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.
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