|
)
|
(4,358
|
)
|
|||||||||
|
Total
|
27,904
|
29,446
|
57,350
|
30,203
|
(532
|
)
|
29,671
|
||||||||||||
|
Expense
from interest-bearing liabilities
|
42,153
|
27,542
|
69,695
|
46,109
|
279
|
46,388
|
|||||||||||||
|
Change
in net interest income
|
$
|
(14,249
|
)
|
$
|
1,904
|
$
|
(12,345
|
)
|
$
|
(15,906
|
)
|
$
|
(811
|
)
|
$
|
(16,717
|
)
|
||
Guarantee
and Commitment Fees.
Guarantee and commitment fee income, which compensate Farmer Mac for assuming
the credit risk on loans underlying Farmer Mac Guaranteed Securities and LTSPCs,
was $21.8 million for 2006, compared to $19.6 million for 2005 and
$21.0 million for 2004. The changes in guarantee and commitment fee income
reflect the changes in the average guarantee and commitment fee rates and the
average balance of outstanding guarantees and LTSPCs. For 2006, 2005 and 2004,
respectively, the effects of SFAS 140 classified guarantee fees received of
$3.4 million, $3.7 million and $4.1 million 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, except to the extent attributable to any retained interest-only strip.
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 gain of
$1.6 million and $11.5 million for 2006 and 2005, respectively, and a net
loss of $14.7 million for 2004.
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
2006, Farmer Mac recognized realized gains of $1.2 million from the sale of
securities from its available-for-sale portfolio. During 2005, Farmer Mac did
not sell any securities from its available-for-sale portfolio. During 2004,
Farmer Mac recognized realized gains of $0.2 million from the sale of securities
from its available-for-sale portfolio.
Gain
on the Repurchase of Debt. During
2005, Farmer Mac recognized a gain of $0.1 million on the repurchase of
$21.0 million of its outstanding debt. During 2006 and 2004, Farmer Mac did
not
repurchase any of its outstanding debt.
Gains
on the Sale of Real Estate Owned.
Gains
on the sale of real estate owned were $0.8 million, $0.1 million and
$0.5 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
Representation
and Warranty Claims Income.
During
2006, 2005 and 2004, Farmer Mac recovered approximately $0.7 million, $0.1
million and $2.8 million, respectively, from sellers (one of which during 2004
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.
Other
Income.
Other
income was $1.0 million, $1.9 million and $1.3 million for the years ended
December 31, 2006, 2005 and 2004, respectively. The increase in 2005 compared
to
2006 and 2004 was the result of a higher level of late fees received in
2005.
Expenses. During
2006, 2005 and 2004, Farmer Mac undertook several initiatives to validate and
enhance its risk management practices, internal controls and accounting and
financial reporting. These initiatives are the result of ongoing corporate
diligence and a number of regulatory considerations, including compliance with
the Sarbanes-Oxley Act of 2002 and FCA requirements, as well as the heightened
focus on the regulatory environment for GSEs generally. The general increases
in
both compensation and employee benefits and general and administrative expenses
from 2004 through 2006 reflect the costs of those initiatives, particularly
staffing increases relative to the internal controls function. In addition,
Farmer Mac recorded stock option expense of $2.4 million in 2006 related to
the
adoption of SFAS 123(R). Compensation and employee benefits were
$11.9 million, $8.2 million and $7.0 million for 2006, 2005 and
2004, respectively. General and administrative expenses, including legal,
independent audit, and consulting fees, were $9.8 million,
$9.7 million and $8.8 million for 2006, 2005 and 2004, respectively.
Farmer Mac expects all of the above-mentioned expenses to continue at
approximately the same levels through 2007.
Regulatory
fees were $2.3 million, $2.3 million and $2.1 million for 2006,
2005 and 2004, respectively. FCA has advised Farmer Mac that its estimated
assessment for 2007 is $2.2 million. The regulatory assessments from FCA
for each of the examination periods corresponding approximately with each of
the
years ended December 31, 2006, 2005 and 2004 include both their originally
estimated assessments and revisions to those estimates that reflect actual
costs
incurred. These revisions have resulted in both additional assessments and
refunds in the past.
Income
Tax Expense.
Income
tax expense totaled $12.7 million in 2006, compared to $23.1 million
in 2005 and $19.8 million in 2004. Farmer Mac’s effective tax rates for
2006, 2005 and 2004 were approximately 28.4 percent, 31.9 percent and 32.4
percent, respectively. 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 - even the direction - of the Corporation’s earnings
under GAAP.
Farmer
Mac enters into financial derivative transactions 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
fixed-rate 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 to effectively fixed-rate medium-term and long-term notes that
match the anticipated duration, interest rate reset date 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. 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
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 billion in LTSPC volume, and an increase of $34.5 million in
Farmer Mac II volume, compared to 2005 volume levels. During 2005, the volume
of
loans purchased or placed under Farmer Mac Guaranteed Securities and LTSPCs
totaled $771.7 million, an increase from 2004 volume of $671.0 million. That
increase was attributable to an increase of $5.7 million in Farmer Mac I
loan volume, an increase of $68.9 million in LTSPC volume, and an increase
of $26.1 million in Farmer Mac II volume, compared to 2004 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,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
|
(in
thousands)
|
|||||||||
|
Farmer
Mac I:
|
|
|
|
|||||||
|
Loans
and Guaranteed Securities
|
$
|
1,598,673
|
$
|
110,056
|
$
|
104,404
|
||||
|
LTSPCs
|
1,139,699
|
461,441
|
392,559
|
|||||||
|
Farmer
Mac II
|
234,684
|
200,168
|
174,074
|
|||||||
|
Total
|
$
|
2,973,056
|
$
|
771,665
|
$
|
671,037
|
||||
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 2006 and 2005 was less than one year
and 71 percent and 60 percent, respectively, had principal amortization periods
longer than the maturity date, resulting in balloon payments at maturity, with
a
weighted-average remaining term to maturity of 16.9 and 19.1 years,
respectively.
During
2006, 2005 and 2004, Farmer Mac securitized loans it purchased and sold the
resulting Farmer Mac Guaranteed Securities in the amount of $4.0 million,
$53.3 million and $94.1 million, respectively. Of those securitization
transactions, $46.7 million and $64.5 million were sold to Zions First
National Bank in 2005 and 2004, respectively, and $4.0 million,
$6.6 million and $29.6 million of such securities were sold to AgStar
Financial Services, ACA in 2006, 2005 and 2004, respectively. Both Zions First
National Bank and AgStar Financial Services, ACA are related parties with
respect to Farmer Mac. During 2006, Farmer Mac issued $1.0 billion of
Farmer Mac I Guaranteed Securities in the form of swap transactions,
$470.2 million of which were issued to related parties. Those related party
transactions consisted of a $341.2 million swap transaction with AgStar
Financial Services, ACA and a $129.0 million swap transaction with
Sacramento Valley Farm Credit, ACA. All of the swap transactions resulted from
the participants’ exercise of a conversion feature incorporated in all existing
LTSPCs.
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,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
|
(in
thousands)
|
|||||||||
|
|
|
|
|
|||||||
|
Loans
securitized and sold as Farmer Mac I
|
|
|
|
|||||||
|
Guaranteed
Securities
|
$
|
3,994
|
$
|
53,315
|
$
|
94,062
|
||||
|
AgVantage
securities
|
1,500,000
|
-
|
-
|
|||||||
|
Swap
transactions
|
1,034,860
|
-
|
-
|
|||||||
|
Total
Farmer Mac Guaranteed Securities Issuances
|
$
|
2,538,854
|
$
|
53,315
|
$
|
94,062
|
||||
The
outstanding principal balance of loans held and loans underlying LTSPCs and
on-
and off-balance sheet Farmer Mac Guaranteed Securities increased
37.3 percent to $7.2 billion as of December 31, 2006 from $5.3 billion as
of December 31, 2005. 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,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
thousands)
|
||||||||||
|
Farmer
Mac I:
|
||||||||||
|
Post-1996
Act:
|
||||||||||
|
Loans
and Guaranteed Securities
|
$
|
4,338,698
|
$
|
2,094,410
|
$
|
2,367,460
|
||||
|
LTSPCs
|
1,969,734
|
2,329,798
|
2,295,103
|
|||||||
|
Pre-1996
Act
|
5,057
|
13,046
|
18,640
|
|||||||
|
Farmer
Mac II
|
925,799
|
835,732
|
768,542
|
|||||||
|
Total
|
$
|
7,239,288
|
$
|
5,272,986
|
$
|
5,449,745
|
||||
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,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
thousands)
|
||||||||||
|
Farmer
Mac I newly originated
|
||||||||||
|
and
current seasoned loan purchases
|
$
|
98,673
|
$
|
110,056
|
$
|
104,404
|
||||
|
Defaulted
loans purchased underlying
|
||||||||||
|
off-balance
sheet Farmer Mac I
|
||||||||||
|
Guaranteed
Securities
|
707
|
2,191
|
2,186
|
|||||||
|
Defaulted
loans purchased
|
||||||||||
|
underlying
LTSPCs
|
7,449
|
1,237
|
2,292
|
|||||||
|
Defaulted
loans underlying
|
||||||||||
|
on-balance
sheet Farmer Mac I
|
||||||||||
|
Guaranteed
Securities transferred
|
||||||||||
|
to
loans
|
1,467
|
7,483
|
8,305
|
|||||||
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 2006 and 2005 was seven years and
six 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
2006, 2005 and 2004, 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.
As of
December 31, 2006, total assets were $5.0 billion compared to $4.3 billion
as of December 31, 2005. On-balance sheet program assets (Farmer Mac
Guaranteed Securities and loans) decreased $24.7 million during 2006 to a
total of $2.1 billion. Farmer Mac’s non-program assets increased $0.6 billion to
$2.9 billion as of December 31, 2006.
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,
|
||||||
|
|
2006
|
2005
|
|||||
|
|
(in
thousands)
|
||||||
|
|
|
|
|||||
|
Fixed
rate (10-yr. wtd. avg. term)
|
$
|
891,429
|
$
|
879,403
|
|||
|
5-to-10
year ARMs and resets
|
761,754
|
764,219
|
|||||
|
1-Month-to-3-Year
ARMs
|
452,656
|
486,870
|
|||||
|
Total
held in portfolio
|
$
|
2,105,839
|
$
|
2,130,492
|
|||
Liabilities.
Total
liabilities increased to $4.7 billion as of December 31, 2006 from
$4.1 billion as of December 31, 2005. The increase in liabilities was due
primarily to an increase in notes payable, which corresponded to the increase
of
on-balance sheet assets. For more information about Farmer Mac’s funding and
interest rate risk practices and how financial derivatives are used, see “—Risk
Management—Interest Rate Risk.” For more information about Farmer Mac’s reserve
for losses, see “—Risk Management—Credit Risk - Loans.”
Capital.
As of
December 31, 2006, stockholders’ equity totaled $248.5 million, compared to
$246.0 million as of December 31, 2005. The increase was primarily due to
net income of $32.0 million earned during 2006, a net after tax decrease of
$10.8 million in unrealized gains on investment securities and Farmer Mac
Guaranteed Securities classified as available for sale and $6.7 million in
stock
option exercises, partially offset by the $21.9 million repurchase of Class
C
non-voting common stock and the payment of preferred stock dividends and common
stock dividends in the amounts of $2.2 million and $4.3 million,
respectively. Farmer Mac’s return on average common equity was 14.0 percent for
2006, compared to 22.9 percent for 2005 and 20.8 percent for 2004.
Accumulated other comprehensive income is not a component of Farmer Mac’s core
capital or regulatory capital.
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, 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, 2006, Farmer Mac’s risk-based capital
stress test generated a regulatory capital requirement of $42.9 million. Farmer
Mac’s regulatory capital of $248.1 million exceeded that amount by
approximately $205.2 million. 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
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 off-balance sheet
transactions for Farmer Mac.
As
of
December 31, 2006 and 2005, outstanding off-balance sheet Farmer Mac Guaranteed
Securities and LTSPCs totaled $5.2 billion and $3.2 billion, respectively.
The following table presents the balance of outstanding LTSPCs and off-balance
sheet Farmer Mac Guaranteed Securities as of December 31, 2006 and
2005:
|
Outstanding
Balance of LTSPCs and
|
|||||||
|
Off-Balance
Sheet Farmer Mac Guaranteed Securities
|
|||||||
|
As
of December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
(in
thousands)
|
|||||||
|
Farmer
Mac I Post-1996 Act obligations:
|
|||||||
|
Farmer
Mac I Guaranteed Securities
|
$
|
3,149,895
|
$
|
804,785
|
|||
|
LTSPCs
|
1,969,734
|
2,329,798
|
|||||
|
Total
Farmer Mac I Post-1996 Act obligations
|
5,119,629
|
3,134,583
|
|||||
|
Farmer
Mac II Guaranteed Securities
|
33,132
|
39,508
|
|||||
|
Total
Farmer Mac I and II
|
$
|
5,152,761
|
$
|
3,174,091
|
|||
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 its interest
rate
risks to a large degree. As
of
December 31, 2006, 46 percent of the total outstanding balance of retained
Farmer Mac I loans and Guaranteed Securities had yield maintenance provisions
and 7 percent had other forms of prepayment protection (together covering 86
percent of all loans with fixed interest rates). Of
the
Farmer Mac I new and current loans purchased in 2006, 14 percent had yield
maintenance or another form of prepayment protection (including 12 percent
of
all loans with fixed interest rates). As of December 31, 2006, none of the
USDA-guaranteed portions underlying Farmer Mac II Guaranteed Securities had
yield maintenance provisions; however, 17 percent contained prepayment
penalties. Of the USDA-guaranteed portions purchased in 2006, 23 percent
contained 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. In addition, Farmer Mac
consults with independent prepayment experts as part of the model development
process.
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 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 $877.7 million of cash and cash equivalents as of December 31, 2006
matures within three months and is match-funded with discount notes having
similar maturities. As of December 31, 2006, $1.0 billion of the $1.8
billion of investment securities (56 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 floating rate 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, 2006 and December 31, 2005 to an immediate and instantaneous parallel
shift in the yield curve.
|
|
|
Percentage
Change in MVE from Base Case
|
||
|
Interest
Rate
|
|
As
of December 31,
|
||
|
Scenario
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
+
300 bp
|
|
-7.9%
|
|
-6.2%
|
|
+
200 bp
|
|
-4.7%
|
|
-3.6%
|
|
+
100 bp
|
|
-1.9%
|
|
-1.4%
|
|
-
100 bp
|
|
0.0%
|
|
0.0%
|
|
-
200 bp
|
|
-1.1%
|
|
-0.7%
|
|
-
300 bp
|
|
-2.1%
|
|
-1.5%
|
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 slope
of
the yield curve that occurred during the year. Farmer Mac’s effective duration
gap was plus 0.7 months as of December 31, 2006, compared to plus 0.5 months
as
of December 31, 2005.
As
of
December 31, 2006, a uniform or “parallel” increase of 100 basis points would
have increased net interest income (“NII”) by 2.8 percent, while a parallel
decrease of 100 basis points would have decreased NII by 4.1 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, 2006, both MVE and NII showed less
sensitivity to non-parallel shocks than to the parallel shocks. 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 transactions
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, 2006, Farmer Mac had $1.9 billion combined notional amount of
interest rate swaps, with terms ranging from one to fifteen years, of which
$803.4 million were floating-to-fixed interest rate swaps, $335.1 million
were basis swaps and $810.5 million were fixed-to-floating interest rate
swaps.
Farmer
Mac uses financial derivatives as an end-user for hedging purposes, 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,
2006, Farmer Mac had uncollateralized net exposures of $1.3 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 cost 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 for investment;
|
|
·
|
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 for investment 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, loans
underlying LTSPCs and Farmer Mac Guaranteed Securities, and real estate owned
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,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
thousands)
|
||||||||||
|
Farmer
Mac I:
|
||||||||||
|
Post-1996
Act:
|
||||||||||
|
Loans
and Guaranteed Securities
|
$
|
4,338,698
|
$
|
2,094,410
|
$
|
2,367,460
|
||||
|
LTSPCs
|
1,969,734
|
2,329,798
|
2,295,103
|
|||||||
|
Pre-1996
Act
|
5,057
|
13,046
|
18,640
|
|||||||
|
Farmer
Mac II
|
925,799
|
835,732
|
768,542
|
|||||||
|
Total
|
$
|
7,239,288
|
$
|
5,272,986
|
$
|
5,449,745
|
||||
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 its guarantee fee is adequate compensation for the
credit risk that it assumes.
Farmer
Mac has established underwriting, collateral valuation and documentation
standards 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 collateral valuations 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 for investment, real estate owned and loans underlying post-1996
Act
Farmer Mac I Guaranteed Securities and LTSPCs in accordance with Statement
of
Financial Accounting Standard No. 5, Accounting
for Contingencies
(“SFAS 5”) and Statement of Financial Accounting
Standard No. 114, Accounting
by Creditors for Impairment of a Loan,
as
amended (“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.
No
allowance for losses has been made for loans underlying Farmer Mac I Guaranteed
Securities issued prior to the 1996 Act, AgVantage securities or Farmer Mac
II
Guaranteed Securities. Farmer Mac I Guaranteed Securities issued prior to
the 1996 Act are supported by unguaranteed first loss subordinated interests,
which are expected to exceed the estimated credit losses on those loans. 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, 2006, 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. 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, 2006, Farmer Mac had not experienced any credit losses on any
Farmer Mac I Guaranteed Securities issued prior to the 1996 Act, AgVantage
securities or 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 for
investment;
|
|
·
|
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 for investment; 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.
|
Prior
to
September 30, 2005, Farmer Mac estimated its inherent probable losses using
a
systematic process that began with management’s evaluation of the results of a
proprietary loan pool simulation and guarantee fee model. That model drew upon
historical information from a data set of agricultural mortgage loans screened
to include only those loans with credit characteristics similar to those
eligible for Farmer Mac’s programs. The model offered historical loss experience
on agricultural mortgage loans similar to those on which Farmer Mac had assumed
credit risk, but over a longer term than Farmer Mac’s own experience. The
results generated by that model were then modified, as necessary, by the
application of management’s judgment. Prior to September 30, 2005, Farmer Mac
did not believe that its own historical portfolio lending and loss experience
was statistically sufficient to estimate the inherent probable losses in its
portfolio.
As
of
September 30, 2005, Farmer Mac believed it had accumulated and analyzed
sufficient data from its own historical portfolio lending, loss experience,
and
credit trends to estimate its inherent probable losses based upon its own
historical experience. Farmer Mac believes that estimating its allowance for
losses based on data derived from its own portfolio reflects the characteristics
of credit trends within the portfolio. Farmer Mac recorded the effects of that
change as a change in accounting estimate, which resulted in a $4.8 million
decrease in the allowance for losses as of September 30, 2005.
Farmer
Mac’s current 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 current
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; and
|
|
·
|
historical
charge-off and recovery activities of the portfolio.
|
If,
based
on that evaluation, management concludes that the assumption is not valid due
to
other more compelling indicators, the loss allowance calculation is modified
by
the addition of further assumptions 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.
As
of
December 31, 2006, Farmer Mac concluded that the credit profile of its portfolio
was consistent with Farmer Mac’s historical credit profile and trends.
Management believes that its use of this methodology produces a reliable
estimate of inherent probable losses, as of the balance sheet date, for all
loans 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, 2006:
|
|
|||||||||||||
|
|
|
|
|
|
|||||||||
|
|
Allowance
|
REO
|
|
Total
|
|||||||||
|
|
for
Loan
|
Valuation
|
Reserve
|
Allowance
|
|||||||||
|
|
Losses
|
Allowance
|
for
Losses
|
for
Losses
|
|||||||||
|
|
(in
thousands)
|
||||||||||||
|
|
|
|
|
|
|||||||||
|
Balance
as of January 1, 2002
|
$
|
1,352
|
$
|
-
|
$
|
14,532
|
$
|
15,884
|
|||||
|
|
|
|
|
|
|||||||||
|
Provision/(recovery)
for losses
|
4,561
|
1,308
|
2,378
|
8,247
|
|||||||||
|
Charge-offs
|
(3,621
|
)
|
(886
|
)
|
(153
|
)
|
(4,660
|
)
|
|||||
|
Recoveries
|
370
|
170
|
-
|
540
|
|||||||||
|
Balance
as of December 31, 2002
|
$
|
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
|
|||||
Farmer
Mac released $3.4 million from the allowance for losses during 2006, compared
to
a release of $8.8 million in 2005. Included in the change in the allowance
for losses in 2005 was a $4.8 million decrease in the allowance for losses
as a
result of a change in accounting estimate. During 2006, Farmer Mac charged
off
$1.0 million in losses against the allowance for losses and had
$0.4 million in recoveries. During 2005, Farmer Mac charged off $0.3
million in losses against the allowance for losses and had
$0.6 million in recoveries. The charge-offs for 2006 and 2005 did not
include any amounts related to previously accrued or advanced interest on loans
or Farmer Mac I Guaranteed Securities.
As
of
December 31, 2006, Farmer Mac’s allowance for losses totaled $4.6 million,
or 10 basis points of the outstanding principal balance of loans held and
loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs,
compared to $8.7 million (20 basis points) as of
December 31, 2005. The year-to-year decrease in this ratio is a result of
the overall improved credit quality of the Farmer Mac portfolio, the strong
U.S.
agricultural economy, and the recordation of a change in accounting estimate
resulting from the implementation, during third quarter 2005, of a new
methodology to estimate probable losses inherent in its post-1996 Act Farmer
Mac
I portfolio.
As
of
December 31, 2006, Farmer Mac’s 90-day delinquencies totaled $19.7 million
and represented 0.41 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 $25.5 million (0.58 percent) as of December 31, 2005.
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, 2006,
loans
held and loans underlying post-1996 Act Farmer Mac I Guaranteed 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 $39.2 million and
represented 0.82 percent of the principal balance of all loans held and
loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs,
compared to $48.8 million (1.11 percent) as of December 31, 2005.
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, 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
|
%
|
|||||||||||
|
September
30, 2004
|
4,756,839
|
75,022
|
1.58
|
%
|
27,438
|
47,584
|
1.01
|
%
|
|||||||||||
|
June
30, 2004
|
4,882,505
|
69,751
|
1.43
|
%
|
36,978
|
32,773
|
0.68
|
%
|
|||||||||||
|
March
31, 2004
|
4,922,759
|
91,326
|
1.86
|
%
|
33,951
|
57,375
|
1.17
|
%
|
|||||||||||
|
December
31, 2003
|
5,020,032
|
69,964
|
1.39
|
%
|
39,908
|
30,056
|
0.60
|
%
|
|||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
(1)
Excludes loans underlying AgVantage securities.
As
of
December 31, 2006, approximately $1.5 billion (31 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 $1.3 billion (29 percent) as of December 31,
2005.
As
of
December 31, 2006, Farmer Mac individually analyzed $18.0 million of its
$56.9 million of impaired assets for collateral shortfalls against updated
appraised values, other updated collateral valuations or discounted values.
Farmer Mac evaluated the remaining $38.8 million of impaired assets for
which updated valuations were not available in the aggregate in consideration
of
their similar risk characteristics and historical statistics. All of the
$18.0 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, 2006. Farmer Mac’s
non-specific or general allowances were $4.6 million as of December 31,
2006.
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. 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.
LTVs
depend upon the market value of a property with due regard for its
income-producing potential in the hands of a competent operator. As required
by
Farmer Mac’s collateral valuation standards, an appraisal of agricultural real
estate should include analysis of the income producing capability of the
property and address the income estimate in the market analysis. 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.
As
of
December 31, 2006, the weighted-average original LTV for loans held and loans
underlying Farmer Mac I Guaranteed Securities and LTSPCs was 50 percent, and
the
weighted-average original LTV for all post-1996 Act non-performing assets was
56 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, 2006
|
|||||||
|
(dollars
in thousands)
|
|||||||
|
|
Post-1996
Act
|
|
|||||
|
|
Non-performing
|
|
|||||
|
Original
LTV Ratio
|
Assets
|
Percentage
|
|||||
|
0.00% to 40.00%
|
$
|
1,912
|
5
|
%
|
|||
|
40.01%
to 50.00%
|
6,674
|
17
|
%
|
||||
|
50.01%
to 60.00%
|
16,862
|
43
|
%
|
||||
|
60.01%
to 70.00%
|
13,384
|
34
|
%
|
||||
|
70.01%
to 80.00%
|
331
|
1
|
%
|
||||
|
80.01%
+
|
69
|
0
|
%
|
||||
|
Total
|
$
|
39,232
|
100
|
%
|
|||
The
following table presents outstanding loans held and loans underlying post-1996
Act Farmer Mac I Guaranteed Securities and LTSPCs, post-1996 Act non-performing
assets as of December 31, 2006 by year of origination, geographic region and
commodity/collateral type:
|
Farmer
Mac I Post-1996 Act Non-performing Assets
|
|||||||||||||
|
Distribution
of
|
|||||||||||||
|
Outstanding
|
Outstanding
|
Post-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
1996
|
11
|
%
|
$
|
510,235
|
$
|
3,163
|
0.62
|
%
|
|||||
|
1996
|
4
|
%
|
198,362
|
6,524
|
3.29
|
%
|
|||||||
|
1997
|
5
|
%
|
254,497
|
3,783
|
1.49
|
%
|
|||||||
|
1998
|
9
|
%
|
430,921
|
6,557
|
1.52
|
%
|
|||||||
|
1999
|
9
|
%
|
450,611
|
11,369
|
2.52
|
%
|
|||||||
|
2000
|
5
|
%
|
255,217
|
4,355
|
1.71
|
%
|
|||||||
|
2001
|
9
|
%
|
436,541
|
2,835
|
0.65
|
%
|
|||||||
|
2002
|
11
|
%
|
511,479
|
496
|
0.10
|
%
|
|||||||
|
2003
|
11
|
%
|
518,104
|
-
|
0.00
|
%
|
|||||||
|
2004
|
8
|
%
|
387,222
|
-
|
0.00
|
%
|
|||||||
|
2005
|
11
|
%
|
505,536
|
150
|
0.03
|
%
|
|||||||
|
2006
|
7
|
%
|
326,258
|
-
|
0.00
|
%
|
|||||||
|
Total
|
100
|
%
|
$
|
4,784,983
|
$
|
39,232
|
0.82
|
%
|
|||||
|
By
geographic region (3):
|
|||||||||||||
|
Northwest
|
18
|
%
|
$
|
845,833
|
$
|
23,934
|
2.83
|
%
|
|||||
|
Southwest
|
45
|
%
|
2,141,618
|
7,911
|
0.37
|
%
|
|||||||
|
Mid-North
|
18
|
%
|
880,206
|
1,521
|
0.17
|
%
|
|||||||
|
Mid-South
|
8
|
%
|
378,866
|
2,562
|
0.68
|
%
|
|||||||
|
Northeast
|
7
|
%
|
340,208
|
1,776
|
0.52
|
%
|
|||||||
|
Southeast
|
4
|
%
|
198,252
|
1,528
|
0.77
|
%
|
|||||||
|
Total
|
100
|
%
|
$
|
4,784,983
|
$
|
39,232
|
0.82
|
%
|
|||||
|
By
commodity/collateral type:
|
|||||||||||||
|
Crops
|
41
|
%
|
$
|
1,977,557
|
$
|
13,769
|
0.70
|
%
|
|||||
|
Permanent
plantings
|
24
|
%
|
1,139,782
|
19,344
|
1.70
|
%
|
|||||||
|
Livestock
|
25
|
%
|
1,193,158
|
3,758
|
0.31
|
%
|
|||||||
|
Part-time
farm/rural housing
|
6
|
%
|
292,179
|
2,361
|
0.81
|
%
|
|||||||
|
Ag
storage and processing
|
3
|
%
|
122,038
|
-
|
0.00
|
%
|
|||||||
|
Other
|
1
|
%
|
60,269
|
-
|
0.00
|
%
|
|||||||
|
Total
|
100
|
%
|
$
|
4,784,983
|
$
|
39,232
|
0.82
|
%
|
|||||
|
(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 and LTSPCs as of December
31,
2006, 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
1996
|
$
|
2,749,275
|
$
|
86
|
0.00
|
%
|
||||
|
1996
|
649,677
|
1,503
|
0.23
|
%
|
||||||
|
1997
|
744,004
|
2,513
|
0.34
|
%
|
||||||
|
1998
|
1,111,998
|
3,895
|
0.35
|
%
|
||||||
|
1999
|
1,121,203
|
1,323
|
0.12
|
%
|
||||||
|
2000
|
724,557
|
2,283
|
0.32
|
%
|
||||||
|
2001
|
1,007,796
|
651
|
0.06
|
%
|
||||||
|
2002
|
975,744
|
-
|
0.00
|
%
|
||||||
|
2003
|
803,961
|
-
|
0.00
|
%
|
||||||
|
2004
|
519,784
|
-
|
0.00
|
%
|
||||||
|
2005
|
616,666
|
-
|
0.00
|
%
|
||||||
|
2006
|
432,641
|
-
|
0.00
|
%
|
||||||
|
Total
|
$
|
11,457,306
|
$
|
12,254
|
0.11
|
%
|
||||
|
|
|
|
|
|||||||
|
By
geographic region (2):
|
|
|
|
|||||||
|
Northwest
|
$
|
2,236,299
|
$
|
6,949
|
0.31
|
%
|
||||
|
Southwest
|
4,910,828
|
4,732
|
0.10
|
%
|
||||||
|
Mid-North
|
1,792,254
|
18
|
0.00
|
%
|
||||||
|
Mid-South
|
735,652
|
336
|
0.05
|
%
|
||||||
|
Northeast
|
925,212
|
1
|
0.00
|
%
|
||||||
|
Southeast
|
857,061
|
218
|
0.03
|
%
|
||||||
|
Total
|
$
|
11,457,306
|
$
|
12,254
|
0.11
|
%
|
||||
|
|
|
|
|
|||||||
|
By
commodity/collateral type:
|
|
|
|
|||||||
|
Crops
|
$
|
4,671,245
|
$
|
(19
|
)
|
0.00
|
%
|
|||
|
Permanent
plantings
|
2,784,982
|
9,359
|
0.34
|
%
|
||||||
|
Livestock
|
2,794,356
|
2,708
|
0.10
|
%
|
||||||
|
Part-time
farm/rural housing
|
795,939
|
206
|
0.03
|
%
|
||||||
|
Ag
storage and processing
|
261,365
|
(3)
|
-
|
0.00
|
%
|
|||||
|
Other
|
149,419
|
-
|
0.00
|
%
|
||||||
|
Total
|
$
|
11,457,306
|
$
|
12,254
|
0.11
|
%
|
||||
|
(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, 2006, approximately
$86.1 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 analysis, 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 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 $23.5 million as of December 31, 2006,
and $28.6 million as of December 31, 2005. In addition, during 2006, as
noted above, Farmer Mac guaranteed $1.5 billion principal amount of AgVantage
off-balance sheet securities.
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 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
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 core capital or
$25.0 million. That limitation excludes exposure to agencies of the
U.S. government, GSEs and money market funds. Farmer Mac's policies also
require each investment or issuer of an investment to be highly rated by an
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. 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.
As
of
December 31, 2006, Farmer Mac had cash equivalents and investments in
commercial paper, corporate debt securities, and preferred stock issued by
61 entities totaling $2.3 billion. Farmer Mac’s investments in 29 of these
entities each exceeded 10 percent of Farmer Mac’s core capital (the
cumulative balance of investments in such entities totaled $1.6 billion),
and investments in thirteen of these entities each exceeded 15 percent of
core capital. In addition, as of December 31, 2006, Farmer Mac held
$173.4 million of securities issued by GSEs or agencies of the
U.S. government and $231.9 million in five money market investment
accounts. The maximum amount held in any one money market fund investment fund
at any time during 2006 was approximately $282.3 million. As of
December 31, 2006, 37.4 percent of Farmer Mac’s investment portfolio,
excluding GSE and agency investments, consisted of short-term highly liquid
investments.
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 has a contingency funding
plan to handle unanticipated disruptions in its access to the capital
markets.
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, 2006), 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
2006, 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, 2006, Farmer Mac was in compliance with the authorizations set
forth in its investment guidelines.
The
following table presents Farmer Mac’s five largest investments as of December
31, 2006:
|
|
|
|
|
Security
|
|
|
|
|
|
|
|
|
|
|
Credit
|
|
|
|
|
Investment
|
|
Issuer
|
|
Rating
|
|
Investment
|
|
|
|
|
(in
thousands)
|
|||||||
|
Corporate
Debt
|
|
CFC
1
|
|
A1
|
|
$
500,000
|
2
|
|
|
Columbia
Strategic Cash
|
|
Bank
of America
|
|
AAA
|
|
104,264
|
|
|
|
Preferred
Stock
|
|
CoBank,
ACB
|
|
not
rated 3
|
|
88,500
|
2
|
|
|
Preferred
Stock
|
|
AgFirst
Farm Credit Bank
|
|
not
rated 3
|
|
88,035
|
2
|
|
|
Primary
Fund
|
|
The
Reserve
|
|
AAA
|
|
79,210
|
|
|
|
1
|
CFC
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 regular issuance of discount notes and medium-term notes
and its status as a federally chartered instrumentality of the United States,
Farmer Mac has been able to access the capital markets at favorable rates.
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 swap
market may provide favorable fixed rates, 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.
Farmer
Mac maintains cash and liquidity investments in cash equivalents (including
commercial paper and other short-term money market instruments) and liquid
investment securities that can be drawn upon for liquidity needs. As of December
31, 2006, Farmer Mac’s cash and cash equivalents and liquidity investment
securities were $877.7 million and $1.3 billion, respectively. In addition,
as of December 31, 2006, Farmer Mac held (1) $500.0 million of mission-related
non-program investments issued by CFC and (2) $892.7 million of Farmer Mac
II Guaranteed Securities backed by USDA-guaranteed portions that carry the
full
faith and credit of the United States. Both types of assets could be drawn
upon
as an additional source of liquidity. As of December 31, 2006, the aggregate
of
the Farmer Mac II Guaranteed Securities, mission-related non-program
investments, cash and liquidity investments represented 80 percent of
Farmer Mac’s total liabilities. Farmer Mac has a policy of maintaining a minimum
of 60 days of liquidity and a target of 90 days of liquidity. During 2006,
Farmer Mac maintained an average of greater than 90 days of liquidity.
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, as amended by the 1996 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, 2006
and 2005, 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, 2006 and 2005.
|
December
31, 2006
|
December
31, 2005
|
||||||||||||||||||
|
Amount
|
Ratio
|
Capital
Required
|
Amount
|
Ratio
|
Capital
Required
|
||||||||||||||
|
(dollars
in
thousands)
|
|||||||||||||||||||
|
On-balance
sheet assets as defined for
|
|||||||||||||||||||
|
determining
statutory minimum capital
|
$
|
4,935,181
|
2.75%
|
|
$
|
135,717
|
$
|
4,306,767
|
2.75%
|
|
$
|
118,436
|
|||||||
|
Outstanding
balance of Farmer Mac
|
|||||||||||||||||||
|
Guaranteed
Securities held by others
|
|||||||||||||||||||
|
and
LTSPCs
|
5,152,761
|
0.75%
|
|
38,646
|
3,174,091
|
0.75%
|
|
23,805
|
|||||||||||
|
Derivative
and hedging obligations
|
23,474
|
0.75%
|
|
176
|
29,162
|
0.75%
|
|
219
|
|||||||||||
|
Minimum
capital level
|
174,539
|
142,460
|
|||||||||||||||||
|
Actual
core capital
|
243,533
|
230,785
|
|||||||||||||||||
|
Capital
surplus
|
$
|
68,994
|
$
|
88,325
|
|||||||||||||||
Based
on
the statutory minimum capital requirements, Farmer Mac’s current capital surplus
would support additional guarantee growth in amounts ranging from
$2.5 billion of on-balance sheet guarantees to more than $9.2 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, 2006 was $42.9 million and Farmer Mac’s regulatory capital of
$248.1 million exceeded that amount by approximately $205.2 million. See
“—Regulatory Matters” for a discussion of the pro forma effect of a recent
change to the risk-based capital requirement.
Accordingly,
in the opinion of management, Farmer Mac has sufficient capital and liquidity
for the next 12 months and for the foreseeable future.
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, 2006.
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)
|
$
|
2,449,531
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
2,449,531
|
||||||
|
Medium-term
notes (1)
|
856,150
|
978,000
|
169,675
|
155,000
|
2,158,825
|
|||||||||||
|
Interest
payments on fixed-rate
|
||||||||||||||||
|
medium-term
notes
|
91,055
|
89,904
|
33,969
|
29,011
|
243,939
|
|||||||||||
|
Interest
payments on floating-rate
|
||||||||||||||||
|
medium-term
notes (2)
|
2,009
|
-
|
-
|
-
|
2,009
|
|||||||||||
|
Operating
lease obligations (3)
|
627
|
1,247
|
1,229
|
-
|
3,103
|
|||||||||||
|
Purchase
obligations (4)
|
480
|
141
|
-
|
-
|
621
|
|||||||||||
|
(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, 2006. 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 audit services, consulting services, information technology support,
equipment maintenance, and financial analysis software and services.
The
amounts actually paid under these agreements will likely be higher
due to
the variable components of some of these agreements under which the
ultimate obligation owed is determined by reference to actual usage
or
hours worked. The table does not include amounts due under agreements
that
are cancelable without penalty or further payment as of December
31, 2006
and therefore do not represent enforceable and legally binding
obligations. The table also does not include amounts due under the
terms
of employment agreements with members of senior management; nor does
it
include payments that are based on a varying outstanding loan volume
(such
as servicing fees), as those payments are not known fixed and determinable
contractual obligations.
|
See
the
tables below for information about Farmer Mac’s commitments to purchase loans
and Farmer Mac’s contingent obligations under outstanding Farmer Mac I
Guaranteed Securities and LTSPCs.
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, 2006 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), 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, 2006 and 2005, 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,
|
|||||||
|
|
2006
|
2005
|
|||||
|
|
(in
thousands)
|
||||||
|
|
|
|
|||||
|
LTSPCs
|
$
|
1,969,764
|
$
|
2,329,798
|
|||
|
|
|
|
|||||
|
Mandatory
commitments to
|
|
|
|||||
|
purchase
loans and
|
|
|
|||||
|
USDA-guaranteed
portions
|
12,463
|
11,212
|
|||||
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, 2006 and 2005:
|
Outstanding
Balance of LTSPCs and
|
|||||||
|
Off-Balance
Sheet Farmer Mac Guaranteed Securities
|
|||||||
|
As
of December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
(in
thousands)
|
|||||||
|
Farmer
Mac I Post-1996 Act obligations:
|
|||||||
|
Farmer
Mac I Guaranteed Securities
|
$
|
3,149,895
|
$
|
804,785
|
|||
|
LTSPCs
|
1,969,734
|
2,329,798
|
|||||
|
Total
Farmer Mac I Post-1996 Act obligations
|
5,119,629
|
3,134,583
|
|||||
|
Farmer
Mac II Guaranteed Securities
|
33,132
|
39,508
|
|||||
|
Total
Farmer Mac I and II
|
$
|
5,152,761
|
$
|
3,174,091
|
|||
See
Note
2(c), Note 2(e) and Note 5 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
Regulatory
actions continue to affect Farmer Mac’s business outlook. On September 30, 2005,
the final regulation relating to Farmer Mac’s investments and liquidity became
effective. FCA included several of the revisions to the proposed regulation
suggested by Farmer Mac in comments to the proposal and Farmer Mac expects
to be
able to comply with the regulation in accordance with the timeframes established
in the regulation. Farmer Mac is required to comply with the liquidity
provisions of the regulation by September 30, 2007.
In
the
December 26, 2006 issue of the Federal Register, FCA published a final rule
that
revises certain FCA regulations governing the risk-based capital stress test
applicable to Farmer Mac. FCA’s announcement of the final rule stated
that the revisions were made “in response to changing financial markets, new
business practices and the evolution of the loan portfolio at Farmer Mac, as
well as continued development of industry best practices among leading financial
institutions.” The new risk-based capital rule will become effective March 31,
2007.
Farmer
Mac is required to hold capital at the higher of the statutory minimum capital
requirement or the amount required by the risk-based capital stress test.
As of December 31, 2006, Farmer Mac’s risk-based capital requirement under the
current rule was $42.9 million. If the new risk-based capital rule were in
effect as of December 31, 2006, the risk-based capital requirement would be
$89.6 million. As of December 31, 2006, Farmer Mac held regulatory capital
of $248.1 million, $205.2 million (478 percent) in excess of that
required under the current rule and $158.5 million (177 percent) in
excess of that which would have been required under the new rule, if it had
been
in effect on that date.
Other
Matters
New
Accounting Standards.
In
May
2005, the FASB issued Statement of Financial Accounting Standards No. 154,
Accounting
Changes and Error Corrections
(“SFAS
154”), which replaces Accounting Principles Board (“APB”) Opinion No. 20,
Accounting
Changes,
and
FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements.
SFAS 154 requires retrospective application to prior periods’ financial
statements for changes in accounting principles, unless determination of either
the period specific effects or the cumulative effect of the change is
impracticable or otherwise promulgated. SFAS 154 is effective January 1, 2006.
SFAS 154, upon adoption, did not have a material effect on Farmer Mac’s results
of operations or financial position.
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 is effective for all financial instruments acquired or issued in a
fiscal year beginning after September 15, 2006. SFAS 155 is not expected to
have a material effect on Farmer Mac’s results of operations and 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 Statement of Financial Accounting Standards No. 140,
Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,
for
subsequent measurement. SFAS 156 is effective on January 1, 2007. The adoption
of SFAS 156 is not expected to have a material effect on Farmer Mac’s results of
operations or financial position.
In
July
2006, FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109
(“FIN 48”), which clarifies the accounting for uncertainty in tax
positions. This Interpretation requires the recognition in financial statements
of the impact of a tax position if that position is more likely than not to
be
sustained on audit, based on the technical merits of the position. The
provisions of FIN
48
are effective for fiscal years beginning after December 31, 2006, with the
cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. Farmer Mac is currently evaluating
the
impact, if any, that
FIN
48 will have on its financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, Quantifying
Financial Misstatements (“SAB
108”), which expresses the SEC’s views regarding the process of quantifying
financial statement misstatements. Registrants are required to quantify the
impact of correcting all misstatements, including both the carryover and
reversing effects of prior year misstatements, on the current year financial
statements. The techniques most commonly used in practice to accumulate and
quantify misstatements are generally referred to as the “rollover” (current year
income statement perspective) and “iron curtain” (year-end balance perspective)
approaches. The financial statements require adjustment when either approach
results in quantifying a misstatement that is material, after considering all
relevant quantitative and qualitative factors. SAB 108 is effective for fiscal
years ending after November 15, 2006. SAB 108 did not have a material
effect on Farmer Mac’s results of operations and financial
position.
In
September 2006, the 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, changes the methods used to measure fair value
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. SFAS 157 requires that costs related to acquiring
financial instruments carried at fair value should not be capitalized, but
rather should be expensed as incurred. SFAS 157 also clarifies that an issuer’s
credit standing should be considered when measuring liabilities at fair value.
SFAS 157 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. Farmer Mac is currently evaluating the
potential impact, if any, that the adoption of SFAS 157 will have on its
financial statements.
In
February 2007, the 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 choose to measure many financial
instruments and certain other items at fair value. 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. Farmer Mac is currently evaluating the potential impact that the
adoption of SFAS 159 would have on its financial statements.
| Item 7A. |
Quantitative
and Qualitative Disclosures About Market
Risk
|
Farmer
Mac is exposed to market risk from changes in interest rates. Farmer Mac manages
this market risk by entering into various financial transactions, including
financial derivatives, and by monitoring 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, 2006. 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, 2006
was effective.
Farmer
Mac’s independent registered public accounting firm, Deloitte & Touche LLP,
has audited management’s assessment of the effectiveness of the Corporation’s
internal control over financial reporting as of December 31, 2006, as
stated in their report appearing below.
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To
the
Board of Directors and Stockholders of
Federal
Agricultural Mortgage Corporation
Washington,
DC
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting,
that
the Federal Agricultural Mortgage Corporation and subsidiary (“Farmer Mac”)
maintained effective internal control over financial reporting as of December
31, 2006, based on criteria established in Internal
Control — Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. Farmer
Mac’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management’s assessment and an opinion on the effectiveness of 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, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
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, management’s assessment that Farmer Mac maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated
in
all material respects, based on the criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Also
in
our opinion, Farmer Mac maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006, 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, 2006 of Farmer Mac and our report dated
March 15, 2007 expressed an unqualified opinion on those consolidated
financial statements and included an explanatory paragraph relating to the
Company’s adoption of Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, on January 1, 2006.
/s/
Deloitte & Touche LLP
McLean,
Virginia
March
15,
2007
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, 2006 and
2005, 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, 2006. 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 the Federal Agricultural Mortgage
Corporation and subsidiary at December 31, 2006 and 2005, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2006, 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
the provisions of Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, on January 1, 2006.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Farmer Mac's internal
control over financial reporting as of December 31, 2006, 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 15, 2007 expressed
an unqualified opinion on management's assessment of the effectiveness of Farmer
Mac's internal control over financial reporting and an unqualified opinion
on
the effectiveness of Farmer Mac's internal control over financial
reporting.
/s/
Deloitte & Touche LLP
McLean,
Virginia
March
15,
2007
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION AND
SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
(in
thousands)
|
|||||||
|
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
877,714
|
$
|
458,852
|
|||
|
Investment
securities
|
1,830,904
|
1,621,941
|
|||||
|
Farmer
Mac Guaranteed Securities
|
1,330,418
|
1,330,976
|
|||||
|
Loans
held for sale
|
71,621
|
41,956
|
|||||
|
Loans
held for investment
|
705,745
|
762,436
|
|||||
|
Allowance
for loan losses
|
(1,945
|
)
|
(4,876
|
)
|
|||
|
Loans
held for investment, net
|
703,800
|
757,560
|
|||||
|
Real
estate owned
|
2,097
|
3,532
|
|||||
|
Financial
derivatives
|
9,218
|
8,719
|
|||||
|
Interest
receivable
|
73,545
|
67,509
|
|||||
|
Guarantee
and commitment fees receivable
|
40,743
|
22,170
|
|||||
|
Deferred
tax asset, net
|
6,886
|
3,223
|
|||||
|
Prepaid
expenses and other assets
|
6,727
|
25,007
|
|||||
|
Total
Assets
|
$
|
4,953,673
|
$
|
4,341,445
|
|||
|
Liabilities
and Stockholders' Equity:
|
|||||||
|
Liabilities:
|
|||||||
|
Notes
payable:
|
|||||||
|
Due
within one year
|
$
|
3,298,097
|
$
|
2,587,704
|
|||
|
Due
after one year
|
1,296,691
|
1,406,527
|
|||||
|
Total
notes payable
|
4,594,788
|
3,994,231
|
|||||
|
Financial
derivatives
|
23,474
|
29,162
|
|||||
|
Accrued
interest payable
|
36,125
|
29,250
|
|||||
|
Guarantee
and commitment obligation
|
35,359
|
17,625
|
|||||
|
Accounts
payable and accrued expenses
|
12,828
|
21,371
|
|||||
|
Reserve
for losses
|
2,610
|
3,777
|
|||||
|
Total
Liabilities
|
4,705,184
|
4,095,416
|
|||||
|
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,
|
|||||||
|
9,075,862
and 9,559,554 shares issued and outstanding
|
|||||||
|
as
of December 31, 2006 and 2005, respectively
|
9,076
|
9,560
|
|||||
|
Additional
paid-in capital
|
85,349
|
83,058
|
|||||
|
Accumulated
other comprehensive income
|
4,956
|
15,247
|
|||||
|
Retained
earnings
|
112,577
|
101,633
|
|||||
|
Total
Stockholders' Equity
|
248,489
|
246,029
|
|||||
|
|
|||||||
|
Total
Liabilities and Stockholders' Equity
|
$
|
4,953,673
|
$
|
4,341,445
|
|||
|
See
accompanying notes to consolidated financial statements.
|
|||||||
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION AND
SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For
Year Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
thousands, except per share amounts)
|
||||||||||
|
Interest
income:
|
||||||||||
|
Investments
and cash equivalents
|
$
|
128,199
|
$
|
70,414
|
$
|
36,386
|
||||
|
Farmer
Mac Guaranteed Securities
|
75,437
|
73,389
|
75,129
|
|||||||
|
Loans
|
46,286
|
48,769
|
51,386
|
|||||||
|
Total
interest income
|
249,922
|
192,572
|
162,901
|
|||||||
|
Total
interest expense
|
211,632
|
141,937
|
95,549
|
|||||||
|
Net
interest income
|
38,290
|
50,635
|
67,352
|
|||||||
|
Recovery/(provision)
for loan losses
|
2,396
|
54
|
(1,589
|
)
|
||||||
|
Net
interest income after recovery/(provision)
|
||||||||||
|
for
loan losses
|
40,686
|
50,689
|
65,763
|
|||||||
|
Non-interest
income:
|
||||||||||
|
Guarantee
and commitment fees
|
21,815
|
19,554
|
20,977
|
|||||||
|
Gains/(losses)
on financial derivatives and trading assets
|
1,617
|
11,537
|
(14,687
|
)
|
||||||
|
Gains
on sale of available-for-sale investment securities
|
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
|
809
|
34
|
523
|
|||||||
|
Representation
and warranty claims income
|
718
|
79
|
2,816
|
|||||||
|
Other
income
|
1,001
|
1,872
|
1,295
|
|||||||
|
Non-interest
income
|
27,110
|
33,192
|
11,491
|
|||||||
|
Non-interest
expense:
|
||||||||||
|
Compensation
and employee benefits
|
11,901
|
8,215
|
7,036
|
|||||||
|
General
and administrative
|
9,769
|
9,697
|
8,800
|
|||||||
|
Regulatory
fees
|
2,313
|
2,316
|
2,141
|
|||||||
|
Real
estate owned operating costs, net
|
123
|
13
|
287
|
|||||||
|
Provision/(recovery)
for losses
|
(1,012
|
)
|
(8,723
|
)
|
(2,001
|
)
|
||||
|
Non-interest
expense
|
23,094
|
11,518
|
16,263
|
|||||||
|
Income
before income taxes
|
44,702
|
72,363
|
60,991
|
|||||||
|
Income
tax expense
|
12,689
|
23,091
|
19,751
|
|||||||
|
Net
income
|
32,013
|
49,272
|
41,240
|
|||||||
|
Preferred
stock dividends
|
(2,240
|
)
|
(2,240
|
)
|
(2,240
|
)
|
||||
|
Net
income available to common stockholders
|
$
|
29,773
|
$
|
47,032
|
$
|
39,000
|
||||
|
Earnings
per common share:
|
||||||||||
|
Basic
earnings per common share
|
$
|
2.74
|
$
|
4.14
|
$
|
3.24
|
||||
|
Diluted
earnings per common share
|
$
|
2.68
|
$
|
4.09
|
$
|
3.20
|
||||
|
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,
|
|
||||||||||||||||||
|
|
|
2006
|
|
2005
|
|
2004
|
|
||||||||||||
|
|
|
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
|
11,091
|
$
|
11,091
|
11,822
|
$
|
11,822
|
12,054
|
$
|
12,054
|
||||||||||
|
Issuance
of class C common stock
|
3
|
3
|
3
|
3
|
2
|
2
|
|||||||||||||
|
Repurchase
and retirement of class C
|
|||||||||||||||||||
|
common
stock
|
(815
|
)
|
(815
|
)
|
(800
|
)
|
(800
|
)
|
(299
|
)
|
(299
|
)
|
|||||||
|
Exercise
of stock options
|
328
|
328
|
66
|
66
|
65
|
65
|
|||||||||||||
|
Balance,
end of year
|
10,607
|
$
|
10,607
|
11,091
|
$
|
11,091
|
11,822
|
$
|
11,822
|
||||||||||
|
Additional
paid-in capital:
|
|||||||||||||||||||
|
Balance,
beginning of year
|
$
|
83,058
|
$
|
87,777
|
$
|
88,652
|
|||||||||||||
|
Stock-based
compensation expense
|
2,436
|
-
|
-
|
||||||||||||||||
|
Issuance
of class C common stock
|
70
|
57
|
88
|
||||||||||||||||
|
Repurchase
and retirement of class C
|
|||||||||||||||||||
|
common
stock
|
(6,625
|
)
|
(5,879
|
)
|
(2,190
|
)
|
|||||||||||||
|
Exercise
of stock options
|
6,410
|
1,103
|
1,227
|
||||||||||||||||
|
Balance,
end of year
|
$
|
85,349
|
$
|
83,058
|
$
|
87,777
|
|||||||||||||
|
Retained
earnings:
|
|||||||||||||||||||
|
Balance,
beginning of year
|
$
|
101,633
|
$
|
69,359
|
$
|
35,295
|
|||||||||||||
|
Net
income
|
32,013
|
49,272
|
41,240
|
||||||||||||||||
|
Preferred
stock dividends
|
(2,240
|
)
|
(2,240
|
)
|
(2,240
|
)
|
|||||||||||||
|
Common
stock dividends
|
(4,334
|
)
|
(4,520
|
)
|
(1,183
|
)
|
|||||||||||||
|
Repurchase
and retirement of class C
|
|||||||||||||||||||
|
common
stock
|
(14,495
|
)
|
(10,238
|
)
|
(3,753
|
)
|
|||||||||||||
|
Balance,
end of year
|
$
|
112,577
|
$
|
101,633
|
$
|
69,359
|
|||||||||||||
|
Accumulated
other comprehensive income:
|
|||||||||||||||||||
|
Balance,
beginning of year
|
$
|
15,247
|
$
|
31,276
|
$
|
39,491
|
|||||||||||||
|
Change
in unrealized gain on available-for-sale
|
|||||||||||||||||||
|
investment
securities, net of tax
|
(10,835
|
)
|
(16,722
|
)
|
(9,714
|
)
|
|||||||||||||
|
Change
in unrealized gain/loss on financial
|
|||||||||||||||||||
|
derivatives,
net of tax
|
544
|
693
|
1,499
|
||||||||||||||||
|
Balance,
end of year
|
$
|
4,956
|
$
|
15,247
|
$
|
31,276
|
|||||||||||||
|
Total
Stockholders' Equity
|
$
|
248,489
|
$
|
246,029
|
$
|
235,234
|
|||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||
|
Net
income
|
$
|
32,013
|
$
|
49,272
|
$
|
41,240
|
|||||||||||||
|
Changes
in accumulated other comprehensive
|
|||||||||||||||||||
|
income,
net of tax
|
(10,291
|
)
|
(16,029
|
)
|
(8,215
|
)
|
|||||||||||||
|
Comprehensive
Income
|
$
|
21,722
|
$
|
33,243
|
$
|
33,025
|
|||||||||||||
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION AND
SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
For
Year Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
thousands)
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income
|
$
|
32,013
|
$
|
49,272
|
$
|
41,240
|
||||
|
Adjustments
to reconcile net income to net cash provided by/
|
||||||||||
|
(used
in) operating activities:
|
||||||||||
|
Net
amortization of premiums and discounts on loans and
investments
|
(2,459
|
)
|
2,401
|
2,564
|
||||||
|
Amortization
of debt premiums, discounts and issuance costs
|
129,390
|
65,411
|
30,687
|
|||||||
|
Proceeds
from repayment of trading investment securities
|
1,776
|
2,812
|
4,617
|
|||||||
|
Purchases
of loans held for sale
|
(53,108
|
)
|
(88,375
|
)
|
(70,524
|
)
|
||||
|
Proceeds
from repayment of loans held for sale
|
8,963
|
11,641
|
11,194
|
|||||||
|
Net
change in fair value of trading securities and financial
derivatives
|
(6,197
|
)
|
(25,738
|
)
|
(20,371
|
)
|
||||
|
Amortization
of SFAS 133 transition adjustment on financial derivatives
|
544
|
693
|
1,499
|
|||||||
|
Gain
on the sale of Farmer Mac Guaranteed Securities
|
-
|
-
|
(367
|
)
|
||||||
|
Gains
on the sale of available-for-sale investment securities
|
(1,150
|
)
|
-
|
(200
|
)
|
|||||
|
Gains
on the sale of real estate owned
|
(809
|
)
|
(34
|
)
|
(523
|
)
|
||||
|
Total
(recovery)/provision for losses
|
(3,408
|
)
|
(8,777
|
)
|
(412
|
)
|
||||
|
Deferred
income taxes
|
2,171
|
12,459
|
8,171
|
|||||||
|
Stock-based
compensation expense
|
2,436
|
-
|
-
|
|||||||
|
(Increase)/decrease
in interest receivable
|
(6,036
|
)
|
(9,379
|
)
|
292
|
|||||
|
Increase
in guarantee and commitment fees receivable
|
(18,573
|
)
|
(2,299
|
)
|
(2,986
|
)
|
||||
|
(Increase)/decrease
in other assets
|
33,152
|
(16,354
|
)
|
6,079
|
||||||
|
Increase/(decrease)
in accrued interest payable
|
6,875
|
3,739
|
(831
|
)
|
||||||
|
Decrease
in other liabilities
|
(9,497
|
)
|
(3,616
|
)
|
(12,995
|
)
|
||||
|
Net
cash provided by/(used in) operating activities
|
116,083
|
(6,144
|
)
|
(2,866
|
)
|
|||||
|
Cash
flows from investing activities:
|
||||||||||
|
Purchases
of available-for-sale investment securities
|
(3,983,479
|
)
|
(2,215,207
|
)
|
(598,858
|
)
|
||||
|
Purchases
of Farmer Mac II Guaranteed Securities and
|
||||||||||
|
AgVantage
Farmer Mac Guaranteed Securities
|
(241,323
|
)
|
(216,436
|
)
|
(225,591
|
)
|
||||
|
Purchases
of loans held for investment
|
(45,565
|
)
|
(21,681
|
)
|
(33,881
|
)
|
||||
|
Purchases
of defaulted loans
|
(9,623
|
)
|
(10,911
|
)
|
(12,783
|
)
|
||||
|
Proceeds
from repayment of investment securities
|
3,470,455
|
1,641,143
|
494,455
|
|||||||
|
Proceeds
from repayment of Farmer Mac Guaranteed Securities
|
227,008
|
238,723
|
257,374
|
|||||||
|
Proceeds
from repayment of loans
|
120,039
|
140,761
|
145,536
|
|||||||
|
Proceeds
from sale of available-for-sale investment
securities
|
308,578
|
-
|
121,100
|
|||||||
|
Proceeds
from sale of Farmer Mac Guaranteed Securities
|
3,994
|
53,315
|
142,523
|
|||||||
|
Proceeds
from sale of real estate owned
|
3,440
|
3,112
|
12,482
|
|||||||
|
Net
cash (used in)/provided by investing activities
|
(146,476
|
)
|
(387,181
|
)
|
302,357
|
|||||
|
Cash
flows from financing activities:
|
||||||||||
|
Proceeds
from issuance of discount notes
|
90,259,882
|
49,707,010
|
58,532,700
|
|||||||
|
Proceeds
from issuance of medium-term notes
|
772,667
|
825,527
|
675,782
|
|||||||
|
Payments
to redeem discount notes
|
(90,278,381
|
)
|
(49,226,177
|
)
|
(59,414,100
|
)
|
||||
|
Payments
to redeem medium-term notes
|
(283,000
|
)
|
(862,240
|
)
|
(278,760
|
)
|
||||
|
Tax
benefit from tax deductions in excess of compensation cost
recognized
|
1,220
|
-
|
-
|
|||||||
|
Proceeds
from common stock issuance
|
5,376
|
1,227
|
1,382
|
|||||||
|
Purchases
of common stock
|
(21,935
|
)
|
(16,914
|
)
|
(6,242
|
)
|
||||
|
Dividends
paid
|
(6,574
|
)
|
(6,760
|
)
|
(3,423
|
)
|
||||
|
Net
cash provided by/(used in) financing activities
|
449,255
|
421,673
|
(492,661
|
)
|
||||||
|
Net
increase/(decrease) in cash and cash equivalents
|
418,862
|
28,348
|
(193,170
|
)
|
||||||
|
Cash
and cash equivalents at beginning of period
|
458,852
|
430,504
|
623,674
|
|||||||
|
Cash
and cash equivalents at end of period
|
$
|
877,714
|
$
|
458,852
|
$
|
430,504
|
||||
See
accompanying notes to consolidated financial statements.
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2006, 2005 and 2004
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, 2006, outstanding loans held by Farmer Mac
and
loans that either back Farmer Mac Guaranteed Securities or are subject to LTSPCs
totaled $7.2 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, 2006, Farmer Mac had outstanding $2.4 billion of discount notes
and
$2.2 billion of medium-term notes. During 2006, the Corporation continued
its strategy of regularly issuing debt 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. 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) 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
Farmer
Mac considers highly liquid investment securities with maturities of three
months or less at the time of purchase to be cash equivalents. Changes in the
balance of cash and cash equivalents are reported in the consolidated statements
of cash flows. The following table sets forth information regarding certain
cash
and non-cash transactions for the years ended December 31, 2006, 2005 and
2004.
|
For
the Year Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
thousands)
|
||||||||||
|
Cash
paid during the year for:
|
||||||||||
|
Interest
|
$
|
80,211
|
$
|
74,701
|
$
|
71,016
|
||||
|
Income
taxes
|
10,500
|
10,500
|
9,000
|
|||||||
|
Non-cash
activity:
|
||||||||||
|
Real
estate owned acquired through foreclosure
|
1,384
|
2,992
|
5,339
|
|||||||
|
Loans
acquired and securitized as Farmer Mac
|
||||||||||
|
Guaranteed
Securities
|
3,994
|
53,315
|
103,150
|
|||||||
|
Loans
previously under LTSPCs exchanged for
|
||||||||||
|
Farmer
Mac Guaranteed Securities
|
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 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. The net
unamortized purchase premiums as of December 31, 2006 and 2005 were
$5.8 million and $7.6 million, respectively. 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.
(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
FASB 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 2004, Farmer Mac realized $0.4 million gain on sale of loans securitized
and
accounted for as sales under SFAS 140. In 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 and 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 loan
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. These transactions also may provide
an overall lower effective cost of borrowing than would otherwise be available
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
Farmer
Mac maintains an allowance for losses to cover estimated probable losses on
loans held for investment, real estate owned and loans underlying post-1996
Act
Farmer Mac I Guaranteed Securities and LTSPCs 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.
Prior
to
September 30, 2005, Farmer Mac estimated its inherent probable losses using
a
systematic process that began with management’s evaluation of the results of a
proprietary loan pool simulation and guarantee fee model. That model drew upon
historical information from a data set of agricultural mortgage loans screened
to include only those loans with credit characteristics similar to those
eligible for Farmer Mac’s programs. The model offered historical loss experience
on agricultural mortgage loans similar to those on which Farmer Mac had assumed
credit risk, but over a longer term than Farmer Mac’s own experience. The
results generated by that model were then modified, as necessary, by the
application of management’s judgment. Prior to September 30, 2005, Farmer Mac
did not believe that its own historical portfolio lending and loss experience
was statistically sufficient to estimate the inherent probable losses in its
portfolio.
As
of
September 30, 2005, Farmer Mac believed it had accumulated and analyzed
sufficient data from its own historical portfolio lending, loss experience,
and
credit trends to estimate its inherent probable losses based upon its own
historical experience. Farmer Mac believes that estimating its allowance for
losses based on data derived from its own portfolio reflects the characteristics
of credit trends within the portfolio. Farmer Mac recorded the effects of that
change as a change in accounting estimate, which resulted in a $4.8 million
decrease in the allowance for losses as of September 30,
2005.
Farmer
Mac’s current 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
current 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; and
|
|
·
|
historical
charge-off and recovery activities of the portfolio.
|
If,
based
on that evaluation, management concludes that the assumption is not valid due
to
other more compelling indicators, the loss allowance calculation is modified
by
the addition of further assumptions 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
inherent 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.
No
allowance for losses has been made for loans underlying Farmer Mac I Guaranteed
Securities issued prior to the 1996 Act, AgVantage securities or Farmer Mac
II
Guaranteed Securities. Farmer Mac I Guaranteed Securities issued prior to
the 1996 Act are supported by unguaranteed first loss subordinated interests,
which are expected to exceed the estimated credit losses on those loans. 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,
2006, 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. 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, 2006, Farmer Mac had not experienced any credit losses on any
Farmer Mac I Guaranteed Securities issued prior to the 1996 Act, AgVantage
securities or 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 is 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, 2006, 2005 and 2004.
|
For
the Year Ended December 31,
|
||||||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||
|
Basic
EPS
|
Dilutive
stock options
|
Diluted
EPS
|
Basic
EPS
|
Dilutive
stock options
|
Diluted
EPS
|
Basic
EPS
|
Dilutive
stock options
|
Diluted
EPS
|
||||||||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||||||||||
|
Net
income available to
|
$
|
29,773
|
$
|
29,773
|
$
|
47,032
|
$
|
47,032
|
$
|
39,000
|
$
|
39,000
|
||||||||||||||||
|
common
stockholders
|
||||||||||||||||||||||||||||
|
Weighted-average
|
10,868
|
253
|
11,121
|
11,352
|
149
|
11,501
|
12,036
|
143
|
12,179
|
|||||||||||||||||||
|
shares
|
||||||||||||||||||||||||||||
|
Earnings
per
|
||||||||||||||||||||||||||||
|
common
share
|
$
|
2.74
|
$
|
2.68
|
$
|
4.14
|
$
|
4.09
|
$
|
3.24
|
$
|
3.20
|
||||||||||||||||
(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 $1.7 million
of compensation expense during 2006, related to the non-vested portion of
previously issued stock option awards that were outstanding as of the initial
date of adoption. Additionally, Farmer Mac recognized $0.7 million of
compensation expense related to stock options awarded during 2006. The effect
of
the recognition of compensation expense resulting from stock options on diluted
EPS for 2006 was a reduction of $0.14 per diluted share. 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
(“APB 25”), and had adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation,
as
amended (“SFAS 123”).
Accordingly, no compensation expense was recognized in 2005 and 2004 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 share for 2005 and 2004 would have been reduced
to
the pro forma amounts indicated in the following table:
|
For
the Year Ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
(in
thousands, except per share amounts)
|
|||||||
|
Net
income available to common
|
|||||||
|
stockholders,
as reported
|
$
|
47,032
|
$
|
39,000
|
|||
|
Add
back: Restricted stock
|
|||||||
|
compensation
expense included in
|
|||||||
|
reported
net income, net of taxes
|
-
|
15
|
|||||
|
Deduct:
Total stock-based
|
|||||||
|
compensation
expense determined
|
|||||||
|
under
fair value-based method
|
|||||||
|
for
all awards, net of tax
|
(2,132
|
)
|
(1,647
|
)
|
|||
|
Pro
forma net income available to
|
|||||||
|
common
stockholders
|
$
|
44,900
|
$
|
37,368
|
|||
|
Earnings
per share:
|
|||||||
|
Basic
- as reported
|
$
|
4.14
|
$
|
3.24
|
|||
|
Basic
- pro forma
|
3.96
|
3.10
|
|||||
|
Diluted
- as reported
|
$
|
4.09
|
$
|
3.20
|
|||
|
Diluted
- pro forma
|
3.90
|
3.07
|
|||||
The underlying assumptions to these fair value calculations are presented in Note 9.
As
of
December 31, 2006, there was $2.0 million
of total unrecognized compensation cost related to stock options outstanding
and
unvested as of December 31, 2005. Of that cost, $1.4 million and
$0.5 million
is expected to be recognized in 2007 and 2008, respectively.
(n) Accumulated
Other Comprehensive Income
The
following table presents Farmer Mac’s accumulated other comprehensive income as
of December 31, 2006, 2005 and 2004.
|
As
of December 31,
|
|
|||||||||
|
|
|
2006
|
|
2005
|
|
2004
|
||||
|
(in
thousands)
|
||||||||||
|
Available
for sale securities:
|
||||||||||
|
Beginning
balance
|
$
|
16,637
|
$
|
33,359
|
$
|
43,073
|
||||
|
Net
unrealized holding (losses) gains, net of tax
|
(10,835
|
)
|
(16,722
|
)
|
(9,561
|
)
|
||||
|
Net
reclassification adjustment for realized (gains) losses
|
||||||||||
|
included
in net income, net of tax
|
-
|
-
|
(153
|
)
|
||||||
|
Ending
balance
|
$
|
5,802
|
$
|
16,637
|
$
|
33,359
|
||||
|
Financial
Derivatives:
|
||||||||||
|
Beginning
balance
|
$
|
(1,390
|
)
|
$
|
(2,083
|
)
|
$
|
(3,582
|
)
|
|
|
Amortization
of SFAS 133 transition adjustment on financial
|
||||||||||
|
derivatives,
net of tax
|
544
|
693
|
1,499
|
|||||||
|
Ending
balance
|
$
|
(846
|
)
|
$
|
(1,390
|
)
|
$
|
(2,083
|
)
|
|
|
Accumulated
other comprehensive income, net of tax
|
$
|
4,956
|
$
|
15,247
|
$
|
31,276
|
||||
Comprehensive
income represents all changes in stockholders’ equity except those resulting
from investments by or distributions to stockholders, and is comprised primarily
of net income available to common stockholders and unrealized gains and losses
on securities available-for-sale net of related taxes. Comprehensive income
was
$21.7 million, $33.2 million and $33.0 million for each of the years ended
December 31, 2006, 2005 and 2004, respectively.
(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
May
2005, the FASB issued Statement of Financial Accounting Standards No. 154,
Accounting
Changes and Error Corrections
(“SFAS 154”), which replaces Accounting Principles Board (“APB”) Opinion
No. 20, Accounting
Changes,
and
FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements.
SFAS 154 requires retrospective application to prior periods’ financial
statements for changes in accounting principles, unless determination of either
the period specific effects or the cumulative effect of the change is
impracticable or otherwise promulgated. SFAS 154 is effective January 1, 2006.
SFAS 154, upon adoption, did not have a material effect on Farmer Mac’s results
of operations or financial position.
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.”
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 SFAS 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 is effective for all financial instruments acquired or issued in a
fiscal year beginning after September 15, 2006. SFAS 155 is not expected to
have a material effect on Farmer Mac’s results of operations and 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 Statement of Financial Accounting Standards No. 140,
Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,
for
subsequent measurement. SFAS 156 is effective on January 1, 2007. The
adoption of SFAS 156 is not expected to have a material effect on Farmer Mac’s
results of operations or financial position.
In
July
2006, FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109
(“FIN 48”), which clarifies the accounting for uncertainty in tax
positions. This Interpretation requires the recognition in financial statements
of the impact of a tax position if that position is more likely than not to
be
sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective for fiscal years beginning after December
31,
2006, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. Farmer Mac is currently
evaluating the impact, if any, that FIN 48 will have on its financial
statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”),
Quantifying
Financial Misstatements,
which
expresses the SEC’s views regarding the process of quantifying financial
statement misstatements. Registrants are required to quantify the impact of
correcting all misstatements, including both the carryover and reversing effects
of prior year misstatements, on the current year financial statements. The
techniques most commonly used in practice to accumulate and quantify
misstatements are generally referred to as the “rollover” (current year income
statement perspective) and “iron curtain” (year-end balance perspective)
approaches. The financial statements require adjustment when either approach
results in quantifying a misstatement that is material, after considering all
relevant quantitative and qualitative factors. SAB 108 is effective for fiscal
years ending after November 15, 2006. SAB 108 did not have a material
effect on Farmer Mac’s results of operations and financial
position.
In
September 2006, the 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, changes the methods used to measure fair value
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. SFAS 157 requires that costs related to acquiring
financial instruments carried at fair value should not be capitalized, but
rather should be expensed as incurred. SFAS 157 also clarifies that an issuer’s
credit standing should be considered when measuring liabilities at fair value.
SFAS 157 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. Farmer Mac is currently evaluating the
potential impact, if any, that the adoption of SFAS 157 will have on its
financial statements.
In
February 2007, the 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 choose to measure many financial
instruments and certain other items at fair value. 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. Farmer Mac is currently evaluating the potential impact that the
adoption of SFAS 159 would have on its financial statements.
(q) Reclassifications
Certain
reclassifications of prior year information were made to conform to the 2006
presentation.
3. RELATED
PARTY TRANSACTIONS
As
provided by Farmer Mac’s statutory charter, only banks, insurance companies and
other financial institutions or similar entities may hold Farmer Mac’s Class A
voting common stock and only institutions of the Farm Credit System may hold
Farmer Mac’s Class B voting common stock. Farmer Mac’s statutory charter also
provides that Class A stockholders elect five members of Farmer Mac’s 15-member
board of directors and that Class B stockholders elect five members of the
board
of directors. Additionally, in order to participate in the Farmer Mac I program,
a financial institution must own a requisite amount of Farmer Mac Class A
or Class B voting common stock, based on the size and type of institution.
As a
result of these requirements, Farmer Mac conducts business with related parties
in the normal course of Farmer Mac’s business. Although Farmer Mac conducted
business during 2006 with Farm Credit West, ACA, information about those
transactions is not included below because that institution was not a related
party during that year. Likewise, Farmer Mac conducted business during 2004
with
Sacramento Valley Farm Credit, ACA; however, information about those
transactions is not included below because that institution was not a related
party during that year.
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. During 2005, Farmer Mac purchased newly originated and current seasoned
eligible loans from 41 entities (the top ten institutions generated
85.7 percent of the purchase volume), placed loans under LTSPCs with 14
entities and conducted Farmer Mac II transactions with 120 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 2006, 2005 and 2004 is presented
below:
|
For
the Year Ended December 31,
|
|||||||||||||||||||
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
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
|
53
|
$
|
26,647
|
54
|
$
|
32,635
|
338
|
$
|
95,528
|
||||||||||
|
AgStar
Financial Services, ACA
|
1,437
|
232,317
|
1,166
|
193,078
|
35
|
11,573
|
|||||||||||||
|
Farm
Credit Bank of Texas
|
354
|
179,880
|
106
|
45,941
|
294
|
67,530
|
|||||||||||||
|
Farm
Credit West, ACA or its affiliates
|
-
|
-
|
-
|
-
|
87
|
89,569
|
|||||||||||||
|
Sacramento
Valley Farm Credit, ACA
|
2
|
7,151
|
6
|
6,622
|
-
|
-
|
|||||||||||||
|
As
of December 31,
|
|||||||||||||
|
2006
|
2005
|
||||||||||||
|
Aggregate
|
Aggregate
|
||||||||||||
|
Number
of
|
Principal
|
Number
of
|
Principal
|
||||||||||
|
Loans
|
Balance
|
Loans
|
Balance
|
||||||||||
|
(dollars
in thousands)
|
|||||||||||||
|
Aggregate
LTSPCs outstanding:
|
|||||||||||||
|
AgFirst
Farm Credit Bank
|
2,617
|
$
|
376,230
|
3,009
|
$
|
430,544
|
|||||||
|
AgStar
Financial Services, ACA *
|
1,469
|
220,555
|
3,974
|
382,455
|
|||||||||
|
Farm
Credit Bank of Texas
|
819
|
263,065
|
568
|
122,197
|
|||||||||
|
Farm
Credit West, ACA or its affiliates
|
-
|
-
|
185
|
146,369
|
|||||||||
|
Sacramento
Valley Farm Credit, ACA **
|
6
|
7,044
|
330
|
144,472
|
|||||||||
|
*
|
During
third quarter 2006, AgStar Financial Services, ACA converted $341.2
million of existing LTSPCs to Farmer Mac I Guaranteed Securities.
The
outstanding principal balance of those securities was $320.1 million
as of December 31, 2006.
|
|||||||
|
**
|
During
fourth quarter 2006, Sacramento Valley Farm Credit, ACA converted
$129.0
million of existing LTSPCs to Farmer Mac I Guaranteed Securities.
The
outstanding principal balance of those securities was $125.6 million
as of December 31, 2006.
|
|||||||
[
|
For
the Year Ended December 31,
|
||||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
|
(in
thousands)
|
|||||||||
|
Commitment
fees received by Farmer Mac:
|
|
|
|
|||||||
|
AgFirst
Farm Credit Bank
|
$
|
1,836
|
$
|
2,164
|
$
|
2,428
|
||||
|
AgStar
Financial Services, ACA
|
964
|
1,096
|
1,112
|
|||||||
|
Farm
Credit Bank of Texas
|
698
|
512
|
423
|
|||||||
|
Farm
Credit West, ACA or its affiliates
|
-
|
801
|
1,046
|
|||||||
|
Sacramento
Valley Farm Credit, ACA
|
631
|
736
|
-
|
|||||||
As
of
December 31, 2006 and 2005, Farmer Mac had the following commitment fees
receivable from related parties:
|
|
As
of December 31,
|
||||||
|
|
2006
|
2005
|
|||||
|
|
(in
thousands)
|
||||||
|
AgFirst
Farm Credit Bank
|
$
|
278
|
$
|
337
|
|||
|
AgStar
Financial Services, ACA
|
64
|
134
|
|||||
|
Farm
Credit Bank of Texas
|
77
|
46
|
|||||
|
Farm
Credit West, ACA or its affiliates
|
-
|
63
|
|||||
|
Sacramento
Valley Farm Credit, ACA
|
3
|
60
|
|||||
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 2006, 2005 and 2004:
|
For
the Year Ended December 31,
|
|||||||||||||||||||
|
|
2006
|
2005
|
2004
|
||||||||||||||||
|
|
|
Aggregate
|
|
Aggregate
|
|
Aggregate
|
|||||||||||||
|
|
Number
|
Principal
|
Number
|
Principal
|
Number
|
Principal
|
|||||||||||||
|
|
of
Loans
|
Balance
|
of
Loans
|
Balance
|
of
Loans
|
Balance
|
|||||||||||||
|
|
(dollars
in thousands)
|
||||||||||||||||||
|
Purchases:
|
|
|
|
|
|
|
|||||||||||||
|
Loans
|
65
|
$
|
26,195
|
68
|
$
|
24,532
|
75
|
$
|
34,403
|
||||||||||
|
USDA-guaranteed
portions
|
25
|
6,143
|
52
|
11,131
|
27
|
6,545
|
|||||||||||||
|
Sales
of Farmer Mac
|
|
|
|
|
|
|
|||||||||||||
|
Guaranteed
Securities
|
|
-
|
|
46,720
|
|
64,458
|
|||||||||||||
The
purchases of loans from Zions under the Farmer Mac I program represented
approximately 26.6 percent, 22.3 percent and 33.0 percent of Farmer Mac I
loan purchase volume for the years ended December 31, 2006, 2005 and 2004,
respectively. Those purchases represented 0.9 percent, 3.2 percent, and 5.1
percent of total program volume, respectively. The purchases of USDA-guaranteed
portions under the Farmer Mac II program from Zions represented approximately
2.6 percent, 5.6 percent and 3.8 percent of that program’s volume for the
years ended December 31, 2006, 2005 and 2004, respectively.
Farmer
Mac or Zions received the applicable amounts shown below with respect to
transactions between the two parties in 2006, 2005 and 2004:
|
For
the Year Ended December 31,
|
||||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
|
(in
thousands)
|
|||||||||
|
Guarantee
fees received by Farmer Mac
|
$
|
2,260
|
$
|
2,406
|
$
|
2,996
|
||||
|
Servicing
fees received by Zions
|
1,594
|
1,496
|
1,855
|
|||||||
|
Underwriting
and loan file review fees received by Zions
|
16
|
10
|
18
|
|||||||
|
Audit
fees for review of servicing reimbursed to Zions
|
-
|
7
|
-
|
|||||||
|
Litigation
expenses reimbursed to Zions
|
5
|
6
|
-
|
|||||||
|
Discount
note commissions received by Zions
|
19
|
40
|
31
|
|||||||
During
second quarter 2004, Farmer
Mac and Zions modified their central servicing agreement to increase the
compensation to Zions thereunder, commensurate with increased responsibilities,
and to transfer from Zions to Farmer Mac the responsibility for advancing
against delinquent loan payments (and the related income from penalty interest
and late fees) and Farmer Mac paid servicing fee compensation to Zions for
increased expenses of training its loan servicing personnel. At
the
same time, Zions
paid Farmer Mac $0.3 million in settlement of an earlier representation and
warranty claim related to a Farmer Mac I loan sold by Zions to Farmer
Mac. Zions
received commissions for acting as dealer with respect to approximately $737.5
million, $1.6 billion and $512.0 million par value of Farmer Mac discount
notes during 2006, 2005 and 2004, respectively.
Farmer
Mac and Zions were parties to interest rate swap contracts having an aggregate
outstanding notional principal amount of approximately $193.0 million and
$225.6 million as of December 31, 2006 and 2005, respectively.
As
of
December 31, 2006 and 2005, Farmer Mac had net interest payable to Zions under
those contracts of approximately $1.6 million and $2.2 million,
respectively. As of December 31, 2006, Zions pledged $3.3 million of securities
as collateral under those contracts. No collateral was pledged as of December
31, 2005.
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
2006 and 2005, Farmer Mac paid Zions $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. 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.
Farmer
Mac did not purchase any loans from AgFirst in 2006 and 2005, and purchased
1
loan for $1.2 million in 2004. In 2006, 2005 and 2004, AgFirst received $39,000,
$0.3 million and $0.4 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, 2006 and 2005, the outstanding balance of those securities owned by AgFirst
was $601.0 million and $686.2 million, respectively. Farmer Mac received
guarantee fees of $0.3 million and $0.2 million for each of 2006 and 2005,
respectively, with respect to those securities.
In
2006
and 2005, Farmer Mac paid AgFirst $1,000 and $1,300, respectively, for marketing
expenses related to Farmer Mac programs.
During
2004, Farmer Mac sold to AgFirst $26.9 million of Farmer Mac I Guaranteed
Securities at a gain of $0.4 million. In 2006, 2005 and 2004, Farmer Mac
received guarantee fees of $87,000, $147,000 and $394,000, 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,
2006,
2005 and 2004.
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 2006, Farmer Mac paid AgStar $3,000 for marketing
expenses related to Farmer Mac programs.
In
2006
and 2005, AgStar received $0.8 million and $0.3 million, respectively in
servicing fees for its work as a Farmer Mac central servicer. AgStar
did not act as a Farmer Mac central servicer in 2004.
In
2006
and 2005, Farmer Mac purchased $3.6 million and $2.1 million principal amount
of
loans, respectively, from AgStar under the Farmer Mac I program. There were
no
such purchases in 2004.
During
2006, 2005 and 2004, Farmer Mac sold Farmer Mac I Guaranteed Securities to
AgStar in the amount of $4.0 million, $6.6 million and $2.7 million,
respectively. Those sales did not result in a gain or loss to Farmer
Mac.
During
third quarter 2006, AgStar converted $341.2 million of existing LTSPCs to Farmer
Mac I Guaranteed Securities. The outstanding principal balance of those
securities was $320.1 million as of December 31, 2006. Farmer Mac received
$0.7 million in guarantee fees on those securities during
2006.
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 2006, 2005 and 2004:
|
For
the Year Ended December 31,
|
|||||||||||||||||||
|
|
2006
|
2005
|
2004
|
||||||||||||||||
|
|
|
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
|
4
|
$
|
918
|
1
|
$
|
725
|
15
|
$
|
3,532
|
||||||||||
|
USDA-guaranteed
portions:
|
|
|
|
|
|
|
|||||||||||||
|
Bath
State Bank
|
28
|
5,535
|
39
|
7,688
|
43
|
6,894
|
|||||||||||||
|
First
Dakota National Bank
|
24
|
4,613
|
18
|
3,419
|
12
|
2,081
|
|||||||||||||
Farmer
Mac received the following guarantee fees with respect to transactions with
other related parties:
|
|
For
the Year Ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
|
(in
thousands)
|
|||||||||
|
Farm
Credit West, ACA or its affiliates
|
$
|
-
|
$
|
2,623
|
$
|
2,799
|
||||
|
Bath
State Bank
|
71
|
50
|
52
|
|||||||
|
First
Dakota National Bank
|
276
|
183
|
188
|
|||||||
During
fourth quarter 2006, Sacramento Valley Farm Credit, ACA converted $129.0 million
of existing LTSPCs to Farmer Mac I Guaranteed Securities. The outstanding
principal balance of those securities was $125.6 million as of December 31,
2006. Farmer Mac received $53,000 in guarantee fees on those securities during
2006.
In
2006,
Sacramento Valley Farm Credit, ACA received $32,000 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
and 2004, Farm Credit West, ACA received $1.7 million and
$1.6 million, respectively, 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, 2006, 2005 and 2004, Farmer Mac owned $88.5 million
of preferred stock 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, 2006 and 2005 was comprised of the
following investment securities:
|
|
As
of December 31,
|
||||||
|
|
2006
|
2005
|
|||||
|
|
(in
thousands)
|
||||||
|
Held-to-maturity
|
$
|
-
|
$
|
10,602
|
|||
|
Available-for-sale
|
1,825,751
|
1,604,419
|
|||||
|
Trading
|
5,153
|
6,920
|
|||||
|
|
$
|
1,830,904
|
$
|
1,621,941
|
|||
The
amortized cost and estimated fair values of investments as of December 31,
2006
and 2005 were as follows.
|
As
of December 31, 2006
|
|||||||||||||
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||
|
(in
thousands)
|
|||||||||||||
|
Available-for-sale:
|
|||||||||||||
|
Floating
rate asset-backed securities
|
$
|
361,822
|
$
|
-
|
$
|
-
|
$
|
361,822
|
|||||
|
Floating
rate corporate debt securities
|
406,374
|
527
|
(6
|
)
|
406,895
|
||||||||
|
Fixed
rate corporate debt securities
|
579,389
|
17
|
(4,153
|
)
|
575,253
|
||||||||
|
Fixed
rate preferred stock
|
236,771
|
3,628
|
(284
|
)
|
240,115
|
||||||||
|
Fixed
rate commercial paper
|
73,371
|
-
|
-
|
73,371
|
|||||||||
|
Floating
rate mortgage-backed securities
|
158,521
|
552
|
(45
|
)
|
159,028
|
||||||||
|
Fixed
rate mortgage-backed securities
|
9,444
|
-
|
(177
|
)
|
9,267
|
||||||||
|
Total
available-for-sale
|
1,825,692
|
4,724
|
(4,665
|
)
|
1,825,751
|
||||||||
|
Trading:
|
|||||||||||||
|
Adjustable
rate 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
|
||||
|
As
of December 31, 2005
|
|||||||||||||
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||
|
Held-to-maturity:
|
|||||||||||||
|
Cash
investment in fixed rate
|
|||||||||||||
|
guaranteed
investment contract
|
$
|
10,602
|
$
|
18
|
$
|
-
|
$
|
10,620
|
|||||
|
Total
held-to-maturity
|
10,602
|
18
|
-
|
10,620
|
|||||||||
|
Available-for-sale:
|
|||||||||||||
|
Floating
rate asset-backed securities
|
336,647
|
941
|
-
|
337,588
|
|||||||||
|
Floating
rate corporate debt securities
|
230,787
|
515
|
(10
|
)
|
231,673
|
||||||||
|
Fixed
rate corporate debt securities
|
520,381
|
-
|
(1,950
|
)
|
518,050
|
||||||||
|
Fixed
rate preferred stock
|
239,033
|
11,687
|
(304
|
)
|
250,416
|
||||||||
|
Fixed
rate commercial paper
|
90,848
|
-
|
-
|
90,848
|
|||||||||
|
Floating
rate mortgage-backed securities
|
175,441
|
481
|
(78
|
)
|
175,844
|
||||||||
|
|
|
||||||||||||
|
Total
available-for-sale
|
1,593,137
|
13,624
|
(2,342
|
)
|
1,604,419
|
||||||||
|
Trading:
|
|||||||||||||
|
Adjustable
rate mortgage-backed securities
|
6,867
|
53
|
-
|
6,920
|
|||||||||
|
Total
trading
|
6,867
|
53
|
-
|
6,920
|
|||||||||
|
Total
investment securities
|
$
|
1,610,606
|
$
|
13,695
|
$
|
(2,342
|
)
|
$
|
1,621,959
|
||||
During
2006, Farmer Mac received proceeds of $308.6 million from the sale of securities
from its available-for-sale portfolio, resulting in realized gains of
$1.2 million. During 2005, Farmer Mac did not sell any securities from its
available-for-sale portfolio. During 2004, Farmer Mac received proceeds of
$121.1 million from the sale of securities from its available-for-sale
portfolio, resulting in realized gains of $0.2 million.
As
of
December 31, 2006 and 2005, there were no unrealized losses on Farmer Mac’s
held-to-maturity or trading securities. As of December 31, 2006 and 2005,
unrealized losses on available-for-sale securities were as follows:
|
As
of December 31,
|
|||||||||||||
|
|
2006
|
2005
|
|||||||||||
|
|
Available-for-Sale
|
Available-for-Sale
|
|||||||||||
|
|
Securities
|
Securities
|
|||||||||||
|
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
|||||||||
|
|
(in
thousands)
|
||||||||||||
|
Unrealized
loss position
|
|
|
|
|
|||||||||
|
for
less than 12 months
|
$
|
111,977
|
$
|
(228
|
)
|
$
|
615,141
|
$
|
(2,324
|
)
|
|||
|
Unrealized
loss position
|
|
|
|
|
|||||||||
|
for
more than 12 months
|
570,005
|
(4,437
|
)
|
12,520
|
(18
|
)
|
|||||||
|
Total
|
$
|
681,982
|
$
|
(4,665
|
)
|
$
|
627,661
|
$
|
(2,342
|
)
|
|||
The
temporary unrealized losses presented above are principally due to changes
in
interest rates from the date of acquisition to December 31, 2006 and 2005.
All investment securities in an unrealized loss position are at least “A” rated
and have not experienced any decline in credit rating during 2006 or 2005.
The
unrealized losses were on 21 and 19 individual investment securities as of
December 31, 2006 and 2005, respectively.
As
of
December 31, 2006, six of the securities in loss positions had been in loss
positions for more than 12 months. Those securities had a total unrealized
loss
of $4.4 million as of December 31, 2006, compared to an unrealized loss of
$2.3
million as of December 31, 2005. The unrealized losses on those securities
are due to overall increases in market interest rates and not due to any
underlying credit deterioration of the issuers. All of the securities with
unrealized losses aged greater than 12 months have a market value as of
December 31, 2006 that is within 99 percent of their amortized cost basis.
All
aged unrealized losses are recoverable within a reasonable period of time by
way
of changes in market interest rates. Accordingly, Farmer Mac has concluded
that
none of the unrealized losses on our investment securities represent
other-than-temporary impairment as of December 31, 2006.
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. As of December 31, 2005, Farmer Mac owned one
held-to-maturity investment that matured in 2006, with an amortized cost of
$10.6 million, a fair value of $10.6 million, and a yield of
6.15 percent and owned trading investment securities that mature after 10
years with an amortized cost of $6.9 million, a fair value of $6.9 million,
and a weighted average yield of 4.38 percent. The amortized cost, fair
value and yield of investments by remaining contractual maturity for
available-for-sale investment securities as of December 31, 2006 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, 2006
|
||||||||||
|
|
Available-for-Sale
Securities
|
|||||||||
|
|
Amortized
Cost
|
Fair
Value
|
Yield
|
|||||||
|
|
(dollars
in thousands)
|
|||||||||
|
Due
within one year
|
$
|
217,666
|
$
|
217,323
|
5.96
|
%
|
||||
|
Due
after one year
|
|
|
|
|||||||
|
through
five years
|
986,814
|
985,018
|
5.29
|
%
|
||||||
|
Due
after five years
|
|
|
|
|||||||
|
through
ten years
|
149,781
|
151,771
|
7.33
|
%
|
||||||
|
Due
after ten years
|
471,431
|
471,639
|
5.41
|
%
|
||||||
|
Total
|
$
|
1,825,692
|
$
|
1,825,751
|
5.57
|
%
|
||||
5. FARMER
MAC GUARANTEED SECURITIES
As
of
December 31, 2006 and 2005, Farmer Mac on-balance sheet Guaranteed Securities
included the following:
|
As
of December 31,
|
|||||||||||||||||||
|
|
2006
|
2005
|
|||||||||||||||||
|
|
Held-to-Maturity
|
Available-for-Sale
|
Total
|
Held-to-Maturity
|
Available-for-Sale
|
Total
|
|||||||||||||
|
|
(in
thousands)
|
||||||||||||||||||
|
Farmer
Mac I
|
$
|
28,489
|
$
|
404,938
|
$
|
433,427
|
$
|
41,573
|
$
|
492,158
|
$
|
533,731
|
|||||||
|
Farmer
Mac II
|
896,991
|
-
|
896,991
|
797,245
|
-
|
797,245
|
|||||||||||||
|
Total
|
$
|
925,480
|
$
|
404,938
|
$
|
1,330,418
|
$
|
838,818
|
$
|
492,158
|
$
|
1,330,976
|
|||||||
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, 2006 and 2005.
|
As
of December 31,
|
|||||||||||||||||||
|
|
2006
|
2005
|
|||||||||||||||||
|
|
Held-to-Maturity
|
Available-for-Sale
|
Total
|
Held-to-Maturity
|
Available-for-Sale
|
Total
|
|||||||||||||
|
|
(in
thousands)
|
||||||||||||||||||
|
Amortized
cost
|
$
|
925,480
|
$
|
395,786
|
$
|
1,321,266
|
$
|
838,818
|
$
|
477,561
|
$
|
1,316,379
|
|||||||
|
Unrealized
gains
|
214
|
11,980
|
12,194
|
448
|
18,395
|
18,843
|
|||||||||||||
|
Unrealized
losses
|
(6,715
|
)
|
(2,828
|
)
|
(9,543
|
)
|
(8,339
|
)
|
(3,798
|
)
|
(12,137
|
)
|
|||||||
|
Fair
value
|
$
|
918,979
|
$
|
404,938
|
$
|
1,323,917
|
$
|
830,927
|
$
|
492,158
|
$
|
1,323,085
|
|||||||
The
temporary unrealized losses presented above are principally due to changes
in
interest rates from the date of acquisition to December 31, 2006 and December
31, 2005. Farmer Mac has the intent and ability to hold its 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, 2006, $822.3 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, 2006.
|
|
As
of December 31, 2006
|
||||||
|
(dollars
in thousands)
|
|||||||
|
Fair
value of beneficial interests retained
|
|||||||
|
in
Farmer Mac Guaranteed Securities
|
$
|
1,323,917
|
|||||
|
Weighted-average
remaining life (in years)
|
4.6
|
||||||
|
Weighted-average
prepayment speed (annual rate)
|
10.7
|
%
|
|||||
|
Effect
on fair value of a 10% adverse change
|
$
|
(353
|
)
|
||||
|
Effect
on fair value of a 20% adverse change
|
$
|
(657
|
)
|
||||
|
Weighted-average
discount rate
|
5.8
|
%
|
|||||
|
Effect
on fair value of a 10% adverse change
|
$
|
(17,109
|
)
|
||||
|
Effect
on fair value of a 20% adverse change
|
$
|
(34,508
|
)
|
||||
These
sensitivities are hypothetical. Changes in fair value based on a 10 percent
variation in individual assumptions generally cannot be extrapolated because
the
relationship of the change in assumptions to the change in fair value may not
be
linear. Also, in this table 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,
|
|||||||
|
2006
|
2005
|
||||||
|
(in
thousands)
|
|||||||
|
On-balance
sheet assets:
|
|||||||
|
Farmer
Mac I:
|
|||||||
|
Loans
|
$
|
770,236
|
$
|
784,421
|
|||
|
Guaranteed
Securities
|
423,624
|
518,250
|
|||||
|
Farmer
Mac II:
|
|||||||
|
Guaranteed
Securities
|
892,667
|
796,224
|
|||||
|
Total
on-balance sheet
|
$
|
2,086,527
|
$
|
2,098,895
|
|||
|
Off-balance
sheet assets:
|
|||||||
|
Farmer
Mac I:
|
|||||||
|
LTSPCs
|
$
|
1,969,734
|
$
|
2,329,798
|
|||
|
AgVantange
|
1,500,000
|
-
|
|||||
|
Guaranteed
Securities
|
1,649,895
|
804,785
|
|||||
|
Farmer
Mac II:
|
|||||||
|
Guaranteed
Securities
|
33,132
|
39,508
|
|||||
|
Total
off-balance sheet
|
$
|
5,152,761
|
$
|
3,174,091
|
|||
|
Total
|
$
|
7,239,288
|
$
|
5,272,986
|
|||
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 purchases of defaulted loans for the years ended December 31, 2006, 2005 and 2004 and the balances of those loans as of December 31, 2006 and 2005.
|
|
For
the Year Ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
|
(in
thousands)
|
|||||||||
|
|
|
|
|
|||||||
|
Fair
Value at Acquistion Date
|
$
|
9,623
|
$
|
10,911
|
$
|
12,783
|
||||
|
Contractually
required payments
|
|
|
|
|||||||
|
receivable
|
9,729
|
11,323
|
13,345
|
|||||||
|
Impairment
recognized subsequent
|
|
|
|
|||||||
|
to
acquisition
|
-
|
80
|
205
|
|||||||
|
|
As
of December 31,
|
||||||
|
|
2006
|
2005
|
|||||
|
|
(in
thousands)
|
||||||
|
Outstanding
Balance
|
$
|
45,330
|
$
|
51,043
|
|||
|
Carrying
Amount
|
42,687
|
47,544
|
|||||
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 Farmer Mac I Guaranteed
Securities issued prior to the 1996 Act, AgVantage securities or Farmer Mac
II
Guaranteed Securities. Farmer Mac I Guaranteed Securities issued prior to the
1996 Act are supported by unguaranteed first loss subordinated interests, which
are expected to exceed the estimated credit losses on those loans. 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,
2006, 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. 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, 2006, Farmer Mac
has not experienced any credit losses on any Farmer Mac I Guaranteed Securities
issued prior to the 1996 Act, AgVantage securities or Farmer Mac II Guaranteed
Securities and does not expect to incur any such losses in the future.
|
90-Day
|
||||||||||||||||
|
Delinquencies
(1)
|
Net
Credit Losses
|
|||||||||||||||
|
As
of December 31,
|
For
the Year Ended December 31,
|
|||||||||||||||
|
2006
|
2005
|
2006
|
2005
|
2004
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
On-balance
sheet assets:
|
||||||||||||||||
|
Farmer
Mac I:
|
||||||||||||||||
|
Loans
|
$
|
18,457
|
$
|
23,308
|
$
|
535
|
$
|
(535
|
)
|
$
|
3,161
|
|||||
|
Guaranteed
Securities
|
-
|
-
|
-
|
-
|
4
|
|||||||||||
|
Total
on-balance sheet
|
$
|
18,457
|
$
|
23,308
|
$
|
535
|
$
|
(535
|
)
|
$
|
3,165
|
|||||
|
Off-balance
sheet assets:
|
||||||||||||||||
|
Farmer
Mac I:
|
||||||||||||||||
|
LTSPCs
|
$
|
1,198
|
$
|
2,153
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Guaranteed
Securities
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Total
off-balance sheet
|
$
|
1,198
|
$
|
2,153
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Total
|
$
|
19,655
|
$
|
25,461
|
$
|
535
|
$
|
(535
|
)
|
$
|
3,165
|
|||||
|
(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.
|
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 and 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 loan
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. These transactions also may provide
an overall lower effective cost of borrowing than would otherwise be available
in the conventional debt market. Farmer Mac is also required to recognize
certain contracts and commitments as derivatives when the characteristics of
those contracts and commitments meet the definition of a derivative as
promulgated by SFAS 133.
Farmer
Mac manages the interest rate risk related to loans it has committed to acquire,
but has not yet purchased and permanently funded, through the use of forward
sale contracts on mortgage-backed securities and the debt of other
government-sponsored enterprises (“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 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, 2006 and 2005, Farmer Mac’s credit exposure to
interest rate swap counterparties, excluding netting arrangements, was
$8.3 million and $8.7 million, respectively; however, including
netting arrangements, Farmer Mac’s credit exposure was $1.3 million and $2.9
million as of December 31, 2006 and 2005, respectively. Conversely, financial
derivatives in a net payable position required Farmer Mac to pledge no
securities as collateral as of December 31, 2006 and approximately
$2.9 million of securities as of December 31, 2005.
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 charged to gains/(losses) 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, 2006 and 2005, the net fair value of the
Corporation’s financial derivatives totaled $(14.3) million and $(20.4) million,
respectively. The maximum term over which Farmer Mac is currently managing
its
exposure for forecasted transactions is 15 years. Gains/(losses) on financial
derivatives and trading assets totaled $1.6 million, $11.5 million, and $(14.7)
million for the years ended December 31, 2006, 2005, and 2004,
respectively.
The
following table summarizes information related to Farmer Mac’s financial
derivatives as of December 31, 2006:
|
|
|
|
|
|
|
Weighted-
|
||||||||||||||||
|
|
|
|
|
Weighted-
|
Weighted-
|
Weighted-
|
Average
|
|||||||||||||||
|
|
|
|
|
Average
|
Average
|
Average
|
Remaining
|
|||||||||||||||
|
|
Notional
|
Fair
Value
|
Pay
|
Receive
|
Forward
|
Life
|
||||||||||||||||
|
|
Amount
|
Asset
|
(Liability)
|
Rate
|
Rate
|
Price
|
(in
Years)
|
|||||||||||||||
|
|
(dollars
in thousands)
|
|||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Pay
fixed callable interest rate swaps
|
$
|
158,163
|
$
|
788
|
$
|
(298
|
)
|
3.44
|
%
|
3.32
|
%
|
|
4.38
|
|||||||||
|
Pay
fixed interest rate swaps
|
645,273
|
4,570
|
(15,042
|
)
|
8.04
|
%
|
7.42
|
%
|
|
7.96
|
||||||||||||
|
Pay
variable callable interest rate swaps
|
343,000
|
82
|
(193
|
)
|
5.16
|
%
|
5.40
|
%
|
|
1.51
|
||||||||||||
|
Pay
variable interest rate swaps
|
467,482
|
-
|
(7,000
|
)
|
5.94
|
%
|
5.70
|
%
|
|
2.77
|
||||||||||||
|
Basis
swaps
|
335,065
|
2,821
|
(290
|
)
|
4.84
|
%
|
5.18
|
%
|
|
5.16
|
||||||||||||
|
Agency
forwards
|
71,045
|
957
|
(651
|
)
|
|
|
102.94
|
|
||||||||||||||
|
Total
financial derivatives
|
$
|
2,020,028
|
$
|
9,218
|
$
|
(23,474
|
)
|
5.47
|
%
|
5.42
|
%
|
|
|
|||||||||
As
of
December 31, 2006, Farmer Mac had outstanding basis swaps with a related party
with a notional amount of $193.0 million and a fair value of $2.8 million.
Those
swaps hedge 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. 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. See Note 3 for additional
information on these related party transactions. As of December 31, 2005, these
swaps had an outstanding notional amount of $225.6 million and a fair value
of
$3.7 million.
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 maturities of one year or less, whereas medium-term notes can have
maturities of one to 15 years.
The
following table sets forth information related to Farmer Mac’s borrowings as of
December 31, 2006 and 2005:
|
As
of December 31,
|
|||||||||||||||||||||||||
|
2006
|
2005
|
||||||||||||||||||||||||
|
Average
|
Average
|
||||||||||||||||||||||||
|
Outstanding
as of
|
Outstanding
During
|
Outstanding
as of
|
Outstanding
During
|
||||||||||||||||||||||
|
December
31, 2006
|
the
Year
|
December
31, 2005
|
the
Year
|
||||||||||||||||||||||
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
||||||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||||||||
|
Due
within one
|
|||||||||||||||||||||||||
|
year:
|
|||||||||||||||||||||||||
|
Discount
notes
|
$
|
2,441,947
|
5.09%
|
|
$
|
2,568,869
|
4.89%
|
|
$
|
2,334,704
|
4.09%
|
|
$
|
1,920,390
|
3.23%
|
|
|||||||||
|
Current
portion
|
|||||||||||||||||||||||||
|
of
medium-
|
|||||||||||||||||||||||||
|
term
notes
|
856,150
|
5.02%
|
|
253,000
|
4.43%
|
|
|||||||||||||||||||
|
$
|
3,298,097
|
5.07%
|
|
$
|
2,587,704
|
4.13%
|
|
||||||||||||||||||
|
Due
after one
|
|||||||||||||||||||||||||
|
year:
|
|||||||||||||||||||||||||
|
Medium-term
|
|||||||||||||||||||||||||
|
notes
due in:
|
|||||||||||||||||||||||||
|
2008
|
$
|
717,789
|
3.78%
|
|
|||||||||||||||||||||
|
2009
|
254,841
|
5.47%
|
|
||||||||||||||||||||||
|
2010
|
58,000
|
4.58%
|
|
||||||||||||||||||||||
|
2011
|
111,591
|
5.32%
|
|
||||||||||||||||||||||
|
Thereafter
|
154,470
|
6.67%
|
|
||||||||||||||||||||||
|
1,296,691
|
4.62%
|
|
|||||||||||||||||||||||
|
Total
|
$
|
4,594,788
|
4.94%
|
|
|||||||||||||||||||||
The
maximum amount of Farmer Mac’s discount notes outstanding at any month end
during each of the years ended December 31, 2006 and 2005 was $2.9 billion
and
$2.4 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 the maturities, amounts and costs for Farmer
Mac debt callable in 2007 by call period as of December 31,
2006.
|
Debt
Callable in 2007 as of December
31, 2006
|
||||
|
Maturity
|
Amount
|
Rate
|
||
|
(dollars
in thousands)
|
||||
|
2007
|
$
187,000
|
5.30%
|
||
|
2008
|
25,000
|
3.80%
|
||
|
2009
|
-
|
0.00%
|
||
|
2010
|
25,000
|
4.53%
|
||
|
2011
|
44,400
|
5.66%
|
||
|
|
$ 281,400
|
5.16%
|
||
The
following schedule summarizes the earliest interest rate reset date of total
borrowings outstanding as of December 31, 2006, 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:
|
|||||||
|
2007
|
$
|
3,392,497
|
5.06
|
%
|
|||
|
2008
|
692,789
|
3.78
|
%
|
||||
|
2009
|
254,841
|
5.47
|
%
|
||||
|
2010
|
33,000
|
4.63
|
%
|
||||
|
2011
|
67,191
|
5.10
|
%
|
||||
|
Thereafter
|
154,470
|
6.67
|
%
|
||||
|
Total
|
$
|
4,594,788
|
4.94
|
%
|
|||
During
2006 and 2005, Farmer Mac called $30.0 million and $13.0 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, 2006, 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
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. During 2006 and 2004, Farmer Mac did
not repurchase any of its outstanding debt.
8. ALLOWANCE
FOR LOSSES AND CONCENTRATIONS OF CREDIT RISK
Allowance
for Losses
Farmer
Mac maintains an allowance for losses to cover probable estimated principal
and
interest losses on all loans held and loans underlying post-1996 Act Farmer
Mac I Guaranteed Securities and LTSPCs and real estate owned. 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. See 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 for
investment;
|
| · |
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
and increased for 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, 2006:
|
|
|||||||||||||
|
|
|
|
|
|
|||||||||
|
|
Allowance
|
REO
|
|
Total
|
|||||||||
|
|
for
Loan
|
Valuation
|
Reserve
|
Allowance
|
|||||||||
|
|
Losses
|
Allowance
|
for
Losses
|
for
Losses
|
|||||||||
|
|
(in
thousands)
|
||||||||||||
|
|
|
|
|
|
|||||||||
|
Balance
as of January 1, 2002
|
$
|
1,352
|
$
|
-
|
$
|
14,532
|
$
|
15,884
|
|||||
|
|
|
|
|
|
|||||||||
|
Provision/(recovery)
for losses
|
4,561
|
1,308
|
2,378
|
8,247
|
|||||||||
|
Charge-offs
|
(3,621
|
)
|
(886
|
)
|
(153
|
)
|
(4,660
|
)
|
|||||
|
Recoveries
|
370
|
170
|
-
|
540
|
|||||||||
|
Balance
as of December 31, 2002
|
$
|
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
|
|||||
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, 2006 and
2005.
|
Reserve
for Losses on LTSPCs and Post-1996 Act
|
|||||||
|
Farmer
Mac I Guaranteed Securities
|
|||||||
|
As
of December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
(in
thousands)
|
|||||||
|
On-balance
sheet Farmer Mac I Guaranteed Securities
|
$
|
982
|
$
|
2,068
|
|||
|
Off-balance
sheet Farmer Mac I Guaranteed Securities
|
679
|
1,078
|
|||||
|
LTSPCs
|
949
|
631
|
|||||
|
Total
reserve for losses
|
$
|
2,610
|
$
|
3,777
|
|||
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 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.
The
balance of impaired loans, both on- and off-balance sheet, and the related
allowance specifically allocated to those impaired loans as of December 31,
2006
and 2005 are summarized in the following table:
|
As
of December 31,
|
|||||||||||||||||||
|
|
2006
|
2005
|
|||||||||||||||||
|
|
Balance
|
Specific
Allowance
|
Net
Balance
|
Balance
|
Specific
Allowance
|
Net
Balance
|
|||||||||||||
|
|
(in
thousands)
|
||||||||||||||||||
|
Impaired
loans:
|
|
|
|
|
|
||||||||||||||
|
Specific
allowance for losses
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
2,445
|
$
|
(161
|
)
|
$
|
2,284
|
||||||
|
No
specific allowance for losses
|
56,854
|
-
|
56,854
|
71,177
|
-
|
71,177
|
|||||||||||||
|
Total
|
$
|
56,854
|
$
|
-
|
$
|
56,854
|
$
|
73,622
|
$
|
(161
|
)
|
$
|
73,461
|
||||||
Farmer
Mac recognized interest income of approximately $4.0 million and $4.8
million on impaired loans during the years ended December 31, 2006 and
2005, respectively. During 2006 and 2005, Farmer Mac’s average investment in
impaired loans was $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
2006, Farmer Mac purchased 14 defaulted loans having a principal balance of
$9.6 million from pools underlying Farmer Mac Guaranteed Securities and
LTSPCs. During 2005, Farmer Mac made 23 such purchases for a total of
$10.9 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,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
|
(in
thousands)
|
|||||||||
|
Defaulted
loans purchased underlying
|
|
|
|
|||||||
|
off-balance
sheet Farmer Mac I
|
|
|
|
|||||||
|
Guaranteed
Securities
|
$
|
707
|
$
|
2,191
|
$
|
2,186
|
||||
|
Defaulted
loans underlying
|
|
|
|
|||||||
|
on-balance
sheet Farmer Mac I
|
|
|
|
|||||||
|
Guaranteed
Securities transferred
|
|
|
|
|||||||
|
to
loans
|
1,467
|
7,483
|
8,305
|
|||||||
|
Defaulted
loans purchased
|
|
|
|
|||||||
|
underlying
LTSPCs
|
7,449
|
1,237
|
2,292
|
|||||||
|
Total
|
$
|
9,623
|
$
|
10,911
|
$
|
12,783
|
||||
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
and LTSPCs as of December 31, 2006 and 2005:
|
As
of December 31,
|
|||||||
|
|
2006
|
2005
|
|||||
|
|
(in
thousands)
|
||||||
|
By
geographic region (1):
|
|
|
|||||
|
Northwest
|
$
|
845,833
|
$
|
908,348
|
|||
|
Southwest
|
2,141,618
|
1,887,189
|
|||||
|
Mid-North
|
880,206
|
740,918
|
|||||
|
Mid-South
|
378,866
|
286,652
|
|||||
|
Northeast
|
340,208
|
339,106
|
|||||
|
Southeast
|
198,252
|
236,976
|
|||||
|
Total
|
$
|
4,784,983
|
$
|
4,399,189
|
|||
|
|
|
|
|||||
|
By
commodity/collateral type:
|
|
|
|||||
|
Crops
|
$
|
1,977,557
|
$
|
1,932,961
|
|||
|
Permanent
plantings
|
1,139,782
|
1,074,502
|
|||||
|
Livestock
|
1,193,158
|
994,386
|
|||||
|
Part-time
farm/rural housing
|
292,179
|
277,304
|
|||||
|
Ag
storage and processing
|
122,038
|
66,364
|
|||||
|
Other
|
60,269
|
53,672
|
|||||
|
Total
|
$
|
4,784,983
|
$
|
4,399,189
|
|||
|
|
|
|
|||||
|
By
original loan-to-value ratio:
|
|
|
|||||
|
0.00%
to 40.00%
|
$
|
1,188,980
|
$
|
1,083,232
|
|||
|
40.01%
to 50.00%
|
934,688
|
896,417
|
|||||
|
50.01%
to 60.00%
|
1,358,315
|
1,249,396
|
|||||
|
60.01%
to 70.00%
|
1,159,928
|
1,052,600
|
|||||
|
70.01%
to 80.00%
|
127,630
|
103,616
|
|||||
|
80.01%
to 90.00%
|
15,442
|
13,928
|
|||||
|
Total
|
$
|
4,784,983
|
$
|
4,399,189
|
|||
|
(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
third quarter 2004, Farmer Mac established a program to repurchase up to 10
percent of the Corporation’s outstanding Class C non-voting common stock. During
third quarter 2005, Farmer Mac had purchased all of the shares authorized by
that program, 1,055,500 shares, at an average purchase price of $20.73 per
share. During fourth quarter 2005, Farmer Mac established a program to
repurchase up to an additional 10 percent, or 958,632 shares, of the
Corporation’s outstanding Class C non-voting common stock. The authority for
this stock repurchase program was set to expire in November 2007, but the
aggregate number of shares repurchased by Farmer Mac under the program reached
the maximum number of authorized shares during first quarter 2007, thereby
terminating the program according to its terms at that time. During 2006 and
2005, Farmer Mac repurchased 796,450 shares and 43,950 shares, respectively,
of
its Class C non-voting common stock under the repurchase program
established in 2005 at an average price of $26.82 and $27.97 per share,
respectively. All of the repurchased shares 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,
3,295,909 have been issued, net of cancellations as of December 31, 2006.
Options granted during 2006 have exercise prices ranging from $24.98 to
$26.65 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 2006:
|
2006
|
|||||||
|
|
|
Weighted-
|
|||||
|
|
|
Average
|
|||||
|
|
|
Exercise
|
|||||
|
|
Shares
|
Price
|
|||||
|
Outstanding,
beginning of year
|
2,153,008
|
$
|
22.41
|
||||
|
Granted
|
407,678
|
26.25
|
|||||
|
Exercised
|
(327,972
|
)
|
16.16
|
||||
|
Canceled
|
(87,009
|
)
|
28.60
|
||||
|
Outstanding,
end of year
|
2,145,705
|
23.83
|
|||||
|
Options
exercisable at year end
|
1,343,374
|
$
|
24.01
|
||||
The
cancellations of stock options during 2006, 2005 and 2004 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 87,009
options canceled in 2006, 27,260 were a result of employee departures from
Farmer Mac and 59,749 were a result of options terminating unexercised on their
expiration date.
Farmer
Mac received $5.3 million, $1.1 million and $1.1 million from the exercise
of
stock options during 2006, 2005 and 2004, respectively. During 2006, 2005 and
2004, the reduction of income tax paid as a result of the deduction for the
exercise of stock options was $1.4 million, $0.2 million and $0.2 million,
respectively. In total, the additional paid-in capital received from the
exercise of stock options was $6.4 million, $1.1 million and $1.2 million
for 2006, 2005 and 2004, respectively.
During
the year ended December 31, 2006, 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
2,046 of share-based payments for $59,000 to eight directors who elected to
receive such stock in lieu of their cash retainers. During the similar period
ended December 31, 2005, Farmer Mac settled 2,767 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, 2006:
|
|
|
|
|
|
|
|
|
|
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
|
|
252,969
|
|
7.0
years
|
|
179,125
|
|
6.8
years
|
|
244,918
|
|
7.0
years
|
|
20.00
- 24.99
|
|
1,087,469
|
|
5.6
years
|
|
733,160
|
|
4.7
years
|
|
1,031,249
|
|
5.5
years
|
|
25.00
- 29.99
|
|
615,099
|
|
6.8
years
|
|
240,921
|
|
4.7
years
|
|
568,231
|
|
6.8
years
|
|
30.00
- 34.99
|
|
189,668
|
|
4.4
years
|
|
189,668
|
|
4.4
years
|
|
189,668
|
|
4.4
years
|
|
35.00
- 39.99
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
40.00
- 44.99
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
45.00
- 50.00
|
|
500
|
|
5.2
years
|
|
500
|
|
5.2
years
|
|
500
|
|
5.2
years
|
|
|
|
2,145,705
|
|
|
|
1,343,374
|
|
|
|
2,034,566
|
|
|
The
weighted average exercise price of the 2,034,566 options vested or expected
to
vest as of December 31, 2006 was $23.85.
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, 2006:
|
Aggregate
|
||||
|
Intrinsic
|
||||
|
Value
|
||||
|
(in
thousands)
|
||||
|
Options
as of December 31, 2006:
|
||||
|
Outstanding
|
$
|
8,286
|
||
|
Exercisable
|
5,420
|
|||
|
Vested
and expected to vest
|
7,901
|
|||
During
2006, 2005 and 2004, the total intrinsic value of options exercised was
$4.1 million, $0.5 million and $0.5 million, respectively.
The
weighted-average grant date fair values of options granted in 2006, 2005 and
2004 were $9.91, $6.69 and $7.34, respectively. Under the fair value-based
method of accounting for stock-based compensation cost, Farmer Mac recognized
compensation cost of $2.4 million during 2006 and would have recognized
compensation cost of $2.1 million and $1.6 million for 2005 and 2004,
respectively. The fair values were estimated using the Black-Scholes option
pricing model based on the following assumptions:
|
2006
|
2005
|
2004
|
||||||||
|
Risk-free
interest rate
|
5.0
|
%
|
3.9
|
%
|
4.3
|
%
|
||||
|
Expected
years until exercise
|
6
years
|
7
years
|
5
years
|
|||||||
|
Expected
stock volatility
|
36.9
|
%
|
46.3
|
%
|
47.8
|
%
|
||||
|
Dividend
yield
|
1.6
|
%
|
1.9
|
%
|
0.0
|
%
|
||||
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 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, 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. As of December 31, 2005, Farmer Mac’s minimum and critical capital
requirements were $142.5 million and $71.2 million, respectively, and
its actual core capital level was $230.8 million, $88.3 million above
the minimum capital requirement and $159.6 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, 2006 was $42.9 million and Farmer Mac’s regulatory
capital (core capital plus the allowance for losses) of $248.1 million
exceeded that amount by approximately $205.2 million. Farmer Mac’s
risk-based capital requirement as of December 31, 2005 was $29.5 million
and Farmer Mac’s regulatory capital of $239.4 million exceeded that amount
by approximately $209.9 million.
10. INCOME
TAXES
The
components of the provision for federal income taxes for the years ended
December 31, 2006, 2005 and 2004 were as follows:
|
|
For
the Year Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
||||||||
|
|
(in
thousands)
|
|||||||||
|
Current
|
$
|
10,518
|
$
|
10,632
|
$
|
11,580
|
||||
|
Deferred:
|
|
|
|
|||||||
|
Allowances
for Losses
|
1,434
|
2,957
|
1,733
|
|||||||
|
Financial
Derivatives
|
1,736
|
9,551
|
6,532
|
|||||||
|
Other
|
(999
|
)
|
(49
|
)
|
(94
|
)
|
||||
|
Total
Deferred
|
2,171
|
12,459
|
8,171
|
|||||||
|
Income
Tax Expense
|
$
|
12,689
|
$
|
23,091
|
$
|
19,751
|
||||
A reconciliation of tax at the statutory federal tax rate to the income tax provision for the years ended December 31, 2006, 2005 and 2004 is as follows:
|
|
For
the Year Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
||||||||
|
|
(dollars
in thousands)
|
|||||||||
|
Tax
expense at statutory rate
|
$
|
15,646
|
$
|
25,327
|
$
|
21,347
|
||||
|
Effect
of non-taxable
|
|
|
|
|||||||
|
dividend
income
|
(2,576
|
)
|
(2,337
|
)
|
(1,694
|
)
|
||||
|
Other
|
(381
|
)
|
101
|
98
|
||||||
|
|
|
|
|
|||||||
|
Income
tax expense
|
$
|
12,689
|
$
|
23,091
|
$
|
19,751
|
||||
|
|
|
|
|
|||||||
|
Statutory
tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
||||
|
Effective
tax rate
|
28.4
|
%
|
31.9
|
%
|
32.4
|
%
|
||||
The
components of the deferred tax assets and liabilities as of December 31, 2006
and 2005 were as follows:
|
As
of December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
(in
thousands)
|
|||||||
|
Deferred
tax assets:
|
|||||||
|
Basis
differences related to financial derivatives
|
$
|
6,690
|
$
|
7,155
|
|||
|
Allowance
for losses
|
1,594
|
3,029
|
|||||
|
Other
|
1,726
|
1,997
|
|||||
|
Total
deferred tax assets
|
10,010
|
12,181
|
|||||
|
Deferred
tax liability:
|
|||||||
|
Unrealized
gain on available-for-sale securities
|
3,124
|
8,958
|
|||||
|
Total
deferred tax liability
|
3,124
|
8,958
|
|||||
|
Net
deferred tax asset
|
$
|
6,886
|
$
|
3,223
|
|||
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, 2006 and 2005.
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”) ($220,000 for 2006, $210,000
for 2005, and $205,000 for 2004), 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, 2006, 2005 and 2004 was $0.7 million, $0.6 million and
$0.5 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.
Off-Balance
Sheet Farmer Mac Guaranteed Securities
Periodically
Farmer Mac transfers agricultural mortgage loans into trusts that are used
as
vehicles for the securitization of the transferred assets and the beneficial
interests in the trusts are sold to third party investors. The table below
summarizes certain cash flows received from and paid to these
trusts.
|
For
the Year Ended December 31,
|
||||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
|
(in
thousands)
|
|||||||||
|
|
|
|
|
|||||||
|
Proceeds
from new securitizations
|
$
|
3,994
|
$
|
53,315
|
$
|
103,150
|
||||
|
Guarantee
fees received
|
1,379
|
1,547
|
1,428
|
|||||||
|
Purchases
of assets from the trusts
|
707
|
2,191
|
2,186
|
|||||||
|
Servicing
advances
|
19
|
18
|
23
|
|||||||
|
Repayments
of servicing advances
|
4
|
30
|
34
|
|||||||
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 off-balance
sheet Farmer Mac Guaranteed Securities as of December 31, 2006 and 2005,
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,
|
|||||||
|
2006
|
2005
|
||||||
|
(in
thousands)
|
|||||||
|
Post-1996
Act Farmer Mac I Guaranteed Securities
|
$
|
3,149,895
|
$
|
804,785
|
|||
|
Farmer
Mac II Guaranteed Securities
|
33,132
|
39,508
|
|||||
|
Total
Farmer Mac I and II
|
$
|
3,183,027
|
$
|
844,293
|
|||
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.
As
of
December 31, 2006, the weighted-average remaining maturity of all loans
underlying off-balance sheet Farmer Mac Guaranteed Securities was
10.7 years. 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, 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 upon 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, 2006 and 2005, the maximum principal amount of potential
undiscounted future payments that Farmer Mac could be requested to make under
LTSPCs, not including offsets provided by any recourse provisions, recoveries
from third parties or collateral for the underlying loans, was $2.0 billion
and
$2.3 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, 2006 and 2005, the weighted-average remaining maturity of all
loans
underlying LTSPCs was 15.3 years and 14.3 years, respectively. 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, 2006 and 2005, commitments to purchase
Farmer Mac I and II loans totaled $12.5 million and $11.2 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, 2006
and
2005. 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
and futures contracts involving U.S. Treasury securities. 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,
2006, 2005 and 2004 was $0.6 million, $0.7 million and
$0.6 million, respectively. The future minimum lease payments under Farmer
Mac’s non-cancelable leases for its office space and other contractual
obligations are as follows:
|
|
Other
|
||||||
|
|
Future
Minimum
|
Contractual
|
|||||
|
|
Lease
Payments
|
Obligations
|
|||||
|
|
(in
thousands)
|
||||||
|
|
|
|
|||||
|
2007
|
$
|
627
|
$
|
480
|
|||
|
2008
|
|
635
|
128
|
||||
|
2009
|
612
|
13
|
|||||
|
2010
|
691
|
-
|
|||||
|
2011
|
538
|
-
|
|||||
|
Thereafter
|
-
|
-
|
|||||
|
Total
|
$
|
3,103
|
$
|
621
|
|||
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,
2006 and 2005. Significant estimates, assumptions and present value calculations
are used for the following disclosure, resulting in a high degree of
subjectivity in the indicated fair values. Accordingly, these estimated fair
values are not necessarily indicative of what Farmer Mac would realize in an
actual sale or purchase.
|
As
of December 31,
|
|||||||||||||
|
2006
|
2005
|
||||||||||||
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
||||||||||
|
(in
thousands)
|
|||||||||||||
|
Financial
assets:
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
877,714
|
$
|
877,714
|
$
|
458,852
|
$
|
458,852
|
|||||
|
Investment
securities
|
1,830,904
|
1,830,904
|
1,621,959
|
1,621,941
|
|||||||||
|
Farmer
Mac Guaranteed Securities
|
1,323,917
|
1,330,418
|
1,323,085
|
1,330,976
|
|||||||||
|
Loans
|
781,078
|
775,421
|
808,785
|
799,516
|
|||||||||
|
Financial
derivatives
|
9,218
|
9,218
|
8,719
|
8,719
|
|||||||||
|
Interest
receivable
|
73,545
|
73,545
|
67,509
|
67,509
|
|||||||||
|
Guarantee
and commitment fees receivable:
|
|||||||||||||
|
LTSPCs
|
22,364
|
23,265
|
13,779
|
14,211
|
|||||||||
|
Farmer
Mac Guaranteed Securities
|
16,783
|
17,478
|
7,942
|
7,959
|
|||||||||
|
Financial
liabilities:
|
|||||||||||||
|
Notes
payable:
|
|||||||||||||
|
Due
within one year
|
3,296,441
|
3,298,097
|
2,585,967
|
2,587,704
|
|||||||||
|
Due
after one year
|
1,305,014
|
1,296,691
|
1,421,175
|
1,406,527
|
|||||||||
|
Financial
derivatives
|
23,474
|
23,474
|
29,162
|
29,162
|
|||||||||
|
Accrued
interest payable
|
36,125
|
36,125
|
29,250
|
29,250
|
|||||||||
|
Guarantee
and commitment obligation:
|
|||||||||||||
|
LTSPCs
|
20,891
|
21,791
|
11,954
|
12,386
|
|||||||||
|
Farmer
Mac Guaranteed Securities
|
12,873
|
13,568
|
5,222
|
5,239
|
|||||||||
Farmer
Mac estimates the fair value of its loans, Farmer Mac Guaranteed Securities
and
notes payable by discounting the projected cash flows of these instruments
at
projected interest rates. 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. Interest rate contracts are
valued
using either a similar methodology or market quotes. For financial derivatives,
including interest rate swaps, futures contracts and commitments to purchase
and
sell government sponsored enterprise debt and mortgage-backed securities,
fair
values are based on quoted market prices. When available, Farmer Mac determines
the fair value investment securities using quoted market prices. For investment
securities 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. The carrying value of cash and cash equivalents approximates
fair value.
14. QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)
|
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
|
|||||
|
2005
Quarter Ended
|
|||||||||||||
|
Dec.
31
|
|
Sept.
30
|
|
June
30
|
|
Mar.
31
|
|||||||
|
(in
thousands, except per share amounts)
|
|||||||||||||
|
Interest
income:
|
|||||||||||||
|
Interest
income
|
$
|
55,094
|
$
|
49,536
|
$
|
44,907
|
$
|
43,035
|
|||||
|
Interest
expense
|
42,789
|
38,028
|
31,966
|
29,154
|
|||||||||
|
Net
interest income
|
12,305
|
11,508
|
12,941
|
13,881
|
|||||||||
|
Recovery/(provision)
for loan losses
|
1,732
|
(2,465
|
)
|
203
|
584
|
||||||||
|
Net
interest income after
|
|||||||||||||
|
provision
for loan losses
|
14,037
|
9,043
|
13,144
|
14,465
|
|||||||||
|
Non-interest
income/(loss):
|
|||||||||||||
|
Guarantee
and commitment fees
|
4,865
|
4,844
|
4,889
|
4,956
|
|||||||||
|
Gains/(losses)
on financial
|
|||||||||||||
|
derivatives
and trading assets
|
4,224
|
12,009
|
(14,562
|
)
|
9,866
|
||||||||
|
Gain
on the repurchase of debt
|
116
|
-
|
-
|
-
|
|||||||||
|
Gains/(losses)
on the sale
|
|||||||||||||
|
of
real estate owned
|
-
|
114
|
(67
|
)
|
(13
|
)
|
|||||||
|
Representation
and warranty
|
|||||||||||||
|
claims
income
|
-
|
-
|
-
|
79
|
|||||||||
|
Other
income
|
259
|
926
|
367
|
320
|
|||||||||
|
Non-interest
income/(loss)
|
9,464
|
17,893
|
(9,373
|
)
|
15,208
|
||||||||
|
Non-interest
expense
|
5,332
|
(2,750
|
)
|
4,718
|
4,218
|
||||||||
|
Income/(loss)
before income taxes
|
18,169
|
29,686
|
(947
|
)
|
25,455
|
||||||||
|
Income
tax expense/(benefit)
|
5,747
|
9,778
|
(944
|
)
|
8,510
|
||||||||
|
Net
income/(loss)
|
12,422
|
19,908
|
(3
|
)
|
16,945
|
||||||||
|
Preferred
stock dividends
|
(560
|
)
|
(560
|
)
|
(560
|
)
|
(560
|
)
|
|||||
|
Net
income/(loss) available to
|
|||||||||||||
|
common
stockholders
|
$
|
11,862
|
$
|
19,348
|
$
|
(563
|
)
|
$
|
16,385
|
||||
|
Earnings
per common share:
|
|||||||||||||
|
Basic
earnings/(loss) per
|
|||||||||||||
|
common
share
|
$
|
1.07
|
$
|
1.73
|
$
|
(0.05
|
)
|
$
|
1.40
|
||||
|
Diluted
earnings/(loss) per
|
|||||||||||||
|
common
share
|
$
|
1.04
|
$
|
1.70
|
$
|
(0.05
|
)
|
$
|
1.39
|
||||
|
Common
stock dividends
|
|||||||||||||
|
per
common share
|
$
|
0.10
|
$
|
0.10
|
$
|
0.10
|
$
|
0.10
|
|||||
| 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, 2006. 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, 2006.
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, 2006 that has materially affected, or is
reasonably likely to materially affect, Farmer Mac’s internal control over
financial reporting. In October 2006, management concluded that the Corporation
did not maintain effective controls over the accounting for financial
derivatives as defined by SFAS
133.
On October 4, 2006, the Corporation’s Board of Directors authorized management
to restate the Corporation’s financial results from 2001 to eliminate the use of
hedge accounting under SFAS 133. On November 9, 2006 the Corporation filed
with
the SEC an Annual Report on Form 10-K/A for 2005, Quarterly Reports
on Form 10-Q/A for first and second quarters 2006 and a
Quarterly Report on Form 10-Q for third quarter 2006 reflecting the
Corporation’s elimination of hedge accounting. That elimination of hedge
accounting during fourth quarter 2006 resolved the material weakness in internal
controls that existed as of December 31, 2005 with no change in Farmer Mac’s
internal control over financial reporting. Farmer Mac does not expect to use
hedge accounting under SFAS 133 at any time in the foreseeable
future.
| Item 9B. |
Other
Information
|
None.
PART
III
| Item 10. |
Directors,
Executive Officers and Corporate
Governance
|
Farmer
Mac has adopted a code of business conduct and ethics (the “Code”) that applies
to all directors, officers, employees and agents of Farmer Mac, including Farmer
Mac’s principal executive officer, principal financial officer, principal
accounting officer and other senior financial officers. A copy of the Code
is
available in the “Investors—Corporate Governance” section of Farmer Mac’s
Internet website (www.farmermac.com). Farmer Mac will post any amendment to,
or
waiver from, a provision of the Code in that same section of its Internet
website. A print copy of the Code is available free of charge upon written
request to Farmer Mac’s Corporate Secretary.
Additional
information required by this item is incorporated by reference to the
Corporation’s definitive proxy statement to be filed on or about April 27,
2007.
| 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 27,
2007.
| 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 27,
2007.
| 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 27,
2007.
| 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 27,
2007.
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).
|
|
|
|
|
|
|
*
|
3.2
|
-
|
Amended
and restated By-Laws of the Registrant (Form 10-Q filed August 9,
2004).
|
|
*
|
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).
|
_______________
*
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
|
-
|
Amended
and Restated 1997 Incentive Plan (Previously filed as Exhibit 10.1.3
to
Form 10-Q filed November 14, 2003).
|
|
|
|
|
|
|
†*
|
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).
|
_______________
*
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.
|
†*
|
10.2.9
|
-
|
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).
|
|
|
|
|
|
|
†*
|
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).
|
|
†*
|
10.3
|
-
|
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).
|
|
†*
|
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).
|
_______________
*
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.
|
†*
|
10.3.4
|
-
|
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).
|
|
†*
|
10.4
|
-
|
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).
|
|
†*
|
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).
|
_______________
*
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.
|
†*
|
10.4.6
|
-
|
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).
|
|
†*
|
10.5
|
-
|
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).
|
|
†*
|
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).
|
_______________
*
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.
|
†*
|
10.5.6
|
-
|
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).
|
|
*
|
10.7
|
-
|
Farmer
Mac I Seller/Servicer Agreement dated as of August 7, 1996 between
Zions
First National Bank and the Registrant (Form 10-Q filed November 14,
2002).
|
|
*
|
10.8
|
-
|
Medium-Term
Notes U.S. Selling Agency Agreement dated as of October 1, 1998 between
Zions First National Bank and the Registrant (Form 10-Q filed
November 14, 2002).
|
|
*
|
10.9
|
-
|
Discount
Note Dealer Agreement dated as of September 18, 1996 between Zions
First
National Bank and the Registrant (Form 10-Q filed November 14,
2002).
|
|
*#
|
10.10
|
-
|
ISDA
Master Agreement and Credit Support Annex dated as of June 26, 1997
between Zions First National Bank and the Registrant (Form 10-Q filed
November 14, 2002).
|
|
*#
|
10.11
|
-
|
Master
Central Servicing Agreement dated as of December 17, 1996 between
Zions
First National Bank and the Registrant (Form 10-Q filed November 14,
2002).
|
|
*#
|
10.11.1
|
-
|
Amendment
No. 1 dated as of February 26, 1997 to Master Central Servicing Agreement
dated as of December 17, 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.
|
*#
|
10.11.2
|
-
|
Amended
and Restated Master Central Servicing Agreement dated as of May 1,
2004 between Zions First National Bank and the Registrant (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.
|
|
*#
|
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).
|
_______________
*
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.
|
†*
|
10.18.1
|
-
|
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).
|
|
|
|
|
|
|
†*
|
10.19
|
-
|
Description
of compensation agreement between the Registrant and its directors
(Form 10-Q filed August 9, 2006).
|
|
21
|
-
|
Farmer
Mac Mortgage Securities Corporation, a Delaware
corporation.
|
|
|
**
|
31.1
|
-
|
Certification
of Chief Executive Officer relating to the Registrant’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2006, pursuant to
Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of
2002.
|
|
**
|
31.2
|
-
|
Certification
of Chief Financial Officer relating to the Registrant’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2006, pursuant to
Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of
2002.
|
|
**
|
32
|
-
|
Certification
of Chief Executive Officer and Chief Financial Officer relating to
the
Registrant’s Annual Report on Form 10-K for the fiscal year ended December
31, 2006, 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
15, 2007
|
|
|
By:
Henry
D. Edelman
President
and
Chief
Executive Officer
|
Date
|
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
15, 2007
|
||
|
Fred
L. Dailey
|
Director
|
|||
|
/s/
Henry D. Edelman
|
President
and Chief Executive
|
March
15, 2007
|
||
|
Henry
D. Edelman
|
Officer
(Principal Executive Officer)
|
|||
|
/s/
Nancy E. Corsiglia
|
Vice
President - Finance,
|
March
15, 2007
|
||
|
Nancy
E. Corsiglia
|
Chief
Financial Officer and
Treasurer
|
|||
|
(Principal
Financial Officer)
|
||||
|
/s/
Timothy L. Buzby
|
Vice
President - Controller
|
March
15, 2007
|
||
|
Timothy
L. Buzby
|
(Principal
Accounting Officer)
|
|
Name
|
Title
|
Date
|
||
|
/s/
Julia Bartling
|
Director
|
March
15, 2007
|
||
|
Julia
Bartling
|
||||
|
/s/
Dennis L. Brack
|
Director
|
March
15, 2007
|
||
|
Dennis
L. Brack
|
||||
|
/s/
Ralph W. Cortese
|
Director
|
March
15, 2007
|
||
|
Ralph
W. Cortese
|
||||
|
/s/
Grace T. Daniel
|
Director
|
March
15, 2007
|
||
|
Grace
T. Daniel
|
||||
|
/s/
Paul A. DeBriyn
|
Director
|
March
15, 2007
|
||
|
Paul
A. DeBriyn
|
||||
|
/s/
Dennis A. Everson
|
Director
|
March
15, 2007
|
||
|
Dennis
A. Everson
|
||||
|
/s/
Ernest M. Hodges
|
Director
|
March
15, 2007
|
||
|
Ernest
M. Hodges
|
||||
|
/s/
Mitchell A. Johnson
|
Director
|
March
15, 2007
|
||
|
Mitchell
A. Johnson
|
||||
|
/s/
Lowell L. Junkins
|
Vice
Chairman
|
March
15, 2007
|
||
|
Lowell
L. Junkins
|
and
Director
|
|||
|
/s/
Timothy F. Kenny
|
Director
|
March
15, 2007
|
||
|
Timothy
F. Kenny
|
||||
|
/s/
Glen O. Klippenstein
|
Director
|
March
15, 2007
|
||
|
Glen
O. Klippenstein
|
||||
|
/s/
Charles E. Kruse
|
Director
|
March
15, 2007
|
||
|
Charles
E. Kruse
|
||||
|
/s/
John G. Nelson
|
Director
|
March
15, 2007
|
||
|
John
G. Nelson
|
||||
|
/s/
John Dan Raines, Jr.
|
Director
|
March
15, 2007
|
||
|
John
Dan Raines, Jr.
|
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