As filed
with the Securities and Exchange Commission on
November
10, 2008
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 September 30, 2008
Commission
File Number 001-14951
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION
(Exact
name of registrant as specified in its charter)
|
Federally
chartered instrumentality of the United States
|
52-1578738
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
employer identification number)
|
|
1133
Twenty-First Street, N.W., Suite 600
Washington,
D.C.
|
20036
|
|
(Address
of principal executive offices)
|
(Zip
code)
|
(202)
872-7700
(Registrant’s
telephone number, including area code)
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 T
|
No £
|
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 £
|
Accelerated
filer T
|
|
Non-accelerated
filer £
|
Smaller
reporting company £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
|
Yes £
|
No T
|
As of
November 1, 2008, the registrant had 1,030,780 shares of Class A Voting Common
Stock, 500,301 shares of Class B Voting Common Stock and 8,601,352 shares of
Class C Non-Voting Common Stock outstanding.
PART
I - FINANCIAL INFORMATION
|
Item
1.
|
Condensed Consolidated
Financial Statements
|
The
following information concerning Farmer Mac’s interim unaudited condensed
consolidated financial statements is included in this report beginning on the
pages listed below:
|
Condensed
Consolidated Balance Sheets as of September 30, 2008 and December 31,
2007
|
3
|
|
Condensed
Consolidated Statements of Operations for the three and nine months ended
September 30, 2008 and 2007
|
4
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended September
30, 2008 and 2007
|
5
|
|
Notes
to Condensed Consolidated Financial Statements
|
6
|
-2-
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(unaudited)
|
September 30, 2008
|
December 31, 2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 50,661 | $ | 101,445 | ||||
|
Investment
securities:
|
||||||||
|
Available-for-sale,
at fair value (includes securities pledged to counterparties of $16.6
million and $7.2 million as of September 30, 2008 and December 31, 2007,
respectively)
|
1,297,255 | 2,616,187 | ||||||
|
Trading,
at fair value
|
171,046 | 8,179 | ||||||
|
Total
investment securities
|
1,468,301 | 2,624,366 | ||||||
|
Farmer
Mac Guaranteed Securities:
|
||||||||
|
Held-to-maturity,
at amortized cost
|
- | 959,865 | ||||||
|
Available-for-sale,
at fair value
|
1,250,194 | 338,958 | ||||||
|
Trading,
at fair value
|
913,211 | - | ||||||
|
Total
Farmer Mac Guaranteed Securities
|
2,163,405 | 1,298,823 | ||||||
|
Loans:
|
||||||||
|
Loans
held for sale, at lower of cost or fair value
|
63,202 | 118,629 | ||||||
|
Loans
held for investment, at amortized cost
|
630,615 | 649,280 | ||||||
|
Allowance
for loan losses
|
(2,329 | ) | (1,690 | ) | ||||
|
Total
loans, net of allowance
|
691,488 | 766,219 | ||||||
|
Real
estate owned, at lower of cost or fair value
|
590 | 590 | ||||||
|
Financial
derivatives, at fair value
|
3,395 | 2,288 | ||||||
|
Interest
receivable
|
57,701 | 91,939 | ||||||
|
Guarantee
and commitment fees receivable
|
60,385 | 57,804 | ||||||
|
Deferred
tax asset, net
|
55,073 | 30,239 | ||||||
|
Prepaid
expenses and other assets
|
107,689 | 3,900 | ||||||
|
Total
Assets
|
$ | 4,658,688 | $ | 4,977,613 | ||||
|
Liabilities,
Mezzanine Equity and Stockholders' Equity:
|
||||||||
|
Liabilities:
|
||||||||
|
Notes
payable:
|
||||||||
|
Due
within one year
|
$ | 3,642,228 | $ | 3,829,698 | ||||
|
Due
after one year
|
664,874 | 744,649 | ||||||
|
Total
notes payable
|
4,307,102 | 4,574,347 | ||||||
|
Financial
derivatives, at fair value
|
65,670 | 55,273 | ||||||
|
Accrued
interest payable
|
32,520 | 50,004 | ||||||
|
Guarantee
and commitment obligation
|
55,582 | 52,130 | ||||||
|
Accounts
payable and accrued expenses
|
24,780 | 20,069 | ||||||
|
Reserve
for losses
|
2,106 | 2,197 | ||||||
|
Total
Liabilities
|
4,487,760 | 4,754,020 | ||||||
|
Mezzanine
Equity:
|
||||||||
|
Series
B redeemable preferred stock, redemption/liquidation value of $1,000
per share, 65,000 shares authorized, issued and
outstanding
|
61,039 | - | ||||||
|
Stockholders'
Equity:
|
||||||||
|
Preferred
stock:
|
||||||||
|
Series
A, stated at redemption/liquidation value, $50 per share, 700,000 shares
authorized, issued and outstanding
|
35,000 | 35,000 | ||||||
|
Common
stock:
|
||||||||
|
Class
A Voting, $1 par value, no maximum authorization
|
1,031 | 1,031 | ||||||
|
Class
B Voting, $1 par value, no maximum authorization
|
500 | 500 | ||||||
|
Class
C Non-Voting, $1 par value, no maximum authorization
|
8,598 | 8,364 | ||||||
|
Additional
paid-in capital
|
96,194 | 87,134 | ||||||
|
Accumulated
other comprehensive loss
|
(41,421 | ) | (2,793 | ) | ||||
|
Retained
earnings
|
9,987 | 94,357 | ||||||
|
Total
Stockholders' Equity
|
109,889 | 223,593 | ||||||
|
Total
Liabilities, Mezzanine Equity and Stockholders' Equity
|
$ | 4,658,688 | $ | 4,977,613 | ||||
See
accompanying notes to condensed consolidated financial statements.
-3-
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in
thousands, except per share amounts)
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
September 30, 2008
|
September 30,
2007
|
September 30,
2008
|
September 30,
2007
|
|||||||||||||
|
Interest
income:
|
||||||||||||||||
|
Investments
and cash equivalents
|
$ | 20,395 | $ | 46,621 | $ | 97,305 | $ | 127,143 | ||||||||
|
Farmer
Mac Guaranteed Securities
|
28,470 | 18,437 | 67,007 | 56,622 | ||||||||||||
|
Loans
|
11,718 | 11,636 | 35,192 | 34,154 | ||||||||||||
|
Total
interest income
|
60,583 | 76,694 | 199,504 | 217,919 | ||||||||||||
|
Total
interest expense
|
39,260 | 66,177 | 135,885 | 189,841 | ||||||||||||
|
Net
interest income
|
21,323 | 10,517 | 63,619 | 28,078 | ||||||||||||
|
(Provision)/recovery
for loan losses
|
(731 | ) | - | (731 | ) | 215 | ||||||||||
|
Net
interest income after (provision)/recovery for loan losses
|
20,592 | 10,517 | 62,888 | 28,293 | ||||||||||||
|
Non-interest
(loss)/income:
|
||||||||||||||||
|
Guarantee
and commitment fees
|
7,281 | 6,421 | 20,574 | 18,633 | ||||||||||||
|
Losses
on financial derivatives
|
(19,021 | ) | (24,906 | ) | (29,691 | ) | (9,040 | ) | ||||||||
|
Losses
on trading assets
|
(14,507 | ) | - | (21,664 | ) | (74 | ) | |||||||||
|
Impairment
losses on available-for-sale investment securities
|
(97,108 | ) | - | (102,452 | ) | - | ||||||||||
|
(Losses)/gains
on sale of available-for-sale investment securities
|
(85 | ) | 87 | 65 | 108 | |||||||||||
|
Gains
on sale of Farmer Mac Guaranteed Securities
|
1,531 | - | 1,531 | - | ||||||||||||
|
Gains
on the repurchase of debt
|
840 | - | 840 | - | ||||||||||||
|
Gains
on the sale of real estate owned
|
- | 98 | - | 130 | ||||||||||||
|
Other
income
|
192 | 712 | 1,315 | 1,163 | ||||||||||||
|
Non-interest
(loss)/income
|
(120,877 | ) | (17,588 | ) | (129,482 | ) | 10,920 | |||||||||
|
Non-interest
expense:
|
||||||||||||||||
|
Compensation
and employee benefits
|
3,748 | 3,459 | 11,327 | 10,315 | ||||||||||||
|
General
and administrative
|
4,061 | 1,982 | 8,331 | 6,556 | ||||||||||||
|
Regulatory
fees
|
513 | 550 | 1,538 | 1,650 | ||||||||||||
|
Real
estate owned operating costs, net
|
15 | (31 | ) | 102 | (31 | ) | ||||||||||
|
(Recovery)/provision
for losses
|
(91 | ) | 386 | (91 | ) | 73 | ||||||||||
|
Non-interest
expense
|
8,246 | 6,346 | 21,207 | 18,563 | ||||||||||||
|
(Loss)/income
before income taxes
|
(108,531 | ) | (13,417 | ) | (87,801 | ) | 20,650 | |||||||||
|
Income
tax (benefit)/expense
|
(2,973 | ) | (5,407 | ) | 3,463 | 5,249 | ||||||||||
|
Net
(loss)/income
|
(105,558 | ) | (8,010 | ) | (91,264 | ) | 15,401 | |||||||||
|
Preferred
stock dividends
|
(578 | ) | (560 | ) | (1,698 | ) | (1,680 | ) | ||||||||
|
Net
(loss)/income available to common stockholders
|
$ | (106,136 | ) | $ | (8,570 | ) | $ | (92,962 | ) | $ | 13,721 | |||||
|
(Loss)/earnings
per common share and dividends:
|
||||||||||||||||
|
Basic
(loss)/earnings per common share
|
$ | (10.55 | ) | $ | (0.82 | ) | $ | (9.33 | ) | $ | 1.32 | |||||
|
Diluted
(loss)/earnings per common share
|
$ | (10.55 | ) | $ | (0.82 | ) | $ | (9.33 | ) | $ | 1.29 | |||||
|
Common
stock dividends per common share
|
$ | 0.10 | $ | 0.10 | $ | 0.30 | $ | 0.30 | ||||||||
See
accompanying notes to condensed consolidated financial statements.
-4-
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
Nine Months Ended
|
||||||||
|
September 30, 2008
|
September 30,
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
(loss) income
|
$ | (91,264 | ) | $ | 15,401 | |||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
|
Net
amortization of premiums and discounts on loans and
investments
|
3,752 | (1,530 | ) | |||||
|
Amortization
of debt premiums, discounts and issuance costs
|
66,790 | 98,154 | ||||||
|
Purchases
of trading investment securities
|
- | (9,090 | ) | |||||
|
Proceeds
from repayment of trading investment securities
|
6,507 | 5,417 | ||||||
|
Purchases
of loans held for sale
|
(38,461 | ) | (36,021 | ) | ||||
|
Proceeds
from repayment of loans held for sale
|
14,747 | 5,744 | ||||||
|
Net
change in fair value of trading securities and financial
derivatives
|
30,954 | 8,692 | ||||||
|
Amortization
of SFAS 133 transition adjustment on financial derivatives
|
222 | 297 | ||||||
|
Impairment
losses on available-for-sale investment securities
|
102,452 | - | ||||||
|
Gains
on sale of Farmer Mac Guaranteed Securities
|
(1,531 | ) | - | |||||
|
Gains
on sale of available-for-sale investment securities
|
(65 | ) | (108 | ) | ||||
|
Gains
on repurchase of debt
|
(840 | ) | - | |||||
|
Gains
on the sale of real estate owned
|
- | (130 | ) | |||||
|
Total
provision/(recovery) for losses
|
640 | (142 | ) | |||||
|
Deferred
income taxes
|
(11,316 | ) | (5,588 | ) | ||||
|
Stock-based
compensation expense
|
3,389 | 2,452 | ||||||
|
Decrease
in interest receivable
|
34,238 | 13,474 | ||||||
|
Increase
in guarantee and commitment fees receivable
|
(2,581 | ) | (14,544 | ) | ||||
|
Increase
in other assets
|
(41,561 | ) | (2,276 | ) | ||||
|
(Decrease)/increase
in accrued interest payable
|
(17,484 | ) | 3,376 | |||||
|
Increase
in other liabilities
|
8,911 | 11,199 | ||||||
|
Net
cash provided by operating activities
|
67,499 | 94,777 | ||||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchases
of available-for-sale investment securities (1)
|
(1,160,501 | ) | (3,211,435 | ) | ||||
|
Purchases
of Farmer Mac II Guaranteed Securities and
|
||||||||
|
AgVantage Farmer
Mac Guaranteed Securities
|
(305,584 | ) | (172,503 | ) | ||||
|
Purchases
of loans held for investment
|
(86,024 | ) | (51,025 | ) | ||||
|
Purchases
of defaulted loans
|
(1,746 | ) | (3,911 | ) | ||||
|
Proceeds
from repayment of investment securities (2)
|
445,154 | 2,314,070 | ||||||
|
Proceeds
from repayment of Farmer Mac Guaranteed Securities
|
219,341 | 201,667 | ||||||
|
Proceeds
from repayment of loans held for investment
|
101,964 | 121,261 | ||||||
|
Proceeds
from sale of available-for-sale investment securities
|
351,256 | 58,383 | ||||||
|
Proceeds
from sale of real estate owned
|
- | 1,523 | ||||||
|
Proceeds
from sale of Farmer Mac Guaranteed Securities
|
649,723 | 2,538 | ||||||
|
Net
cash provided by/(used in) investing activities
|
213,583 | (739,432 | ) | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from issuance of discount notes
|
105,086,822 | 88,500,039 | ||||||
|
Proceeds
from issuance of medium-term notes
|
1,486,903 | 1,261,000 | ||||||
|
Payments
to redeem discount notes
|
(104,926,504 | ) | (88,604,301 | ) | ||||
|
Payments
to redeem medium-term notes
|
(1,979,660 | ) | (805,665 | ) | ||||
|
Tax
benefit from tax deductions in excess of compensation cost
recognized
|
381 | 593 | ||||||
|
Proceeds
from common stock issuance
|
5,722 | 7,531 | ||||||
|
Purchases
of common stock
|
(830 | ) | (15,041 | ) | ||||
|
Dividends
paid on common and preferred stock
|
(4,700 | ) | (4,789 | ) | ||||
|
Net
cash (used in)/provided by financing activities
|
(331,866 | ) | 339,367 | |||||
|
Net
decrease in cash and cash equivalents
|
(50,784 | ) | (305,288 | ) | ||||
|
Cash
and cash equivalents at beginning of period
|
101,445 | 877,714 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 50,661 | $ | 572,426 | ||||
|
(1)
|
Includes
purchases of $349.0 million and $2.0 billion related to auction-rate
certificates for the nine months ended September 30, 2008 and 2007,
respectively. See Note 2 to the condensed consolidated
financial statements.
|
|
(2)
|
Includes
proceeds, through the normal auction process, of $268.0 million and $1.9
billion related to auction-rate certificates for the nine months ended
September 30, 2008 and 2007, respectively. See Note 2 to the
condensed consolidated financial
statements.
|
See
accompanying notes to condensed consolidated financial statements.
-5-
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”) 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 condition and the results of operations and cash flows of Farmer
Mac 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. The December 31, 2007 consolidated balance sheet
presented in this report has been derived from the Corporation’s audited 2007
consolidated financial statements. Management believes that the
disclosures are adequate to present fairly the condensed consolidated financial
position, condensed consolidated results of operations and condensed
consolidated cash flows as of the dates and for the periods
presented. These interim unaudited condensed consolidated financial
statements should be read in conjunction with the audited 2007 consolidated
financial statements of Farmer Mac included in the Corporation’s Annual Report
on Form 10-K for the year ended December 31, 2007. 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.
|
|
(a)
|
Cash and Cash
Equivalents and Statements of Cash
Flows
|
Farmer
Mac considers highly liquid investment securities with original maturities of
three months or less at the time of purchase to be cash
equivalents. Changes in the balance of cash and cash equivalents are
reported in the condensed consolidated statements of cash flows. The
following table sets forth information regarding certain cash and non-cash
transactions for the nine months ended September 30, 2008 and 2007.
-6-
|
Nine Months Ended
|
||||||||
|
September 30, 2008
|
September 30,
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Cash
paid for:
|
||||||||
|
Interest
|
$ | 88,012 | $ | 93,345 | ||||
|
Income
taxes
|
25,069 | 8,000 | ||||||
|
Non-cash
activity:
|
||||||||
|
Loans
acquired and securitized as Farmer Mac Guaranteed
Securities
|
79,757 | 1,324 | ||||||
|
Issuance
of Series B redeemable preferred stock (net of deferred offering
costs)
|
61,039 | - | ||||||
|
Reclassification
of unsettled trades with The Reserve Primary Fund from Cash and cash
equivalents to Prepaid expenses and other assets
|
42,489 | - | ||||||
|
Transfers
of investment securities from available-for-sale to trading from the
effect of adopting SFAS 159
|
600,468 | - | ||||||
|
Transfers
of Farmer Mac II Guaranteed Securities from held-to-maturity to trading
from the effect of adopting SFAS 159
|
428,670 | - | ||||||
|
Transfers
of Farmer Mac II Guaranteed Securities from held-to-maturity to
available-for-sale
|
493,997 | - | ||||||
|
Transfers
of Farmer Mac I Guaranteed Securities from held-to-maturity to
available-for-sale
|
25,458 | - | ||||||
|
Transfers
of available-for-sale investment securities to available-for-sale Farmer
Mac Guaranteed Securities - Rural Utilities
|
902,420 | - | ||||||
|
Transfers
of trading investment securities to trading Farmer Mac Guaranteed
Securities - Rural Utilities
|
459,026 | - | ||||||
|
|
(b)
|
Allowance for
Losses
|
As of
September 30, 2008, Farmer Mac maintained an allowance for losses to cover
estimated probable losses on loans held, real estate owned, and loans underlying
long-term standby purchase commitments (“LTSPCs”) and Farmer Mac I Guaranteed
Securities issued after the Farm Credit System Reform Act of 1996 (the “1996
Act”) in accordance with Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies
(“SFAS 5”), and Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for
Impairment of a Loan, as amended (“SFAS 114”).
The
allowance for losses is increased through periodic provisions for loan losses
that are charged against net interest income and provisions for losses that are
charged to non-interest expense and is reduced by charge-offs for actual losses,
net of recoveries. Negative provisions for loan losses or negative
provisions for losses are recorded in the event that the estimate of probable
losses as of the end of a period is lower than the estimate at the beginning of
the period.
-7-
Farmer
Mac’s methodology for determining its allowance for losses incorporates the
Corporation’s proprietary automated loan classification system. That
system scores loans based on criteria such as historical repayment performance,
loan seasoning, loan size and loan-to-value ratio. For the purposes
of the loss allowance methodology, the loans in Farmer Mac’s portfolio of loans
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs
have been scored and classified for each calendar quarter since first quarter
2000. The allowance methodology captures the migration of loan scores
across concurrent and overlapping three-year time horizons and calculates loss
rates separately within each loan classification for (1) loans underlying LTSPCs
and (2) loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities. The calculated loss rates are applied to the current
classification distribution of Farmer Mac’s portfolio to estimate inherent
losses, on the assumption that the historical credit losses and trends used to
calculate loss rates will continue in the future. Management
evaluates this assumption by taking into consideration factors
including:
|
|
·
|
economic
conditions;
|
|
|
·
|
geographic
and agricultural commodity/product concentrations in the
portfolio;
|
|
|
·
|
the
credit profile of the portfolio;
|
|
|
·
|
delinquency
trends of the portfolio;
|
|
|
·
|
historical
charge-off and recovery activities of the portfolio;
and
|
|
|
·
|
other
factors to capture current portfolio trends and characteristics that
differ from historical experience.
|
Management
believes that its use of this methodology produces a reliable estimate of
probable losses, as of the balance sheet date, for all loans held, real estate
owned and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs in accordance with SFAS 5 and SFAS 114.
-8-
The
following table summarizes the changes in the components of Farmer Mac’s
allowance for losses for the three and nine months ended September 30, 2008 and
2007:
|
September 30, 2008
|
||||||||||||||||
|
Allowance
for Loan Losses
|
REO
Valuation Allowance
|
Reserve
for Losses
|
Total
Allowance for Losses
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Three
Months Ended:
|
||||||||||||||||
|
Beginning
balance
|
$ | 1,592 | $ | - | $ | 2,197 | $ | 3,789 | ||||||||
|
Provision/(recovery)
for losses
|
731 | - | (91 | ) | 640 | |||||||||||
|
Charge-offs
|
- | - | - | - | ||||||||||||
|
Recoveries
|
6 | - | - | 6 | ||||||||||||
|
Ending
balance
|
$ | 2,329 | $ | - | $ | 2,106 | $ | 4,435 | ||||||||
|
Nine
Months Ended:
|
||||||||||||||||
|
Beginning
balance
|
$ | 1,690 | $ | - | $ | 2,197 | $ | 3,887 | ||||||||
|
Provision/(recovery)
for losses
|
731 | - | (91 | ) | 640 | |||||||||||
|
Charge-offs
|
(108 | ) | - | - | (108 | ) | ||||||||||
|
Recoveries
|
16 | - | - | 16 | ||||||||||||
|
Ending
balance
|
$ | 2,329 | $ | - | $ | 2,106 | $ | 4,435 | ||||||||
|
September 30, 2007
|
||||||||||||||||
|
Allowance
for Loan Losses
|
REO
Valuation Allowance
|
Reserve
for Losses
|
Total
Allowance for Losses
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Three
Months Ended:
|
||||||||||||||||
|
Beginning
balance
|
$ | 1,681 | $ | - | $ | 2,197 | $ | 3,878 | ||||||||
|
Provision/(recovery)
for losses
|
- | - | 386 | 386 | ||||||||||||
|
Charge-offs
|
- | - | (386 | ) | (386 | ) | ||||||||||
|
Recoveries
|
20 | - | - | 20 | ||||||||||||
|
Ending
balance
|
$ | 1,701 | $ | - | $ | 2,197 | $ | 3,898 | ||||||||
|
Nine
Months Ended:
|
||||||||||||||||
|
Beginning
balance
|
$ | 1,945 | $ | - | $ | 2,610 | $ | 4,555 | ||||||||
|
Provision/(recovery)
for losses
|
(215 | ) | 100 | (27 | ) | (142 | ) | |||||||||
|
Charge-offs
|
(49 | ) | (100 | ) | (386 | ) | (535 | ) | ||||||||
|
Recoveries
|
20 | - | - | 20 | ||||||||||||
|
Ending
balance
|
$ | 1,701 | $ | - | $ | 2,197 | $ | 3,898 | ||||||||
Prior to
third quarter 2007, no allowance for losses had been made for loans underlying
Farmer Mac I Guaranteed Securities issued prior to the 1996 Act (“Pre-1996 Act
Farmer Mac I Guaranteed Securities”), AgVantage securities or securities issued
under the Farmer Mac II program (“Farmer Mac II Guaranteed
Securities”). Pre-1996 Act Farmer Mac I Guaranteed Securities are
supported by unguaranteed first loss subordinated interests, which are expected
to exceed the estimated credit losses on those loans. Through
September 30, 2008, Farmer Mac had charged off $0.4 million related to one loan
underlying Pre-1996 Act Farmer Mac I Guaranteed Securities. The
remaining $1.7 million of Pre-1996 Act Farmer Mac I Guaranteed Securities
represent interests in seasoned performing loans with low loan-to-value
ratios. Farmer Mac does not expect to incur any further losses on the
remaining Pre-1996 Act Farmer Mac I Guaranteed Securities in the
future. Each AgVantage security is a general obligation of an issuing
institution approved by Farmer Mac and is collateralized by eligible mortgage
loans. As of September 30, 2008, there were no probable losses
inherent in Farmer Mac’s AgVantage securities due to the high credit quality of
the obligors, as well as the underlying collateral. As of September
30, 2008, Farmer Mac had not experienced any credit losses on any AgVantage
securities and does not expect to incur any such losses in the
future. The guaranteed portions collateralizing Farmer Mac II
Guaranteed Securities are guaranteed by the United States Department of
Agriculture (“USDA”). Each USDA guarantee is an obligation backed by
the full faith and credit of the United States. As of September 30,
2008, Farmer Mac had not experienced any credit losses on any Farmer Mac II
Guaranteed Securities and does not expect to incur any such losses in the
future.
-9-
On May
22, 2008, Congress enacted into law the Food, Conservation and Energy Act of
2008 (the “Farm Bill”), which expanded Farmer Mac’s authorities to include
providing a secondary market for rural electric and telephone loans made by
cooperative lenders. During second quarter 2008, Farmer Mac placed
its guarantee on $430.7 million of securities representing interests in rural
electric cooperative loans and $900.0 million principal amount of obligations
collateralized by rural electric cooperative loans previously held as
mission-related investments under authority granted by the Farm Credit
Administration (“FCA”). During third quarter 2008, $500.0 million of
the obligations collateralized by rural electric cooperative loans matured and
was repaid and $5.7 million of the securities representing interests in rural
electric cooperative loans was repaid. Farmer Mac evaluated the
remaining $825.0 million Farmer Mac Guaranteed Securities – Rural Utilities
outstanding as of September 30, 2008 and determined that there were no probable
losses inherent in the securities or the underlying rural utilities
loans. Accordingly, no allowance for losses was recorded as of
September 30, 2008 with respect to those securities.
The table
below summarizes the components of Farmer Mac’s allowance for losses as of
September 30, 2008 and December 31, 2007:
|
September 30,
2008
|
December 31,
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Allowance
for loan losses
|
$ | 2,329 | $ | 1,690 | ||||
|
Real
estate owned valuation allowance
|
- | - | ||||||
|
Reserve
for losses:
|
||||||||
|
On-balance
sheet Farmer Mac I Guaranteed Securities
|
868 | 857 | ||||||
|
Off-balance
sheet Farmer Mac I Guaranteed Securities
|
895 | 655 | ||||||
|
LTSPCs
|
343 | 685 | ||||||
|
Farmer
Mac Guaranteed Securities - Rural Utilities
|
- | - | ||||||
|
Total
|
$ | 4,435 | $ | 3,887 | ||||
-10-
As of
September 30, 2008, Farmer Mac individually analyzed $3.7 million of its $47.8
million of impaired assets for collateral shortfalls against updated appraised
values, other updated collateral valuations or discounted
values. Farmer Mac evaluated the remaining $44.1 million of impaired
assets, for which updated valuations were not available, in the aggregate in
consideration of their similar risk characteristics and historical
statistics. All of the $3.7 million of assets analyzed individually
were adequately collateralized. Accordingly, Farmer Mac did not
record any specific allowances for any of its impaired assets as of September
30, 2008. Similarly, as of December 31, 2007, Farmer Mac did not
record any specific allowances related to its $36.6 million of impaired assets
as of that date.
Farmer
Mac recognized interest income of approximately $1.0 million and $3.1 million on
impaired loans during the three and nine months ended September 30, 2008,
respectively, compared to $1.1 million and $2.9 million, respectively, during
the same periods in 2007. During the three and nine months ended
September 30, 2008, Farmer Mac’s average investment in impaired loans was $46.9
million and $42.2 million, respectively, compared to $44.5 million and $50.1
million, respectively, for the same periods in 2007.
|
|
(c)
|
Adoption of Fair Value
Accounting Standards
|
Effective
January 1, 2008, Farmer Mac adopted Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements (“SFAS 157”) and Statement of Financial Accounting Standards
No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115 (“SFAS 159”). These standards require
disclosures about financial assets and liabilities that are measured at fair
value and provide an election option to report financial instruments at fair
value with changes in fair value recorded in earnings as they
occur.
Fair
Value Measurements
SFAS 157
defines fair value, establishes a framework for measuring fair value under other
accounting pronouncements that permit or require fair value measurements, and
expands disclosures about fair value measurements. In particular,
disclosures are required to provide information on the extent to which fair
value is used to measure assets and liabilities, the inputs used to develop
measurements and the effects of certain of the measurements on earnings or
changes in net assets.
The
principal impact of SFAS 157 to Farmer Mac is to require expanded disclosures
regarding fair value measurements. SFAS 157 establishes a fair value
hierarchy that prioritizes inputs to valuation techniques used to measure fair
value. The hierarchy gives highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements). Farmer Mac’s assets and liabilities recorded at fair
value have been categorized based upon a fair value hierarchy in accordance with
SFAS 157. The levels of fair value hierarchy are described
below:
-11-
Basis of
Fair Value Measurement
|
|
Level
1
|
Unadjusted
quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or liabilities. Farmer
Mac has classified exchange-traded Treasury futures as Level 1
measurements.
|
|
|
Level
2
|
Quoted
prices in markets that are not active or financial instruments for which
all significant inputs are observable, either directly or
indirectly. Level 2 inputs include inputs other than quoted
prices that are observable for the financial instrument, such as interest
rates and yield curves that are observable at commonly quoted
intervals. Farmer Mac has classified financial instruments for
which there are continuous and verifiable pricing sources as Level 2
inputs, including certificates of deposit, commercial paper, asset-backed
securities, corporate debt securities, mortgage-backed securities,
preferred stock issued by Fannie Mae, and most financial
derivatives.
|
|
|
Level
3
|
Prices
or valuations that require inputs that are both significant to the fair
value measurement and unobservable. Level 3 inputs include
situations where there is little, if any, market activity for the
financial instrument. For financial instruments that are thinly
traded, Farmer Mac uses as its primary fair value source analytical models
that project cash flows based on internal and external inputs, including
transaction terms, yield curves, benchmark data, volatility data,
prepayment assumptions and default assumptions. Financial
instruments requiring Level 3 inputs include available-for-sale Farmer Mac
I Guaranteed Securities, available-for-sale and trading Farmer Mac II
Guaranteed Securities, available-for-sale and trading Farmer Mac
Guaranteed Securities – Rural Utilities, auction-rate certificates, basis
swaps, preferred stock issued by institutions of the Farm Credit System
and loans held for sale.
|
In some
cases, the inputs used to measure fair value may fall into different levels of
the fair value hierarchy. In such cases, the level in the fair value
hierarchy within which the fair value measurement in its entirety falls has been
determined based on the lowest level input that is significant to the fair value
measurement in its entirety. Farmer Mac’s assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the financial
instrument.
Both
observable and unobservable inputs may be used to determine the fair value of
positions that Farmer Mac has classified within the Level 3
category. As a result, the unrealized gains and losses for assets and
liabilities within the Level 3 category presented in the following tables may
include changes in fair value that were attributable to both observable (e.g.,
changes in market interest rates) and unobservable (e.g., changes in long-dated
volatilities) inputs.
-12-
The
following table presents information about Farmer Mac’s assets and liabilities
measured at fair value on a recurring and nonrecurring basis as of September 30,
2008, and indicates the fair value hierarchy of the valuation techniques
utilized by Farmer Mac to determine such fair value.
Assets and Liabilities
Measured at Fair Value as of September 30,
2008
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Recurring:
|
(in
thousands)
|
|||||||||||||||
|
Assets:
|
||||||||||||||||
|
Investment
Securities:
|
||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||
|
Fixed
rate certificates of deposit
|
$ | - | $ | 60,000 | $ | - | $ | 60,000 | ||||||||
|
Fixed
rate commercial paper
|
- | 84,571 | - | 84,571 | ||||||||||||
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans
|
- | - | 192,010 | 192,010 | ||||||||||||
|
Floating
rate asset-backed securities
|
- | 94,437 | - | 94,437 | ||||||||||||
|
Floating
rate corporate debt securities
|
- | 448,950 | - | 448,950 | ||||||||||||
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
- | 355,748 | - | 355,748 | ||||||||||||
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
- | 7,508 | - | 7,508 | ||||||||||||
|
Floating
rate GSE subordinated debt
|
- | 51,562 | - | 51,562 | ||||||||||||
|
Floating
rate GSE preferred stock
|
- | 2,469 | - | 2,469 | ||||||||||||
|
Total
available-for-sale investment securities
|
- | 1,105,245 | 192,010 | 1,297,255 | ||||||||||||
|
Trading:
|
||||||||||||||||
|
Floating
rate asset-backed securities
|
- | - | 4,357 | 4,357 | ||||||||||||
|
Fixed
rate GSE preferred stock
|
- | - | 166,689 | 166,689 | ||||||||||||
|
Total
trading investment securities
|
- | - | 171,046 | 171,046 | ||||||||||||
|
Total
investment securities
|
- | 1,105,245 | 363,056 | 1,468,301 | ||||||||||||
|
Farmer
Mac Guaranteed Securities:
|
||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||
|
Farmer
Mac I
|
- | - | 354,712 | 354,712 | ||||||||||||
|
Farmer
Mac II
|
- | - | 493,997 | 493,997 | ||||||||||||
|
Rural
Utilities
|
- | - | 401,485 | 401,485 | ||||||||||||
|
Total
available-for-sale guaranteed securities
|
- | - | 1,250,194 | 1,250,194 | ||||||||||||
|
Trading:
|
||||||||||||||||
|
Farmer
Mac II
|
- | - | 476,880 | 476,880 | ||||||||||||
|
Rural
Utilities
|
- | - | 436,331 | 436,331 | ||||||||||||
|
Total
trading guaranteed securities
|
- | - | 913,211 | 913,211 | ||||||||||||
|
Total
Farmer Mac guaranteed securities
|
- | - | 2,163,405 | 2,163,405 | ||||||||||||
|
Financial
Derivatives
|
238 | 3,157 | - | 3,395 | ||||||||||||
|
Total
Assets at fair value
|
$ | 238 | $ | 1,108,402 | $ | 2,526,461 | $ | 3,635,101 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Financial
Derivatives
|
$ | - | $ | 64,461 | $ | 1,209 | $ | 65,670 | ||||||||
|
Total
Liabilities at fair value
|
$ | - | $ | 64,461 | $ | 1,209 | $ | 65,670 | ||||||||
|
Nonrecurring:
|
||||||||||||||||
|
Loans
held for sale
|
$ | - | $ | - | $ | 63,202 | $ | 63,202 | ||||||||
-13-
The
following tables present additional information about assets and liabilities
measured at fair value on a recurring and nonrecurring basis for which Farmer
Mac has used significant Level 3 inputs to determine fair value for the three
and nine months ended September 30, 2008.
Level 3 Assets and
Liabilities Measured at Fair Value for the Three Months Ended September 30,
2008
|
Beginning Balance
|
Purchases, Sales, Issuances and Settlements,
Net
|
Realized and Unrealized Gains/(Losses) included in
Income
|
Unrealized Gains/(Losses) included in Other
Comprehensive Income
|
Net Transfers In and/or Out
|
Ending Balance
|
|||||||||||||||||||
|
Recurring:
|
(in
thousands)
|
|||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Investment
Securities:
|
||||||||||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||||||
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans
|
$ | 209,360 | $ | (17,525 | ) | $ | - | $ | 175 | $ | - | $ | 192,010 | |||||||||||
|
Floating
rate corporate debt securities
|
- | - | - | - | - | - | ||||||||||||||||||
|
Fixed
rate corporate debt securities
|
- | - | - | - | - | - | ||||||||||||||||||
|
Total
available-for-sale
|
209,360 | (17,525 | ) | - | 175 | - | 192,010 | |||||||||||||||||
|
Trading:
|
||||||||||||||||||||||||
|
Floating
rate asset-backed securities (1)
|
7,414 | (143 | ) | (2,914 | ) | - | - | 4,357 | ||||||||||||||||
|
Fixed
rate mortgage-backed securities
|
- | - | - | - | - | - | ||||||||||||||||||
|
Fixed
rate GSE preferred stock(1)
|
- | (338 | ) | (12,073 | ) | - | 179,100 | 166,689 | ||||||||||||||||
|
Total
trading
|
7,414 | (481 | ) | (14,987 | ) | - | 179,100 | 171,046 | ||||||||||||||||
|
Total
investment securities
|
216,774 | (18,006 | ) | (14,987 | ) | 175 | 179,100 | 363,056 | ||||||||||||||||
|
Farmer
Mac Guaranteed Securities:
|
||||||||||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||||||
|
Farmer
Mac I
|
391,904 | (64,387 | ) | - | 2,203 | 24,992 | 354,712 | |||||||||||||||||
|
Farmer
Mac II
|
- | - | - | 419 | 493,578 | 493,997 | ||||||||||||||||||
|
Rural
Utilities
|
901,639 | (500,000 | ) | - | (154 | ) | - | 401,485 | ||||||||||||||||
|
Total
available-for-sale
|
1,293,543 | (564,387 | ) | - | 2,468 | 518,570 | 1,250,194 | |||||||||||||||||
|
Trading:
|
||||||||||||||||||||||||
|
Farmer
Mac II (2)
|
450,562 | 26,218 | 100 | - | - | 476,880 | ||||||||||||||||||
|
Rural
Utilities (1)
|
441,685 | (5,735 | ) | 381 | - | - | 436,331 | |||||||||||||||||
|
Total
trading
|
892,247 | 20,483 | 481 | - | - | 913,211 | ||||||||||||||||||
|
Total
Farmer Mac Guaranteed Securities
|
2,185,790 | (543,904 | ) | 481 | 2,468 | 518,570 | 2,163,405 | |||||||||||||||||
|
Total
Assets at fair value
|
$ | 2,402,564 | $ | (561,910 | ) | $ | (14,506 | ) | $ | 2,643 | $ | 697,670 | $ | 2,526,461 | ||||||||||
|
Liabilities:
|
||||||||||||||||||||||||
|
Financial
Derivatives (3)
|
$ | (1,457 | ) | $ | - | $ | 248 | $ | - | $ | - | $ | (1,209 | ) | ||||||||||
|
Total
Liabilities at fair value
|
$ | (1,457 | ) | $ | - | $ | 248 | $ | - | $ | - | $ | (1,209 | ) | ||||||||||
|
Nonrecurring:
|
||||||||||||||||||||||||
|
Loans
held for sale
|
$ | 142,695 | $ | (79,534 | ) | $ | 41 | $ | - | $ | - | $ | 63,202 | |||||||||||
|
(1)
|
Unrealized
gains/(losses) are attributable to assets still held as of September 30,
2008 and are recorded in losses on trading
assets.
|
|
(2)
|
Includes
unrealized gains of approximately $455,000 attributable to assets still
held as of September 30, 2008 that are recorded in losses on trading
assets.
|
|
(3)
|
Unrealized
gains are attributable to liabilities still held as of September 30, 2008
and are recorded in losses on financial
derivatives.
|
-14-
Level 3 Assets and
Liabilities Measured at Fair Value for the Nine Months Ended September 30,
2008
|
Beginning Balance
|
Purchases, Sales, Issuances and Settlements,
Net
|
Realized and Unrealized Gains/(Losses) included in
Income
|
Unrealized Gains/(Losses) included in Other
Comprehensive Income
|
Net Transfers In and/or Out
|
Ending Balance
|
|||||||||||||||||||
|
Recurring:
|
(in
thousands)
|
|||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Investment
Securities:
|
||||||||||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||||||
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans
|
$ | - | $ | 62,406 | $ | - | $ | (1,940 | ) | $ | 131,544 | $ | 192,010 | |||||||||||
|
Floating
rate corporate debt securities
|
- | 400,000 | - | (669 | ) | (399,331 | ) | - | ||||||||||||||||
|
Fixed
rate corporate debt securities
|
500,138 | - | - | 2,951 | (503,089 | ) | - | |||||||||||||||||
|
Total
available-for-sale
|
500,138 | 462,406 | - | 342 | (770,876 | ) | 192,010 | |||||||||||||||||
|
Trading:
|
||||||||||||||||||||||||
|
Floating
rate asset-backed securities (1)
|
8,179 | (771 | ) | (3,051 | ) | - | - | 4,357 | ||||||||||||||||
|
Fixed
rate mortgage-backed securities
|
415,813 | 29,367 | 13,846 | - | (459,026 | ) | - | |||||||||||||||||
|
Fixed
rate GSE preferred stock(1)
|
- | (338 | ) | (12,073 | ) | - | 179,100 | 166,689 | ||||||||||||||||
|
Total
trading
|
423,992 | 28,258 | (1,278 | ) | - | (279,926 | ) | 171,046 | ||||||||||||||||
|
Total
investment securities
|
924,130 | 490,664 | (1,278 | ) | 342 | (1,050,802 | ) | 363,056 | ||||||||||||||||
|
Farmer
Mac Guaranteed Securities:
|
||||||||||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||||||
|
Farmer
Mac I
|
338,958 | (15,161 | ) | - | 5,923 | 24,992 | 354,712 | |||||||||||||||||
|
Farmer
Mac II
|
- | - | - | 419 | 493,578 | 493,997 | ||||||||||||||||||
|
Rural
Utilities
|
- | (500,000 | ) | - | (935 | ) | 902,420 | 401,485 | ||||||||||||||||
|
Total
available-for-sale
|
338,958 | (515,161 | ) | - | 5,407 | 1,420,990 | 1,250,194 | |||||||||||||||||
|
Trading:
|
||||||||||||||||||||||||
|
Farmer
Mac II (2)
|
428,670 | 46,715 | 1,495 | - | - | 476,880 | ||||||||||||||||||
|
Rural
Utilities (1)
|
- | (5,735 | ) | (16,960 | ) | - | 459,026 | 436,331 | ||||||||||||||||
|
Total
trading
|
428,670 | 40,980 | (15,465 | ) | - | 459,026 | 913,211 | |||||||||||||||||
|
Total
Farmer Mac Guaranteed Securities
|
767,628 | (474,181 | ) | (15,465 | ) | 5,407 | 1,880,016 | 2,163,405 | ||||||||||||||||
|
Total
Assets at fair value
|
$ | 1,691,758 | $ | 16,483 | $ | (16,743 | ) | $ | 5,749 | $ | 829,214 | $ | 2,526,461 | |||||||||||
|
Liabilities:
|
||||||||||||||||||||||||
|
Financial
Derivatives (3)
|
$ | (1,106 | ) | $ | - | $ | (103 | ) | $ | - | $ | - | $ | (1,209 | ) | |||||||||
|
Total
Liabilities at fair value
|
$ | (1,106 | ) | $ | - | $ | (103 | ) | $ | - | $ | - | $ | (1,209 | ) | |||||||||
|
Nonrecurring:
|
||||||||||||||||||||||||
|
Loans
held for sale
|
$ | - | $ | (79,534 | ) | $ | (20 | ) | $ | - | $ | 142,756 | $ | 63,202 | ||||||||||
|
(1)
|
Unrealized losses
are attributable to assets still held as of September 30, 2008 and are
recorded in losses on trading
assets.
|
|
(2)
|
Includes
unrealized gains of approximately $2.3 million attributable to assets
still held as of September 30, 2008 that are recorded in losses on trading
assets.
|
|
(3)
|
Unrealized
losses are attributable to liabilities still held as of September 30, 2008
and are recorded in losses on financial
derivatives.
|
-15-
Fair
Value Option
SFAS 159
permits entities to make a one-time election to report financial instruments at
fair value with changes in fair value recorded in earnings as they
occur. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions.
Farmer
Mac adopted the provisions of SFAS 159 on January 1, 2008 and recorded a
cumulative effect of adoption adjustment of $12.1 million, net of tax, as an
increase to the beginning balance of retained earnings. The fair
value option election was made for certain available-for-sale investment
securities and certain Farmer Mac II Guaranteed Securities that were classified
as held-to-maturity on January 1, 2008. These assets were selected
for the fair value option under SFAS 159 because they were funded or hedged
principally with financial derivatives and, therefore, it was expected that the
changes in fair value of the assets would provide partial economic and financial
reporting offsets to the related financial derivatives.
Impact of
Adopting SFAS 159 to Retained Earnings as of January 1, 2008
|
Carrying Value as of January 1, 2008 Prior to
Adoption of Fair Value Option
|
Transition Gain
|
Fair Value as of January 1, 2008 After
Adoption of Fair Value Option
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Available-for-sale
Investment Securities:
|
||||||||||||
|
Fixed
rate GSE preferred stock (1)
|
$ | 184,655 | $ | 2,783 | $ | 184,655 | ||||||
|
Fixed
rate mortgage-backed securities (1)
|
415,813 | 14,504 | 415,813 | |||||||||
|
Held-to-maturity
Farmer Mac Guaranteed Securities:
|
||||||||||||
|
Farmer
Mac II Guaranteed Securities
|
427,330 | 1,340 | 428,670 | |||||||||
|
Pre-tax
cumulative effect of adoption
|
18,627 | |||||||||||
|
Tax
effect
|
6,519 | |||||||||||
|
Cumulative
effect of adoption to beginning retained earnings
|
$ | 12,108 | ||||||||||
(1)
Farmer Mac adopted the fair value option for certain securities classified
within its investment portfolio previously classified as
available-for-sale. These securities are presented in the condensed
consolidated balance sheet at fair value in accordance with Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities and the amount of the transition gain was
recognized in accumulated other comprehensive loss prior to the adoption of SFAS
159.
|
|
(d)
|
Financial
Derivatives
|
Farmer
Mac enters into financial derivative transactions principally to protect against
risk from the effects of market price or interest rate movements on the value of
certain assets, future cash flows or debt issuance, not for trading or
speculative purposes. Principally, Farmer Mac enters into interest
rate swap contracts to adjust the characteristics of its short-term debt to
match more closely the cash flow and duration characteristics of its longer-term
mortgage and other assets, and also to adjust the characteristics of its
long-term debt to match more closely the cash flow and duration characteristics
of its short-term assets, thereby reducing interest rate risk and also to derive
an overall lower effective cost of borrowing than would otherwise be available
to Farmer Mac in the conventional debt market. During third quarter
2008, Farmer Mac, for the first time, purchased pay-fixed swaptions, which
provide the option of entering into pay-fixed swaps, as part of its overall
strategy in managing interest rate risk. Farmer Mac is required also
to recognize certain contracts and commitments as derivatives when the
characteristics of those contracts and commitments meet the definition of a
derivative as promulgated by Statement of Financial Accounting Standards No.
133, Accounting for Derivative
Instruments and Hedging Activities, as amended (“SFAS 133”).
-16-
Farmer
Mac manages the interest rate risk related to loans it has committed to acquire,
but has not yet purchased and permanently funded, through the use of forward
sale contracts on mortgage-backed securities and the debt of other
government-sponsored enterprises (“GSEs”), futures contracts involving U.S.
Treasury securities and interest rate swaps. Farmer Mac uses forward
sale contracts on GSE securities to reduce its interest rate exposure to changes
in both Treasury rates and spreads on Farmer Mac debt and Farmer Mac Guaranteed
Securities. The notional amounts of these contracts are determined
based on a duration-matched hedge ratio between the hedged item and the hedge
instrument. Gains or losses generated by these hedge transactions
should offset changes in funding costs or Farmer Mac Guaranteed Securities sale
prices that occur during the hedge period.
All
financial derivatives are recorded on the balance sheet at fair value as a
freestanding asset or liability in accordance with SFAS 133. Farmer
Mac does not designate its financial derivatives as fair value hedges or cash
flow hedges; therefore, the changes in the fair values of financial derivatives
are reported as gains or losses on financial derivatives in the condensed
consolidated statements of operations.
The
following table summarizes information related to Farmer Mac’s financial
derivatives as of September 30, 2008 and December 31, 2007:
|
September 30, 2008
|
December 31,
2007
|
|||||||||||||||
|
Notional
Amount
|
Fair
Value
|
Notional
Amount
|
Fair
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Interest
rate swaps:
|
||||||||||||||||