As filed with the Securities and Exchange Commission on August 9, 2011
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
Commission File Number 001-14951
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FEDERAL AGRICULTURAL MORTGAGE CORPORATION
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(Exact name of registrant as specified in its charter)
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Federally chartered instrumentality
of the United States
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52-1578738
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. employer identification number)
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1133 Twenty-First Street, N.W., Suite 600
Washington, D.C.
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20036
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(Address of principal executive offices)
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(Zip code)
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(202) 872-7700
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(Registrant’s telephone number, including area code)
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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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer x |
| Non-accelerated filer o | Smaller reporting company 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
As of August 1, 2011 the registrant had 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock and 8,821,878 shares of Class C Non-Voting Common Stock outstanding.
PART I - FINANCIAL INFORMATION
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Item 1.
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Condensed Consolidated Financial Statements
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The following information concerning Farmer Mac’s interim unaudited condensed consolidated financial statements is included in this report beginning on the pages listed below:
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Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010
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3 |
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Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010
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4 |
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Condensed Consolidated Statements of Equity for the six months ended June 30, 2011 and 2010
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5 |
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Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010
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6 |
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Notes to Condensed Consolidated Financial Statements
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7 |
-2-
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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June 30,
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December 31,
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2011
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2010
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(in thousands)
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Assets:
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| Cash and cash equivalents | $ | 768,335 | $ | 729,920 | ||||
| Investment securities: | ||||||||
| Available-for-sale, at fair value | 2,005,714 | 1,677,233 | ||||||
| Trading, at fair value | 88,151 | 86,096 | ||||||
| Total investment securities | 2,093,865 | 1,763,329 | ||||||
| Farmer Mac Guaranteed Securities: | ||||||||
| Available-for-sale, at fair value | 3,243,965 | 2,907,264 | ||||||
| USDA Guaranteed Securities: | ||||||||
| Available-for-sale, at fair value | 1,120,397 | 1,005,679 | ||||||
| Trading, at fair value | 249,074 | 311,765 | ||||||
| Total USDA Guaranteed Securities | 1,369,471 | 1,317,444 | ||||||
| Loans: | ||||||||
| Loans held for sale, at lower of cost or fair value | 447,087 | 1,212,065 | ||||||
| Loans held for investment, at amortized cost | 1,168,995 | 90,674 | ||||||
| Loans held for investment in consolidated trusts, at amortized cost | 1,182,408 | 1,265,663 | ||||||
| Allowance for loan losses | (11,053 | ) | (9,803 | ) | ||||
| Total loans, net of allowance | 2,787,437 | 2,558,599 | ||||||
| Real estate owned, at lower of cost or fair value | 4,067 | 1,992 | ||||||
| Financial derivatives, at fair value | 43,976 | 41,492 | ||||||
| Interest receivable | 88,852 | 90,295 | ||||||
| Guarantee and commitment fees receivable | 31,824 | 34,752 | ||||||
| Deferred tax asset, net | 3,591 | 14,530 | ||||||
| Prepaid expenses and other assets | 9,445 | 20,297 | ||||||
| Total Assets | $ | 10,444,828 | $ | 9,479,914 | ||||
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Liabilities and Equity:
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Liabilities:
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| Notes payable: | ||||||||
| Due within one year | $ | 5,201,832 | $ | 4,509,419 | ||||
| Due after one year | 3,744,877 | 3,430,656 | ||||||
| Total notes payable | 8,946,709 | 7,940,075 | ||||||
| Debt securities of consolidated trusts held by third parties | 755,357 | 827,411 | ||||||
| Financial derivatives, at fair value | 109,151 | 113,687 | ||||||
| Accrued interest payable | 56,152 | 57,131 | ||||||
| Guarantee and commitment obligation | 27,628 | 30,308 | ||||||
| Accounts payable and accrued expenses | 21,781 | 22,113 | ||||||
| Reserve for losses | 7,443 | 10,312 | ||||||
| Total Liabilities | 9,924,221 | 9,001,037 | ||||||
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Commitments and Contingencies (Note 5)
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Equity:
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| Preferred stock: | ||||||||
| Series C, par value $1,000 per share, 100,000 shares authorized, 57,578 shares issued | ||||||||
| and outstanding | 57,578 | 57,578 | ||||||
| Common stock: | ||||||||
| Class A Voting, $1 par value, no maximum authorization, 1,030,780 shares outstanding | 1,031 | 1,031 | ||||||
| Class B Voting, $1 par value, no maximum authorization, 500,301 shares outstanding | 500 | 500 | ||||||
| Class C Non-Voting, $1 par value, no maximum authorization, 8,812,500 shares outstanding | ||||||||
| as of June 30, 2011 and 8,752,711 shares outstanding as of December 31, 2010 | 8,813 | 8,753 | ||||||
| Additional paid-in capital | 101,097 | 100,050 | ||||||
| Accumulated other comprehensive income | 36,436 | 18,275 | ||||||
| Retained earnings | 73,299 | 50,837 | ||||||
| Total Stockholders' Equity | 278,754 | 237,024 | ||||||
| Non-controlling interest - preferred stock | 241,853 | 241,853 | ||||||
| Total Equity | 520,607 | 478,877 | ||||||
| Total Liabilities and Equity | $ | 10,444,828 | $ | 9,479,914 | ||||
See accompanying notes to condensed consolidated financial statements.
-3-
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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For the Three Months Ended
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For the Six Months Ended
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June 30, 2011
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June 30, 2010
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June 30, 2011
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June 30, 2010 | |||||||||||||
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(in thousands, except per share amounts)
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Interest income:
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Investments and cash equivalents
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$ | 7,033 | $ | 6,390 | $ | 14,220 | $ | 12,873 | ||||||||
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Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
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29,358 | 18,795 | 57,133 | 39,626 | ||||||||||||
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Loans
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30,461 | 32,142 | 59,571 | 65,560 | ||||||||||||
| Total interest income | 66,852 | 57,327 | 130,924 | 118,059 | ||||||||||||
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Total interest expense
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37,640 | 35,719 | 74,693 | 72,834 | ||||||||||||
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Net interest income
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29,212 | 21,608 | 56,231 | 45,225 | ||||||||||||
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(Provision for)/release of loan losses
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(160 | ) | 1,870 | (1,441 | ) | (980 | ) | |||||||||
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Net interest income after (provision for)/release of loan losses
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29,052 | 23,478 | 54,790 | 44,245 | ||||||||||||
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Non-interest (loss)/income:
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Guarantee and commitment fees
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6,320 | 5,710 | 12,707 | 11,629 | ||||||||||||
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Losses on financial derivatives
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(17,806 | ) | (15,840 | ) | (13,801 | ) | (21,644 | ) | ||||||||
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Gains on trading assets
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1,968 | 5,058 | 3,279 | 8,425 | ||||||||||||
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Gains on sale of available-for-sale investment securities
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38 | - | 195 | 240 | ||||||||||||
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Gains on sale of real estate owned
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627 | - | 724 | - | ||||||||||||
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Lower of cost or fair value adjustment on loans held for sale
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(156 | ) | 90 | (964 | ) | (2,184 | ) | |||||||||
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Other income
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1,124 | 211 | 5,022 | 1,040 | ||||||||||||
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Non-interest (loss)/income
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(7,885 | ) | (4,771 | ) | 7,162 | (2,494 | ) | |||||||||
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Non-interest expense:
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Compensation and employee benefits
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4,666 | 3,907 | 9,163 | 7,418 | ||||||||||||
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General and administrative
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2,656 | 2,051 | 4,912 | 4,554 | ||||||||||||
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Regulatory fees
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573 | 562 | 1,164 | 1,125 | ||||||||||||
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Real estate owned operating costs, net
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231 | 298 | 599 | 308 | ||||||||||||
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(Release of)/provision for losses
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(935 | ) | 3,043 | (2,869 | ) | 1,575 | ||||||||||
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Other expense
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- | - | 900 | - | ||||||||||||
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Non-interest expense
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7,191 | 9,861 | 13,869 | 14,980 | ||||||||||||
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Income before income taxes
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13,976 | 8,846 | 48,083 | 26,771 | ||||||||||||
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Income tax expense
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2,539 | 756 | 12,056 | 5,092 | ||||||||||||
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Net income
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11,437 | 8,090 | 36,027 | 21,679 | ||||||||||||
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Less: Net income attributable to non-controlling interest -
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preferred stock dividends
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(5,547 | ) | (5,546 | ) | (11,094 | ) | (9,614 | ) | ||||||||
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Net income attributable to Farmer Mac
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5,890 | 2,544 | 24,933 | 12,065 | ||||||||||||
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Preferred stock dividends
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(720 | ) | (720 | ) | (1,440 | ) | (2,690 | ) | ||||||||
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Loss on retirement of preferred stock
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- | - | - | (5,784 | ) | |||||||||||
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Net income available to common stockholders
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$ | 5,170 | $ | 1,824 | $ | 23,493 | $ | 3,591 | ||||||||
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Earnings per common share and dividends:
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Basic earnings per common share
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$ | 0.50 | $ | 0.18 | $ | 2.28 | $ | 0.35 | ||||||||
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Diluted earnings per common share
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$ | 0.48 | $ | 0.17 | $ | 2.20 | $ | 0.34 | ||||||||
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Common stock dividends per common share
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$ | 0.05 | $ | 0.05 | $ | 0.10 | $ | 0.10 | ||||||||
See accompanying notes to condensed consolidated financial statements.
-4-
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
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For the Six Months Ended
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June 30, 2011
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June 30, 2010
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Shares
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Amount
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Shares
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Amount
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(in thousands)
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Preferred stock:
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Balance, beginning of period
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58 | $ | 57,578 | 58 | $ | 57,578 | ||||||||||
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Issuance of Series C preferred stock
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- | - | - | - | ||||||||||||
| Balance, end of period | 58 | $ | 57,578 | 58 | $ | 57,578 | ||||||||||
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Common stock:
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Balance, beginning of period
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10,284 | $ | 10,284 | 10,142 | $ | 10,142 | ||||||||||
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Issuance of Class C common stock
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58 | 58 | 121 | 121 | ||||||||||||
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Exercise of stock options and SARs
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2 | 2 | 13 | 13 | ||||||||||||
| Balance, end of period | 10,344 | $ | 10,344 | 10,276 | $ | 10,276 | ||||||||||
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Additional paid-in capital:
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Balance, beginning of period
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$ | 100,050 | $ | 97,090 | ||||||||||||
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Stock-based compensation expense
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1,490 | 1,507 | ||||||||||||||
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Issuance of Class C common stock
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15 | 22 | ||||||||||||||
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Exercise, vesting and cancellation of stock options,
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| SARs and restricted stock | (458 | ) | 306 | |||||||||||||
| Balance, end of period | $ | 101,097 | $ | 98,925 | ||||||||||||
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Retained earnings:
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Balance, beginning of period
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$ | 50,837 | $ | 28,127 | ||||||||||||
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Net income attributable to Farmer Mac
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24,933 | 12,065 | ||||||||||||||
| Cash dividends: | ||||||||||||||||
| Preferred stock, Series B ($8.33 per share) | - | (1,250 | ) | |||||||||||||
| Preferred stock, Series C ($25.00 per share) | (1,440 | ) | (1,440 | ) | ||||||||||||
| Common stock ($0.10 per share) | (1,031 | ) | (1,020 | ) | ||||||||||||
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Loss on retirement of preferred stock
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- | (5,784 | ) | |||||||||||||
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Cumulative effect of adoption of new accounting standard, net of tax
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- | 2,679 | ||||||||||||||
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Balance, end of period
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$ | 73,299 | $ | 33,377 | ||||||||||||
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Accumulated other comprehensive income:
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Balance, beginning of period
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$ | 18,275 | $ | 3,254 | ||||||||||||
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Change in unrealized gain on available-for-sale securities,
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net of tax and reclassification adjustments
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18,161 | 28,163 | ||||||||||||||
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Change in unrealized gain on financial derivatives,
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net of tax and reclassification adjustments
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- | 52 | ||||||||||||||
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Balance, end of period
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$ | 36,436 | $ | 31,469 | ||||||||||||
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Total Stockholders' Equity
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$ | 278,754 | $ | 231,625 | ||||||||||||
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Non-controlling interest:
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Balance, beginning of period
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$ | 241,853 | $ | - | ||||||||||||
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Preferred stock - Farmer Mac II LLC
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- | 241,853 | ||||||||||||||
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Balance, end of period
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$ | 241,853 | $ | 241,853 | ||||||||||||
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Total Equity
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$ | 520,607 | $ | 473,478 | ||||||||||||
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Comprehensive income:
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Net income
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$ | 36,027 | $ | 21,679 | ||||||||||||
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Change in accumulated other comprehensive income, net of tax
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18,161 | 28,215 | ||||||||||||||
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Comprehensive income
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$ | 54,188 | $ | 49,894 | ||||||||||||
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Less: Comprehensive income attributable to non-controlling interest
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11,094 | 9,614 | ||||||||||||||
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Total comprehensive income
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$ | 43,094 | $ | 40,280 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
-5-
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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For the Six Months Ended
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June 30, 2011
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June 30, 2010
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(restated)
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(in thousands)
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Cash flows from operating activities:
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Net income
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$ | 36,027 | $ | 21,679 | ||||
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Adjustments to reconcile net income to net cash used in operating activities:
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Net amortization of premiums and discounts on loans, investments, and
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| Farmer Mac Guaranteed Securities and USDA Guaranteed Securities | 9,365 | 6,150 | ||||||
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Amortization of debt premiums, discounts and issuance costs
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5,765 | 3,033 | ||||||
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Net change in fair value of trading securities, financial derivatives and loans held for sale
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(10,299 | ) | (5,288 | ) | ||||
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Amortization of deferred gains on certain Farmer Mac Guaranteed
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| Securities and USDA Guaranteed Securities | (4,036 | ) | - | |||||
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Gains on the sale of available-for-sale investment securities
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(195 | ) | (240 | ) | ||||
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Gains on the sale of real estate owned
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(724 | ) | - | |||||
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Total (release of)/provision for losses
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(1,428 | ) | 2,555 | |||||
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Deferred income taxes
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393 | (3,347 | ) | |||||
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Stock-based compensation expense
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1,490 | 1,508 | ||||||
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Proceeds from repayment and sale of trading investment securities
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550 | 400 | ||||||
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Purchases of loans held for sale
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(119,410 | ) | (293,003 | ) | ||||
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Proceeds from repayment of loans purchased as held for sale
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51,012 | 15,242 | ||||||
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Net change in:
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Interest receivable
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1,434 | (5,438 | ) | |||||
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Guarantee and commitment fees receivable
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2,928 | 18,437 | ||||||
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Other assets
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12,650 | (2,496 | ) | |||||
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Accrued interest payable
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(979 | ) | 13,351 | |||||
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Other liabilities
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(3,976 | ) | (19,294 | ) | ||||
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Net cash used in operating activities
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(19,433 | ) | (246,751 | ) | ||||
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Cash flows from investing activities:
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Purchases of available-for-sale investment securities
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(990,568 | ) | (306,239 | ) | ||||
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Purchases of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
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(1,016,815 | ) | (216,302 | ) | ||||
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Purchases of loans held for investment
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(329,782 | ) | (19,924 | ) | ||||
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Purchases of defaulted loans
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(18,345 | ) | (3,403 | ) | ||||
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Proceeds from repayment of available-for-sale investment securities
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511,562 | 112,337 | ||||||
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Proceeds from repayment of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities
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647,701 | 202,526 | ||||||
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Proceeds from repayment of loans purchased as held for investment
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181,792 | 173,921 | ||||||
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Proceeds from sale of available-for-sale investment securities
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153,609 | 69,175 | ||||||
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Proceeds from sale of trading securities - fair value option
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- | 5,013 | ||||||
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Proceeds from sale of Farmer Mac Guaranteed Securities
|
10,734 | 12,906 | ||||||
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Proceeds from sale of real estate owned
|
1,279 | - | ||||||
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Net cash (used in)/provided by investing activities
|
(848,833 | ) | 30,010 | |||||
|
Cash flows from financing activities:
|
||||||||
|
Proceeds from issuance of discount notes
|
34,663,582 | 31,919,565 | ||||||
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Proceeds from issuance of medium-term notes
|
991,849 | 1,006,272 | ||||||
|
Payments to redeem discount notes
|
(34,114,562 | ) | (32,095,725 | ) | ||||
|
Payments to redeem medium-term notes
|
(540,000 | ) | (908,590 | ) | ||||
|
Excess tax benefits related to stock-based awards
|
144 | 747 | ||||||
|
Payments to third parties on debt securities of consolidated trusts
|
(80,783 | ) | (113,749 | ) | ||||
|
Proceeds from common stock issuance
|
16 | 168 | ||||||
|
Issuance costs on retirement of preferred stock
|
- | (5,784 | ) | |||||
|
Proceeds from preferred stock issuance - Farmer Mac II LLC
|
- | 241,853 | ||||||
|
Retirement of Series B preferred stock
|
- | (144,216 | ) | |||||
|
Dividends paid - non-controlling interest - preferred stock
|
(11,094 | ) | (9,551 | ) | ||||
|
Dividends paid on common and preferred stock
|
(2,471 | ) | (3,710 | ) | ||||
|
Net cash provided by/(used in) financing activities
|
906,681 | (112,720 | ) | |||||
|
Net increase/(decrease) in cash and cash equivalents
|
38,415 | (329,461 | ) | |||||
|
Cash and cash equivalents at beginning of period
|
729,920 | 654,794 | ||||||
|
Cash and cash equivalents at end of period
|
$ | 768,335 | $ | 325,333 | ||||
See accompanying notes to condensed consolidated financial statements.
-6-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
Note 1.
|
Accounting Policies
|
The interim unaudited condensed consolidated financial statements of the Federal Agricultural Mortgage Corporation (“Farmer Mac” or the “Corporation”) and subsidiaries have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These interim unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial position and the results of operations and cash flows of Farmer Mac and subsidiaries for the interim periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements have been condensed or omitted as permitted by SEC rules and regulations. On June 1, 2011, Farmer Mac filed with the SEC an amendment to its Annual Report on Form 10-K for the year ended December 31, 2010 to correct prior misclassifications of proceeds from the repayments of certain loans between operating activities and investing activities on the consolidated statements of cash flows. These misclassifications had no impact on the net increase or decrease in cash and cash equivalents as previously reported and had no effect on Farmer Mac’s previously issued condensed consolidated interim or annual consolidated balance sheets, statements of operations or statements of equity. See Note 1(a) for further information. The December 31, 2010 condensed consolidated balance sheet presented in this report has been derived from the Corporation’s 2010 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the condensed consolidated financial statements as of the dates and for the periods presented. These interim unaudited condensed consolidated financial statements should be read in conjunction with the 2010 consolidated financial statements of Farmer Mac and subsidiaries included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 16, 2011, as amended by Amendment No. 1 on Form 10-K/A filed on June 1, 2011. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year. Below is a summary of Farmer Mac’s significant accounting policies.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Farmer Mac and its two subsidiaries: (1) Farmer Mac Mortgage Securities Corporation (“FMMSC”), whose principal activities are to facilitate the purchase and issuance of Farmer Mac Guaranteed Securities and to act as a registrant under registration statements filed with the Securities and Exchange Commission, and (2) Farmer Mac II LLC, whose principal activity is the operation of substantially all of the business related to the Farmer Mac II program – primarily the acquisition of the portions of loans (the “USDA-guaranteed portions”) guaranteed by the U.S. Department of Agriculture (“USDA”) presented as “USDA Guaranteed Securities” on the condensed consolidated balance sheets. Farmer Mac II LLC was formed as a Delaware limited liability company on December 10, 2009. The business operations of Farmer Mac II LLC began in January 2010. The condensed consolidated financial statements also include the accounts of variable interest entities (“VIEs”) in which Farmer Mac determined itself to be the primary beneficiary. See Note 2(g) for more information on consolidated VIEs.
-7-
A Farmer Mac guarantee of timely payment of principal and interest is an explicit element of the terms of all Farmer Mac Guaranteed Securities. When Farmer Mac retains such securities in its portfolio, that guarantee is not extinguished. For Farmer Mac Guaranteed Securities in the Corporation’s portfolio, Farmer Mac has entered into guarantee arrangements with FMMSC. The guarantee fee rate established between Farmer Mac and FMMSC is an element in determining the fair value of these Farmer Mac Guaranteed Securities, and guarantee fees related to these securities are reflected in guarantee and commitment fees in the condensed consolidated statements of operations. These guarantee fees totaled $2.0 million and $4.1 million for the three and six months ended June 30, 2011, respectively, compared to $1.5 million and $3.2 million for the same periods in 2010, respectively. The corresponding expense of FMMSC has been eliminated against interest income in consolidation. All other inter-company balances and transactions have been eliminated in consolidation.
(a) Cash and Cash Equivalents and Statements of Cash Flows
Farmer Mac considers highly liquid investment securities with maturities at the time of purchase of three months or less to be cash equivalents. The carrying value of cash and cash equivalents is a reasonable estimate of their fair value. Changes in the balance of cash and cash equivalents are reported in the condensed consolidated statements of cash flows. The following table sets forth information regarding certain cash and non-cash transactions for the six months ended June 30, 2011 and 2010.
|
For the Six Months Ended
|
||||||||
|
June 30, 2011
|
June 30, 2010
|
|||||||
|
(in thousands)
|
||||||||
|
Cash paid during the period for:
|
||||||||
|
Interest
|
$ | 49,261 | $ | 37,989 | ||||
|
Income taxes
|
11,500 | 12,000 | ||||||
|
Non-cash activity:
|
||||||||
|
Real estate owned acquired through loan liquidation
|
2,639 | 3,580 | ||||||
|
Loans acquired and securitized as loans held for investment in consolidated trusts
|
8,729 | 1,288 | ||||||
|
Consolidation of Farmer Mac I Guaranteed Securities from off-balance sheet to
|
||||||||
|
loans held for investment in consolidated trusts
|
8,729 | 1,401,659 | ||||||
|
Consolidation of Farmer Mac I Guaranteed Securities from off-balance sheet to
|
||||||||
|
debt securities of consolidated trusts held by third parties
|
8,729 | 1,401,659 | ||||||
|
Transfers of available-for-sale Farmer Mac I Guaranteed Securities to loans held for
|
||||||||
|
investment in consolidated trusts, upon the adoption of new consolidation guidance
|
- | 5,385 | ||||||
|
Transfers of trading Farmer Mac Guaranteed Securities - Rural Utilities to loans held
|
||||||||
|
for investment in consolidated trusts, upon the adoption of new
|
||||||||
|
consolidation guidance
|
- | 451,448 | ||||||
|
Deconsolidation of loans held for investment in consolidated trusts - transferred to off-
|
||||||||
|
balance sheet Farmer Mac I Guaranteed Securities
|
- | 414,462 | ||||||
|
Deconsolidation of debt securities of consolidated trusts held by third
|
||||||||
|
parties - transferred to off-balance sheet Farmer Mac I Guaranteed Securities
|
- | 414,462 | ||||||
|
Transfers of loans held for sale to loans held for investment
|
878,798 | - | ||||||
-8-
Effective January 1, 2011, Farmer Mac transferred $878.8 million of loans in the Farmer Mac I program from held for sale to held for investment because Farmer Mac no longer has the intent to securitize or sell these loans in the foreseeable future. Farmer Mac transferred these loans at their cost, which was lower than the estimated fair value at the time of transfer.
At the time of purchase, loans are classified as either held for sale or held for investment depending upon management’s intent and ability to hold the loans for the foreseeable future. On two occasions, once in first quarter 2009 and again in first quarter 2011, consistent with a change in management’s intent, Farmer Mac reclassified loans from one classification to the other on the balance sheet. Prior to first quarter 2011, cash receipts from the repayment of loans were classified within the statements of cash flows consistent with the then current balance sheet classification as opposed to the original balance sheet classification assigned based on management's intent upon purchase of the loan, as prescribed by accounting guidance related to the statement of cash flows. As a result of these incorrect classifications, Farmer Mac restated its previously issued interim condensed consolidated statements of cash flows for the six and nine month periods ended June 30, and September 30, 2009 and 2010, respectively, and its consolidated statements of cash flows for the years ended December 31, 2009 and 2010 by amending its Annual Report on Form 10-K for the year ended December 31, 2010, which included the interim periods, on Amendment No.1 of Form 10-K/A filed on June 1, 2011. The restatements impacted only the classification of items in operating activities and investing activities and had no impact on the net increase or decrease in cash and cash equivalents as previously reported and had no effect on Farmer Mac’s previously issued condensed consolidated interim or annual consolidated balance sheets, statements of operations or statements of changes in equity.
(b) Allowance for Losses
Farmer Mac maintains an allowance for losses to cover estimated probable losses on loans held (“allowance for loan losses”) and loans underlying Long Term Standby Purchase Commitments (“LTSPCs”) and Farmer Mac Guaranteed Securities (“reserve for losses”) based on available information. Farmer Mac’s methodology for determining the allowance for losses separately considers its portfolio segments - Farmer Mac I, Farmer Mac II, and Rural Utilities, and disaggregates its analysis, where relevant, into classes of financing receivables, which currently include loans and AgVantage securities. Further disaggregation to commodity type is performed, where appropriate, in analyzing the need for an allowance for losses.
The allowance for losses is increased through periodic provisions for loan losses that are charged against net interest income and provisions for losses that are charged to non-interest expense and are reduced by charge-offs for actual losses, net of recoveries. Negative provisions, or releases of allowance for losses, are recorded in the event that the estimate of probable losses as of the end of a period is lower than the estimate at the beginning of the period.
The total allowance for losses consists of a general allowance for losses and a specific allowance for impaired loans.
-9-
General Allowance for Losses
Farmer Mac I
Farmer Mac’s methodology for determining its allowance for losses incorporates the Corporation’s automated loan classification system. That system scores loans based on criteria such as historical repayment performance, indicators of current financial condition, loan seasoning, loan size and loan-to-value ratio. For the purposes of the loss allowance methodology, the loans in the Farmer Mac I portfolio and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs have been scored and classified for each calendar quarter since first quarter 2000. The allowance methodology captures the migration of loan scores across concurrent and overlapping three-year time horizons and calculates loss rates separately within each loan classification for (1) loans underlying LTSPCs and (2) loans held and loans underlying Farmer Mac I Guaranteed Securities. The calculated loss rates are applied to the current classification distribution of unimpaired loans in Farmer Mac’s portfolio to estimate inherent losses, on the assumption that the historical credit losses and trends used to calculate loss rates will continue in the future. Management evaluates this assumption by taking into consideration factors, including:
|
·
|
economic conditions;
|
|
·
|
geographic and agricultural commodity/product concentrations in the portfolio;
|
|
·
|
the credit profile of the portfolio;
|
|
·
|
delinquency trends of the portfolio;
|
|
·
|
historical charge-off and recovery activities of the portfolio; and
|
|
·
|
other factors to capture current portfolio trends and characteristics that differ from historical experience.
|
Management believes that its use of this methodology produces a reasonable estimate of probable losses, as of the balance sheet date, for all loans held in the Farmer Mac I portfolio and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs. There were no purchases or sales during the first half of 2011 that materially affected the credit profile of the Farmer Mac I portfolio.
Farmer Mac has not provided an allowance for losses for loans underlying Farmer Mac I AgVantage securities. Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is collateralized by eligible loans in an amount at least equal to the outstanding principal amount of the security, with some level of overcollateralization also required for Farmer Mac I AgVantage securities. Farmer Mac excludes the loans that secure AgVantage securities from the credit risk metrics it discloses because of the credit quality of the issuing institutions, the collateralization level for the securities, and because delinquent loans are required to be removed from the pool of pledged loans and replaced with current eligible loans.
Farmer Mac II
No allowance for losses has been provided for USDA Guaranteed Securities or Farmer Mac II Guaranteed Securities. The USDA-guaranteed portions presented as “USDA Guaranteed Securities” on the condensed consolidated balance sheets, as well as those that collateralize 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. Farmer Mac excludes these guaranteed portions from the credit risk metrics it discloses because of the USDA guarantee.
-10-
Rural Utilities
Farmer Mac separately evaluates the rural utilities loans it owns, as well as the lender obligations and loans underlying or securing its Farmer Mac Guaranteed Securities – Rural Utilities, including AgVantage securities, to determine if there are probable losses inherent in those assets. Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is collateralized by eligible loans in an amount at least equal to the outstanding principal amount of the security. No allowance for losses has been provided for this portfolio segment based on the credit quality of the collateral supporting rural utilities assets and Farmer Mac’s counterparty risk analysis. As of June 30, 2011, there were no delinquencies and no probable losses inherent in Farmer Mac’s rural utilities loans held or in any Farmer Mac Guaranteed Securities – Rural Utilities.
Specific Allowance for Impaired Loans
Farmer Mac also analyzes assets in its portfolio for impairment in accordance with the Financial Accounting Standards Board (“FASB”) standard on measuring individual impairment of a loan. Farmer Mac’s impaired assets generally include:
|
·
|
non-performing assets (loans 90 days or more past due, in foreclosure, restructured, in bankruptcy – including loans performing under either their original loan terms or a court-approved bankruptcy plan);
|
|
·
|
loans for which Farmer Mac has adjusted the timing of borrowers’ payment schedules, but still expects to collect all amounts due and has not made economic concessions; and
|
|
·
|
additional performing loans that have previously been delinquent or are secured by real estate that produces agricultural commodities or products currently under stress.
|
For loans with an updated appraised value, other updated collateral valuation or management’s estimate of discounted collateral value, this analysis includes the measurement of the fair value of the underlying collateral for individual loans relative to the total recorded investment, including principal, interest and advances and net of any charge-offs. In the event that the collateral value does not support the total recorded investment, Farmer Mac provides an allowance for the loan for the difference between the recorded investment and its fair value, less estimated costs to liquidate the collateral. For the remaining impaired assets without updated valuations, this analysis is performed in the aggregate in consideration of the similar risk characteristics of the assets and historical statistics.
As of June 30, 2011 and 2010, Farmer Mac’s specific allowances for losses were $7.5 million and $3.0 million, respectively.
-11-
Allowance for Losses
The following is a summary of the changes in the allowance for losses for the three and six months ended June 30, 2011 and 2010:
|
June 30, 2011
|
June 30, 2010
|
|||||||||||||||||||||||
|
Allowance
|
Total
|
Allowance
|
Total
|
|||||||||||||||||||||
|
for Loan
|
Reserve
|
Allowance
|
for Loan
|
Reserve
|
Allowance
|
|||||||||||||||||||
|
Losses
|
for Losses
|
for Losses
|
Losses
|
for Losses
|
for Losses
|
|||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||
|
For the Three Months Ended:
|
||||||||||||||||||||||||
|
Beginning Balance
|
$ | 11,084 | $ | 8,378 | $ | 19,462 | $ | 9,142 | $ | 6,427 | $ | 15,569 | ||||||||||||
|
Provision for/(release of) losses
|
160 | (935 | ) | (775 | ) | (1,870 | ) | 3,043 | 1,173 | |||||||||||||||
|
Charge-offs
|
(191 | ) | - | (191 | ) | - | - | - | ||||||||||||||||
|
Recoveries
|
- | - | - | 2,223 | - | 2,223 | ||||||||||||||||||
|
Ending Balance
|
$ | 11,053 | $ | 7,443 | $ | 18,496 | $ | 9,495 | $ | 9,470 | $ | 18,965 | ||||||||||||
|
For the Six Months Ended:
|
||||||||||||||||||||||||
|
Beginning Balance
|
$ | 9,803 | $ | 10,312 | $ | 20,115 | $ | 6,292 | $ | 7,895 | $ | 14,187 | ||||||||||||
|
Provision for/(release of) losses
|
1,441 | (2,869 | ) | (1,428 | ) | 980 | 1,575 | 2,555 | ||||||||||||||||
|
Charge-offs
|
(191 | ) | - | (191 | ) | - | - | - | ||||||||||||||||
|
Recoveries
|
- | - | - | 2,223 | - | 2,223 | ||||||||||||||||||
|
Ending Balance
|
$ | 11,053 | $ | 7,443 | $ | 18,496 | $ | 9,495 | $ | 9,470 | $ | 18,965 | ||||||||||||
During second quarter 2011, Farmer Mac recorded provisions to its allowance for loan losses of $0.2 million and releases from its reserve for losses of $0.9 million. The net release from the allowance for losses in second quarter 2011 was primarily due to a decline in estimated probable losses related to Farmer Mac’s exposure to the ethanol and dairy industries. Farmer Mac also charged off $0.2 million of losses upon acquisition of real estate owned (“REO”) during second quarter 2011. In first quarter 2011, Farmer Mac purchased two defaulted loans pursuant to the terms of an LTSPC agreement. This resulted in the reclassification of $1.8 million of specific allowance, which had been recorded in fourth quarter 2010, from the reserve for losses to the allowance for loan losses. The provision for/(release of) losses for the six months ended June 30, 2011 reflects this reclassification as well as the decline in estimated probable losses related to Farmer Mac’s exposure to the ethanol and dairy industries.
During second quarter 2010, Farmer Mac recorded releases from its allowance for loan losses of $1.9 million and provisions to its reserve for losses of $3.0 million. Farmer Mac also recorded recoveries of $2.2 million on a loan secured by an ethanol plant during second quarter 2010. For the six months ended June 30, 2010, Farmer Mac recorded provisions to its allowance for loan losses and its reserve for losses of $1.0 million and $1.6 million, respectively. These amounts include the reclassification of $2.0 million from the reserve for losses to the allowance for loan losses upon adoption of the new consolidation guidance in first quarter 2010.
Farmer Mac’s reserve for losses for off-balance sheet Farmer Mac I Guaranteed Securities and LTSPCs as of June 30, 2011 were $0.5 million and $6.9 million, respectively, compared to $0.6 million and $9.7 million, respectively as of December 31, 2010.
-12-
The following tables present the ending balances of Farmer Mac I loans held and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities and the related allowance for losses by impairment method and commodity type as of June 30, 2011 and December 31, 2010 and changes in the allowance for losses for the three and six months ended June 30, 2011.
|
As of June 30, 2011
|
||||||||||||||||||||||||||||
|
AgStorage and
|
||||||||||||||||||||||||||||
|
Processing
|
||||||||||||||||||||||||||||
|
Permanent
|
Part-time
|
(including ethanol
|
||||||||||||||||||||||||||
|
Crops
|
Plantings
|
Livestock
|
Farm
|
facilities)
|
Other
|
Total
|
||||||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||||||
|
Ending Balance
|
||||||||||||||||||||||||||||
|
Evaluated collectively
|
||||||||||||||||||||||||||||
|
for impairment
|
$
|
1,771,634
|
$
|
813,080
|
$
|
1,138,248
|
$
|
259,825
|
$
|
218,938
|
$
|
19,322
|
$
|
4,221,047
|
||||||||||||||
|
Evaluated individually
|
||||||||||||||||||||||||||||
|
for impairment
|
31,611
|
30,788
|
13,553
|
11,532
|
6,316
|
1,140
|
94,940
|
|||||||||||||||||||||
|
$
|
1,803,245
|
$
|
843,868
|
$
|
1,151,801
|
$
|
271,357
|
$
|
225,254
|
$
|
20,462
|
$
|
4,315,987
|
|||||||||||||||
|
Allowance for Losses:
|
||||||||||||||||||||||||||||
|
Evaluated collectively
|
||||||||||||||||||||||||||||
|
for impairment
|
$
|
1,637
|
$
|
1,204
|
$
|
1,118
|
$
|
782
|
$
|
6,250
|
$
|
8
|
$
|
10,999
|
||||||||||||||
|
Evaluated individually
|
||||||||||||||||||||||||||||
|
for impairment
|
2,078
|
2,599
|
656
|
313
|
1,850
|
1
|
7,497
|
|||||||||||||||||||||
|
$
|
3,715
|
$
|
3,803
|
$
|
1,774
|
$
|
1,095
|
$
|
8,100
|
$
|
9
|
$
|
18,496
|
|||||||||||||||
|
For the Three Months Ended:
|
||||||||||||||||||||||||||||
|
Beginning balance
|
$
|
3,922
|
$
|
3,802
|
$
|
1,850
|
$
|
1,053
|
$
|
8,823
|
$
|
12
|
$
|
19,462
|
||||||||||||||
|
Provision for/(release of) losses
|
(31
|
)
|
8
|
(68
|
)
|
42
|
(723
|
)
|
(3
|
)
|
(775
|
)
|
||||||||||||||||
|
Charge-offs
|
(176
|
)
|
(7
|
)
|
(8
|
)
|
-
|
-
|
-
|
(191
|
)
|
|||||||||||||||||
|
Ending balance
|
$
|
3,715
|
$
|
3,803
|
$
|
1,774
|
$
|
1,095
|
$
|
8,100
|
$
|
9
|
$
|
18,496
|
||||||||||||||
|
For the Six Months Ended:
|
||||||||||||||||||||||||||||
|
Beginning balance
|
$
|
3,572
|
$
|
3,537
|
$
|
2,749
|
$
|
445
|
$
|
9,797
|
$
|
15
|
$
|
20,115
|
||||||||||||||
|
Provision for/(release of) losses
|
319
|
273
|
(967
|
)
|
650
|
(1,697
|
)
|
(6
|
)
|
(1,428
|
)
|
|||||||||||||||||
|
Charge-offs
|
(176
|
)
|
(7
|
)
|
(8
|
)
|
-
|
-
|
-
|
(191
|
)
|
|||||||||||||||||
|
Ending balance
|
$
|
3,715
|
$
|
3,803
|
$
|
1,774
|
$
|
1,095
|
$
|
8,100
|
$
|
9
|
$
|
18,496
|
||||||||||||||
-13-
|
As of December 31, 2010
|
||||||||||||||||||||||||||||
|
AgStorage and
|
||||||||||||||||||||||||||||
|
Processing
|
||||||||||||||||||||||||||||
|
Permanent
|
Part-time
|
(including ethanol
|
||||||||||||||||||||||||||
|
Crops
|
Plantings
|
Livestock
|
Farm
|
facilities)
|
Other
|
Total
|
||||||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||||||
|
Ending Balance
|
||||||||||||||||||||||||||||
|
Evaluated collectively
|
||||||||||||||||||||||||||||
|
for impairment
|
$ | 1,699,477 | $ | 835,254 | $ | 1,130,466 | $ | 282,400 | $ | 239,933 | $ | 22,514 | $ | 4,210,044 | ||||||||||||||
|
Evaluated individually
|
||||||||||||||||||||||||||||
|
for impairment
|
31,903 | 30,221 | 15,992 | 8,745 | 6,790 | 425 | 94,076 | |||||||||||||||||||||
| $ | 1,731,380 | $ | 865,475 | $ | 1,146,458 | $ | 291,145 | $ | 246,723 | $ | 22,939 | $ | 4,304,120 | |||||||||||||||
|
Allowance for Losses
|
||||||||||||||||||||||||||||
|
Evaluated collectively
|
||||||||||||||||||||||||||||
|
for impairment
|
$ | 1,499 | $ | 783 | $ | 2,236 | $ | 222 | $ | 7,947 | $ | 13 | $ | 12,700 | ||||||||||||||
|
Evaluated individually
|
||||||||||||||||||||||||||||
|
for impairment
|
2,073 | 2,754 | 513 | 223 | 1,850 | 2 | 7,415 | |||||||||||||||||||||
| $ | 3,572 | $ | 3,537 | $ | 2,749 | $ | 445 | $ | 9,797 | $ | 15 | $ | 20,115 | |||||||||||||||
Farmer Mac recognized interest income of approximately $0.3 million and $1.1 million on impaired loans during the three months and six months ended June 30, 2011, respectively, compared to $0.4 million and $0.9 million, respectively, for the same periods in 2010. During the three and six months ended June 30, 2011, Farmer Mac’s average investment in impaired loans was $89.1 million and $94.4 million, respectively, compared to $115.7 million and $124.3 million, respectively, for the same periods in 2010.
The following tables present by commodity type the unpaid principal balances, recorded investment and specific allowance for losses related to impaired loans, the recorded investment in loans on nonaccrual status as of June 30, 2011 and December 31, 2010 and the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2011.
-14-
|
As of June 30, 2011
|
||||||||||||||||||||||||||||
|
AgStorage and
|
||||||||||||||||||||||||||||
|
Processing
|
||||||||||||||||||||||||||||
|
Permanent
|
Part-time
|
(including ethanol
|
||||||||||||||||||||||||||
|
Crops
|
Plantings
|
Livestock
|
Farm
|
facilities)
|
Other
|
Total
|
||||||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||||||
|
Impaired Loans:
|
||||||||||||||||||||||||||||
|
With no specific allowance:
|
||||||||||||||||||||||||||||
|
Recorded investment
|
$ | 12,586 | $ | 10,134 | $ | 7,135 | $ | 3,056 | $ | - | $ | 964 | $ | 33,875 | ||||||||||||||
|
Unpaid principal balance
|
12,797 | 9,574 | 7,570 | 3,063 | - | 902 | 33,906 | |||||||||||||||||||||
|
With a specific allowance:
|
||||||||||||||||||||||||||||
|
Recorded investment
|
20,017 | 20,743 | 6,133 | 8,575 | 6,316 | 240 | 62,024 | |||||||||||||||||||||
|
Unpaid principal balance
|
18,814 | 21,214 | 5,983 | 8,469 | 6,316 | 238 | 61,034 | |||||||||||||||||||||
|
Associated allowance
|
2,078 | 2,599 | 656 | 313 | 1,850 | 1 | 7,497 | |||||||||||||||||||||
|
Total:
|
||||||||||||||||||||||||||||
|
Recorded investment
|
32,603 | 30,877 | 13,268 | 11,631 | 6,316 | 1,204 | 95,899 | |||||||||||||||||||||
|
Unpaid principal balance
|
31,611 | 30,788 | 13,553 | 11,532 | 6,316 | 1,140 | 94,940 | |||||||||||||||||||||
|
Associated allowance
|
2,078 | 2,599 | 656 | 313 | 1,850 | 1 | 7,497 | |||||||||||||||||||||
|
For the Three Months Ended June 30, 2011:
|
||||||||||||||||||||||||||||
|
Average recorded investment
|
||||||||||||||||||||||||||||
|
in impaired loans
|
30,040 | 29,531 | 12,990 | 9,391 | 6,458 | 723 | 89,133 | |||||||||||||||||||||
|
Income recognized
|
||||||||||||||||||||||||||||
|
on impaired loans
|
59 | 186 | 29 | 19 | - | - | 293 | |||||||||||||||||||||
|
For the Six Months Ended June 30, 2011:
|
||||||||||||||||||||||||||||
|
Average recorded investment
|
||||||||||||||||||||||||||||
|
in impaired loans
|
32,016 | 30,188 | 14,597 | 10,235 | 6,578 | 817 | 94,431 | |||||||||||||||||||||
|
Income recognized
|
||||||||||||||||||||||||||||
|
on impaired loans
|
215 | 213 | 246 | 60 | 382 | - | 1,116 | |||||||||||||||||||||
|
Recorded investment of loans on non accrual status:
|
9,865 | 25,060 | 3,422 | 5,244 | - | - | 43,591 | |||||||||||||||||||||
|
As of December 31, 2010
|
||||||||||||||||||||||||||||
|
AgStorage and
|
||||||||||||||||||||||||||||
|
Processing
|
||||||||||||||||||||||||||||
|
Permanent
|
Part-time
|
(including ethanol
|
||||||||||||||||||||||||||
|
Crops
|
Plantings
|
Livestock
|
Farm
|
facilities)
|
Other
|
Total
|
||||||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||||||
|
Impaired Loans:
|
||||||||||||||||||||||||||||
|
With no specific allowance:
|
||||||||||||||||||||||||||||
|
Recorded investment
|
$ | 16,015 | $ | 10,549 | $ | 6,873 | $ | 1,050 | $ | - | $ | - | $ | 34,487 | ||||||||||||||
|
Unpaid principal balance
|
17,274 | 10,895 | 7,087 | 1,072 | - | - | 36,328 | |||||||||||||||||||||
|
With a specific allowance:
|
||||||||||||||||||||||||||||
|
Recorded investment
|
15,414 | 18,949 | 9,052 | 7,788 | 6,839 | 430 | 58,472 | |||||||||||||||||||||
|
Unpaid principal balance
|
14,630 | 19,326 | 8,905 | 7,672 | 6,790 | 425 | 57,748 | |||||||||||||||||||||
|
Associated allowance
|
2,073 | 2,754 | 513 | 223 | 1,850 | 2 | 7,415 | |||||||||||||||||||||
|
Total:
|
||||||||||||||||||||||||||||
|
Recorded investment
|
31,429 | 29,498 | 15,925 | 8,838 | 6,839 | 430 | 92,959 | |||||||||||||||||||||
|
Unpaid principal balance
|
31,904 | 30,221 | 15,992 | 8,744 | 6,790 | 425 | 94,076 | |||||||||||||||||||||
|
Associated allowance
|
2,073 | 2,754 | 513 | 223 | 1,850 | 2 | 7,415 | |||||||||||||||||||||