The poWer of
collaboration
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annual rePorT 2011
2/27/12 3:48 PM
95
Years Strong The road to success was built through collaboration
Don’t take past success for granted, especially when it comes to working for customer-owners and understanding financial markets. At Farm Credit East, we lived by those words in
to serve changing markets and enterprises
future, we seek new ways to collaborate with
2011. We refused to remain complacent or rest
emerge with new approaches.
agricultural organizations and businesses that support a common goal — to provide more
on past accomplishments. Instead, we focused on delivering credit and financial services with
As the Northeast agricultural infrastructure has
our customer-driven focus.
consolidated in the past 20 years, fewer players
value to our members.
step up to provide leadership and support. It
We have a number of specific items to report
While the Farm Credit System is proud to have
has become more important to look for ways
from 2011:
celebrated our 95th anniversary in 2011, we
where we can collaborate in order to best serve
know that it will not be what we have done in
the farm community. We need to avoid
the past that will be important to our customers
unnecessary and costly duplication of services
in 2011 and the election of three new
in the future. Instead, it is innovative financial
that offer little value to farmers, commercial
members. The Board’s diversity means
products, service and delivery that you will
fishermen or forest products businesses.
strong governance and a results orientation
❖❖ The Board of Directors saw six retirements
that keeps Farm Credit East at the top of
continue to look for to support your success. At Farm Credit East, we have collaborated with
Farm Credit associations nationwide.
2011 was a difficult year for many farmers who
Farm Credit System institutions for years. We
dealt with the most challenging weather condi-
appreciate our relationship with CoBank and
tions in recent memory, dramatically higher
other Farm Credit associations, such as North-
to be leaders within the Farm Credit
input costs and a sluggish general economy. The
west Farm Credit and Farm Credit Services of
System, which allows us to efficiently
businesses we serve continue to see wide price
America. Financial Partners, Inc., our technology
access financial markets. Ensuring the flow
swings, market uncertainty, political challenges
provider, is a collaborative effort of eight
of funds is too important to our customers
and regulatory barriers. Consumers continue to
entities within the Farm Credit System. By work-
for us not to be involved.
be cautious about spending disposable income,
ing together, we deploy the best technology and
which, in some cases, put downward pressure on
reduce overall association costs. Together, we
farm prices.
support youth and leadership programs through
for each of our branch offices) continue
our AgEnhancement and Farm Credit National
to play an important role in Farm Credit
Contributions Programs.
East. We appreciated their feedback during
Agricultural industries are faced with rapidly
❖❖ Our Board and management team continue
❖❖ Nineteen customer service councils (one
their “blue-sky” discussions on financial
changing economic factors. The need for realtime information has never been greater and
We believe industry collaboration will be more
services. Self-evaluation allows us to
failure to have such information has never been
important in the future. We need to work to-
improve existing programs and develop
more serious.
gether to ensure that farmers benefit from new
new initiatives.
processors coming to the Northeast. We need to The growth of world markets for U.S. agricultural
coordinate public and private sector efforts to
❖❖ Our FarmStart program celebrated its fifth
goods, increased consumer interest to buy local
establish helpful policies to grow the industry.
anniversary. FarmStart, which gives young entrepreneurs a start in farming, is viewed
and a renewed interest by processors to locate in the Northeast spells opportunities for
The history of farmers working together is
as one of the most innovative beginning
agriculture. It is clear that agricultural entrepre-
strong. The history of organizations working
farmer programs nationwide.
neurship is strong as existing businesses adjust
together is less vibrant. As we build to the
FCE AR - rev1.indd 2
2/27/12 3:48 PM
Your cooperative had a very successful year in 2011 with record earnings along with enhanced capacity and knowledge to support your business for the future. Strong financial results for 2011 are indicative of the capacity and efficiencies that our cooperative accomplished. ❖ Net income grew to $108.8 million, an increase from $101.0 million in 2010. Strong earnings help to maintain investor confidence allowing for a lower cost of funds. ❖ We declared a record $35.5 million in patronage to be paid in cash during February 2012. ❖ With total assets of $4.5 billion, our total capital grew to $811.4 million. Our risk funds ratio increased to 17.6 percent making us well-positioned to deal with future industry adversity. ❖ Cost-per-$100 of loans for credit delivery declined to $0.79, making us one of the most efficient associations in the Farm Credit System. ❖ We increased financial services (noncredit) revenue by more than 7 percent to $16.5 million. The Farm Credit East team is mindful that agriculture has and will continue to see volatile times and
William J. Lipinski CEO
that our customers need us to remain strong through economic cycles. We understand the difficult business issues that our customers face. We know that our customers expect us to run an efficient cooperative that is forward-looking and
Abbott W. Lee Chairman of the Board
works hard to deliver results every day. We appreciate your business and will continue to strive to deserve your business in the future.
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2/27/12 3:50 PM
2011 Board of Directors
Seated in front
Back row from left
Abbott W. Lee Chairman Integrity Propagation, LLC Chatsworth, N.J.
Peter J. Russell Russell Farms, Inc. Appleton, N.Y.
Ann P. Hudson, CPA Outside director Suffield, Conn. Richard P. Janiga Vice Chairman R + D Janiga Enterprises, LLC East Aurora, N.Y.
FCE AR - rev1.indd 4
Peggy Jo Jones (seated) Outside Director Albertsons, LLC Boise, Idaho Charles R. Miller Willow Ridge Farms, LLC Alexander, N.Y.
Matthew W. Beaton Sure-Cran Services, Inc. and Beaton’s, Inc. Wareham, Mass. Samuel G. Conard (seated) S.R. Conard & Sons Hillsborough, N.J. Benjamin J. Freund Freund’s Farm, Inc. East Canaan, Conn. June W. Hoeflich Outside Director Retired, HSBC Bank, USA Williamsville, N.Y.
Andrew J. Gilbert Adon Farms Potsdam, N.Y. Christine E. Fesko Fesko Farms, Inc. and Chris Fesko Enterprises Skaneateles, N.Y. Henry “Hal” Adams III Vice Chairman Black Brook Farm Shortsville, N.Y.
Robert R. Brown II Orchard Dale Fruit Farms, Inc. and Brown’s Berry Patch Waterport, N.Y. Laurie K. Griffen Saratoga Sod Farm, Inc. Stillwater, N.Y. Sandra K. Prokop (seated) Crossbrook Farm Middleburgh, N.Y. Henry L. Huntington Pleasant View Gardens, Inc. Loudon, N.H.
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Financial Strength, Strong Results Farm Credit East serves 12,500 member-borrowers in New Hampshire, Massachusetts, Connecticut, Rhode Island, New York and New Jersey. We provide $4.4 billion in loans, leases and financial services to farmers, rural homeowners, aquatic producers, timber harvesters and agribusinesses. Farm Credit East enjoys strong profitability.
12 .31. 2011
4.4 b i ll i o n
16.5 m i ll i o n
108.8 m i ll i o n
35.5
811.4
35.0
760.5
m i ll i o n
m i ll i o n
12 .31. 2010
4.3 b i ll i o n
15.4 m i ll i o n
101.0 m i ll i o n
m i ll i o n
m i ll i o n
Loan Volume
Financial Net Services Income
Patronage Capital
Loan volume increased
Farm Credit East assists its
Farm Credit East contin-
slightly in 2011 as many
customers with a variety
customers paid down debt
Since the patronage
Strong capital levels allow
program was first adapted,
us to serve agriculture in
customer owners of Farm
good times and bad and
ued its strong record of
Credit East (including
prepare to serve future
of management tools, from
earnings in 2011 with net
predecessor associations)
generations of farm
and others grew their
Agrifax accounting services
income reaching 108.8
have earned more than
businesses. By focusing
businesses cautiously.
and crop insurance to
million. This solid earnings
$376 million in dividends
on sound lending practices
estate planning and busi-
record enables your
from ownership in their
and strong capital, we
ness management plans.
cooperative to build
cooperative. The $35.5
continue to grow as the
Financial services revenue
capital, pay patronage
million declared from
leading financial partner
grew 7 percent, reaching
and maintain investor
2011 earnings will be our
to Northeast agriculture,
$16.5 million. Helping
confidence.
sixteenth consecutive
commercial fishing and
patronage distribution.
forest products
our customers manage emerging challenges is
industries.
a vital aspect of Farm Credit East.
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The Wine Trails of New York Collaboration bears fruit for wineries and the region
One winery may inspire local interest, but a dozen working together? That’s how you create a regional destination. New York’s Cayuga Wine Trail, established in 1982, was the first in the nation. Today, New York boasts of more than 12 trails, adding profitability to the individual wineries and contributing to the economic vitality of a beautiful region. Despite different philosophies, practices and specialties, winery owners working together to create a trail become more than the sum of their parts — which is, of course, the beauty of collaboration. “Each winery on the Seneca Lake Wine Trail competes with each other,” confirms Mark Wagner, owner of Lamoreaux Landing Wine Cellars, in Lodi, N.Y. “We are all entrepreneurs who take a lot of pride in our work. But we work collaboratively for the benefit of all. “The collaboration lesson has been a hard one for me to learn over the years,” says Mark, “because I am so independent, having been my own boss since I was 22, after the death of my dad at a young age. I now realize that collaborations have been a big part of what helped build my business. “I opened the winery because I wanted to show off what my vineyards could do,” he continues. “I started my first commercial vintage in 1990, and have consistently expanded since, due in part to the success of the collaborative efforts of the 40 wineries along the trail. The traffic flow of tourists coming through the area has increased tremendously since the Seneca Wine Trail first organized in 1986. New businesses have sprouted up to cater to visitors, and together we have built an economic engine that has put us in a different league.”
FCE AR - rev1.indd 6
Each member pays a fee to the Seneca Wine Trail Association and the New York Wine and Grape Foundation, he notes, for marketing efforts that showcase the quality of fruit in the area and attract new customers. “We also collaborate with area businesses, such as restaurants and hotels, to help create an attractive destination for consumers.” Mark’s family credits Farm Credit East for its collaborative work as a financial partner for more than 30 years. “Farm Credit’s understanding of my business and low interest rates have made my life simpler and helped me stay competitive. That collaboration builds businesses that probably wouldn’t have been built or as healthy if it weren’t for access to money at a fair price.” Mark and his family credit Farm Credit East services like the Winery Benchmarks Program and tax planning and preparation for enabling the business to grow.
“We are all entrepreneurs who take a lot of pride in our work. But we work collaboratively for the benefit of all.”
In closing, Mark cited two more collaborative efforts by New York growers that promoted growth: “Growers lobbied the state government, which eventually enacted the New York State Winery Act of 1976, allowing a lower-priced license for farm wineries. The state helped fund marketing, promotion and research and created the New York Wine and Grape Foundation. This collaboration gave us power in Albany and help securing funds. In addition, we worked collaboratively to raise matching funds so we could tap into state funds. “Those efforts,” he said, “showcased very independent people working together to reap huge benefits.”
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Mark Wagner, owner of Lamoreaux Landing Wine Cellars and recipient of the prestigious New York State Winery of the Year Award, with Farm Credit East’s senior vice president of Agrifax accounting services Greg Bouchard and loan officer Emily Robertson. About Farm Credit, Mark said, “My family credits Farm Credit East for its collaborative work as a financial partner for more than 30 years. Their understanding of my business and low interest rates have made my life simpler and helped me stay competitive.”
About
Lamoreaux Landing Wine Cellars Peak production: 40,000 gallons, 16,000 cases Acreage: 105 acres of producing vineyards Market: New York, Maryland, Boston, Canada, Finland Some (of many) distinctions:
FCE AR - rev1.indd 7
Winery of the Year and Best Chardonnay: 2011 New York Wine and Food Classic
2010 Winery of the Year: Wine and Spirits magazine
Listed in 100 Top Wineries in the World: Wine and Spirits
Best of Class Chardonnay: 2007 San Francisco Chronicle Wine Competition
2006 Riesling: Cover of Wine Spectator
1998 Cabernet Franc, example of American Greatness: 2000 Jefferson Cup Invitational
Featured in The New York Times: 1994 and 1995
2/27/12 3:53 PM
Steve Hyde, president and CEO of the Genesee County Economic Development Center, onsite at the Agri-Business Park with a team from Farm Credit East, including Nathan Rudgers, senior vice president of business development; Scott Herring, president and chief operating officer; and Brian Monckton, executive vice president. About Farm Credit East’s role, Hollis Upson, a former Genesee County legislator, said, “Farm Credit East’s vision, collaboration and capital investment played pivotal roles in the park’s development and will certainly help build a stronger agriculture in this county.”
the geneSee valleY agri-buSineSS park
econoMic developMent and aGriculture find coMMon Ground In a world where speed to market is essential and food safety is critical (think post 9-11), what better resource for a dynamic agricultural community than having Ag processing plants move in next door? That was the concept behind the Genesee Valley Agri-Business Park, a shovel-ready new park in Batavia, N.Y., that has already experienced “shoveling” from two new tenants who broke ground in late 2011. This 202-acre property is more than a park, notes Steve Hyde, president and CEO of the Genesee County Economic Development Center — it is a dream come true for local Ag producers and for those tasked with
FCE AR - rev1.indd 8
local economic development. It is also a great example of the power of publicprivate collaboration, in this case by the local economic development center and Farm Credit East. “Together our two organizations put in the initial equity capital to create what I would say is one of most unique publicprivate joint ventures in the state,” said Hyde. “Our public not-for-profit corporation focused on economic development came together with a strong financial institution focused on Ag to create a site that would drive growth in agriculture and food processing. The multiplying effect is incredible.”
Hollis Upson, a former Genesee County legislator who was involved in the initial project, agreed. “Farm Credit East’s vision, collaboration and capital investment played pivotal roles in the park’s development and will certainly help build a stronger agriculture in this county.” The collaboration has been eight years from initial vision and strategy sessions with a small group of creative thinkers that included area farmers and agribusiness leaders, such as Scott Herring, president of Farm Credit East. The goal was to develop an agribusiness park that would bring more processors into the heart of Ag production. Key to the
2/27/12 3:54 PM
“this is a Great eXaMple of the poWer of puBlic-private collaBoration, in this case By the local edc and farM credit east.”
project is the fact that Genesee County has a vibrant agricultural industry with farmers who will provide the input needed for value-added companies. The Farm Credit East investment was part of a pilot program called “Investment in Rural America,” which was approved by the national Farm Credit Administration. “The project was still a twinkle in my eye when Farm Credit East joined our board,” said Hyde, who pointed out the benefits of working with such an Ag industry leader. “It became real when Farm Credit East helped us take it to the next level in early discussions. By collaborating, we found the perfect site with the perfect infrastructure to fit what manufacturing businesses want.”
FCE AR - rev1.indd 9
The minute the infrastructure was built — roads, water, sewer, electric, environmental review, pre-permits — the first manufacturer came on board. As of year-end 2011, two companies are under construction and a third is close to signing a contract. On board are Alpina Foods, a Columbia, South America-based company, which is constructing a specialty yogurt-making facility that should be at full production by July. A partnership including PepsiCo and a German dairy business will add what some are calling a “yogurt cluster” in the park and a boon to local producers. In addition, MarkTec, which produces and services product labeling equipment for the food
processing industry, plans to open its doors in the summer of 2012. What led these processors to Upstate New York are the Genesee Valley Agri-Business Park’s infrastructure, access to Northeast markets of more than 125 million people, a dynamic farming community and proximity to leading research institutions, such as Cornell, with whom they can collaborate on new products.
2/27/12 3:55 PM
95 YEARS OF COLLABORATION BY FARM CREDIT ORGANIZATIONS 2011 was the 95th anniversary of the nationwide Farm Credit System. Collaboration between system organizations has been a powerful contributor toward achieving this milestone. Throughout our history, our commitment to a thriving agricultural industry has extended well beyond financial services. We have built initiatives that align with our mission to deliver positive impact to agriculture and our rural communities. Examples include: ❖ Farm Credit AgEnhancement Grants. The Northeast Farm Credit associations — Farm Credit East, Farm Credit of Maine and Yankee Farm Credit — and CoBank, our wholesale lender, have provided more than $1.27 million in grants to nonprofit organizations since 1996. We are proud of the 480 organizations that received our grants over the past 15 years and the impressive work they do to promote Northeast agriculture, support youth programs and generate a greater understanding of our vital agricultural, commercial fishing and forest products industries among the nonfarm public.
In 2011 ❖ Northeast AgEnhancement Grants: $89,050 ($1.27 million since 1996) ❖ National Contributions to FFA and 4-H: $2.4 million and 16,362 volunteer hours
❖ National Contributions Program. Farm Credit organizations pool financial resources to target organizations that advocate for agriculture; young, beginning, small and minority farmers; and friends of agriculture. For example, Farm Credit has been a strong sponsor of FFA and 4-H for decades, both locally and nationally. Financial donations and volunteer support reached an all-time high in 2011: $2.4 million and a total of 16,362 volunteer hours for local programs. At least one employee from each of 56 associations, including Farm Credit East, participated on an FFA or 4-H board or committee.
FCE AR - rev1.indd 10
2/28/12 1:08 PM
FinancialS
FCE AR - rev1.indd 11
annual rePorT 2011
2/27/12 3:55 PM
FARM CREDIT EAST | 2011 ANNUAL REPORT
Five Year Summary of Selected Financial Data (dollars in thousands) As of December 31, Consolidated Balance Sheet Loans Less: allowance for loan losses Net loans Cash Investment in CoBank, ACB Other property owned Other assets Total assets Obligations with maturities of one y ear or less Obligations with maturities greater than one year Total liabilities Cap ital stock and participation certificates Additional paid-in capital Allocated surplus Unallocated surp lus Accumulated other comprehensive loss Total members' equity Total liabilities and members' equity Year Ended December 31, Consolidated Statement of Income Net interest income Provision for loan losses Noninterest expenses, net Provision for income taxes Net income
2011
2010
2009*
2008*
2007*
$ 4,352,586 64,586 4,288,000 13,592 149,828 3,337 64,919 $ 4,519,676
$ 4,275,104 55,395 4,219,709 12,493 144,139 2,609 68,218 $ 4,447,168
$ 3,079,138 40,764 3,038,374 5,389 107,551 267 46,672 $ 3,198,253
$ 2,976,624 31,353 2,945,271 13,121 98,907 755 47,197 $ 3,105,251
$ 2,603,096 24,195 2,578,901 14,686 88,521 119 45,061 $ 2,727,288
$
$
$
$
$
52,925
40,152
33,698
24,517
3,645,745 3,708,255
3,633,787 3,686,712
2,630,249 2,670,401
2,578,311 2,612,009
2,237,566 2,262,083
12,242 164,369 34,846 632,697 (32,733) 811,421 $ 4,519,676
11,962 164,369 45,488 559,424 (20,787) 760,456 $ 4,447,168
8,850 0 41,528 493,417 (15,943) 527,852 $ 3,198,253
8,763 0 47,846 450,627 (13,994) 493,242 $ 3,105,251
8,475 0 44,336 413,697 (1,303) 465,205 $ 2,727,288
2011
2010
2009*
2008*
2007*
$ 141,396 15,000 16,984 628 $ 108,784
$ 134,427 20,000 12,727 693 $ 101,007
Key Financial Ratios Return on average assets Return on average members' equity Net interest income as a percentage of average earning assets M embers' equity as a p ercentage of total assets Debt to members' equity Net charge-offs as a percentage of average loans Allowance for loan losses as a percentage of loans and accrued interest receivable Permanent capital ratio Total surp lus ratio Core surp lus ratio Net income distribution Patronage dividends: Cash Allocated surp lus
62,510
$ $
$
$
95,665 15,000 14,339 136 66,190
$
$
80,718 7,500 12,853 351 60,014
$
$
75,485 3,500 13,365 158 58,462
2.44% 13.61%
2.36% 13.57%
2.10% 12.72%
2.06% 12.20%
2.26% 12.95%
3.33%
3.32%
3.19%
2.90%
3.06%
17.95% 4.57:1
17.10% 4.85:1
16.50% 5.06:1
15.88% 5.30:1
17.06% 4.86:1
0.14%
0.13%
0.19%
0.00%
0.00%
1.48% 16.39% 16.11% 15.29%
1.29% 15.81% 15.53% 14.70%
1.32% 15.36% 15.06% 14.25%
1.04% 14.71% 14.40% 13.63%
0.92% 15.48% 15.14% 14.36%
35,500 -
$ $
35,000 -
* Information p resented p rior to 2010 includes First Pioneer only. See Note 1 to the Financial Statements for further discussion.
2
$ $
23,400 -
$ $
13,948 9,052
$ $
13,474 8,800
FARM CREDIT EAST | 2011 ANNUAL REPORT
Management’s Discussion and Analysis of Financial Position and Results of Operations is to maintain and improve the income and well-being of American farmers, ranchers, and producers or harvesters of aquatic products and farm-related businesses. The Farm Credit System is the largest agricultural lending organization in the United States. The Farm Credit System is regulated by the Farm Credit Administration (FCA) which is an independent safety and soundness regulator.
The following commentary is a review of the financial condition and results of operations of Farm Credit East, ACA (the Association) as of December 31, 2011 with comparisons to prior years. The commentary includes material known trends, commitments, events, or uncertainties that have impacted or are reasonably likely to impact our financial condition and results of operations. This commentary should be read in conjunction with the accompanying consolidated financial statements and notes appearing in this Annual Report. Dollar amounts are in thousands unless otherwise noted.
As a cooperative, the Association is owned by the members it serves. The territory served extends across a diverse agricultural region covering the entire states of Connecticut, Massachusetts, Rhode Island and New Jersey, six counties of New Hampshire and all of New York except two counties. The Association makes short and intermediate term loans for agricultural production and long term real estate mortgage loans. Our success begins with our extensive agricultural experience and knowledge of the market.
The accompanying financial statements were prepared under the oversight of the Audit Committee. Forward-Looking Statements Certain information included in this report contains forwardlooking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Words such as “believes,” “could,” “estimates,” “anticipates,” “may,” “should,” “will,” or other variations of these terms or similar expressions are intended to identify forward-looking statements. These statements are based on assumptions and analyses made in light of experience, historical trends, current conditions, and expected future developments. However, actual results and developments may differ materially from our expectations and predictions due to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties include, but are not limited to fluctuations in the economy, the relative strengths and weaknesses in the agricultural credit sectors and in the real estate market, and the actions taken by the Federal Reserve in implementing monetary policy.
The Association obtains its funding for its lending and operations from CoBank, ACB (CoBank). CoBank is a cooperative of which Farm Credit East is an owner and member. The Association, along with other Farm Credit System (FCS) entities, also purchases payroll and other human resource services from CoBank. The Association is materially affected by CoBank’s financial condition and results of operations. To obtain a free copy of the CoBank Annual Report to Stockholders, please contact us at one of our offices or by accessing CoBank’s website at www.cobank.com. Farm Credit East’s Annual and Quarterly reports to stockholders are available on the Association’s website, Farmcrediteast.com or can be obtained free of charge by calling the Association’s main office at 860-741-4390. Annual reports are available 75 days after year end and quarterly reports are available 40 days after each calendar quarter end.
Critical Accounting Estimates The financial statements are reported in conformity with accounting principles generally accepted in the United States of America. The Association’s significant accounting policies are critical to the understanding of the results of operations and financial position because some accounting policies require management to make complex or subjective judgments and estimates that may affect the value of certain assets or liabilities. Management considers these policies critical because it has to make judgments about matters that are inherently uncertain. For a complete discussion of significant accounting policies, see Note 2 to the consolidated financial statements “Summary of Significant Accounting Policies”.
The Association purchases technology and other operational services from Farm Credit Financial Partners, Inc. (FPI), a technology service corporation. Farm Credit East is an owner in FPI. Merger Effective January 1, 2010, Farm Credit of Western New York, ACA (Western New York) merged into First Pioneer Farm Credit, ACA (First Pioneer). The merged association operates under the name of Farm Credit East, ACA. The merger successfully brought together two excellent organizations and established a business entity with greater capacity of capital, people and leadership to serve northeast agriculture. For additional information, see Note 1 to these consolidated financial statements “Organization, Business Combination and Operations”.
Business Structure The Association is an institution of the Farm Credit System, which was created by Congress in 1916 and has served agricultural producers for over 95 years. The System’s mission
3
FARM CREDIT EAST | 2011 ANNUAL REPORT
to implement various risk management tools by which they can better manage their downside risk on milk-feed margins.
Year in Review The 2011 general business climate was the continuation of a slow growth economy that started with the financial crisis of 2008. Agriculture has performed better than the general economy. This has resulted in some farms having above average earnings in 2011, while farms with their business model tied to real estate and/or the general economy have had average to below average earnings. At Farm Credit East, we continue to focus on maintaining a financially strong organization with high customer service and value. When our customers require capital for their businesses, we are ready with not only the right products and the financial capability to deliver them, but also a highly trained and knowledgeable staff to work with customers.
Severe weather played a role this year, and many farmers, particularly in Eastern New York were negatively affected by hurricane Irene and tropical storm Lee. Exports continued to increase during 2011, leading to a record trade surplus in dairy. Demand for improved diets in countries such as China and India, supply challenges in other major exporting nations and the relatively low value of the U.S. dollar are all drivers of increased US exports of dairy protein products. Dairy economists project a price decline of about $1.70/cwt during 2012. While milk prices are expected to decline, input costs are projected to further increase, squeezing margins at the farm level. However, there is substantial uncertainty around this forecast.
2011 was the second year of operation of Farm Credit East. Accordingly, financial results for years after 2009 reflect the merged entity. Merger accounting rules require the financial statement presentation of combined balances as of the date of merger, but not for previous periods. The equity of the former Western New York entity shows as “additional paid -in capital” in the equity section of the balance sheet for years after 2009.
The challenges in this industry continue to be the availability of sufficient labor and the cost and complexity of environmental compliance.
Farm Credit East had a very good year financially in 2011. The Association experienced modest growth in loans (just under 2%), with stable high risk assets such as nonaccrual loans and acquired property. Net income of $108.8 million was an increase of $7.8 million over 2010 earnings. The return on average assets of 2.44% and permanent capital of 16.39% were the highest levels for these key measures on the five year trend. For the year ending December 31, 2011, the Association declared a $35.5 million cash patronage dividend which is expected to be paid in 2012. Cash redemption of allocated surplus issued as part of the patronage program in years prior to 2010 was distributed to patrons in both 2010 and 2011 in accordance with the Merger Plan.
Cash Field (11.1% of total loan volume): The Northeast industry consists of corn for grain, soybeans, hay and some small grains. In the western region, there are many full-time crop farmers and the markets for their crops are more diverse, such as ethanol facilities. In New Jersey and in eastern New York, there are some full-time producers, but also substantial numbers of part-time and/or semi-retired farmers growing these crops. During 2011, corn and soybean prices reached record highs, but have since declined. However, given strong export demand, stable ethanol consumption, and strong demand for livestock feed, cash field crops are expected to remain profitable in 2012. Purchasing farmers report shortages and high prices for quality hay and silage going into the new year.
Agricultural Outlook The Association has a diverse loan portfolio. The following reflects the economic conditions for the various key commodities served by the Association.
Livestock (9.7% of total loan volume): These borrowers are primarily part-time farmers with horses or beef cattle in the Association’s more suburban areas. Their farm is typically their home and also a part-time enterprise. The primary economic influence is nonfarm income, not agricultural factors. The outlook for this sector is fair for equine, and good for beef and other protein producers. Beef cattle prices were up significantly in 2011 over 2010. A high commercial slaughter rate combined with lower cattle inventories has kept the herd sizes low, with herd rebuilding efforts further held back by forecasted high grain prices. Higher prices are expected to persist in 2012, but input costs will also be up.
Dairy (23.8% of total loan volume) – 2011 was an overall positive year, with record high milk prices. Unfortunately the good news in milk prices was tempered by record high costs as well, primarily due to high feed costs. Farmers used the increased net income to pay down debt incurred in 2009, as well as catch up on deferred capital spending. There continued to be a wide range of operating results with some farms having a good year, and others struggling to break even. Volatility of milk prices, purchased feeds and oil-related inputs continues to be a challenge in dairy. A growing number of producers are learning
4
FARM CREDIT EAST | 2011 ANNUAL REPORT
Nursery (5.4% of total loan volume): This industry continues to struggle due to poor housing and construction markets, and lackluster consumer spending. Primary sales outlets are Big Box retailers and re-wholesalers serving the landscape market. Independent garden centers continue to be important, but many of them are struggling in the current economic environment. 2011 saw modest increases in sales. Growers report more volume was moved but at a higher discount, therefore net income did not improve. Grower focus in 2012 is to reduce controllable costs, (i.e., labor, supplies, inventory), and to continue rebuilding revenue through innovative marketing.
Equine operations have been negatively impacted by the recession and its aftermath. Racing and breeding facilities in New York look forward to a stable to improving price environment in 2012. Timber (9.3% of total loan volume): Timberland investment, lumber production, specialty wood products and structural panels are the primary industries within this segment of the portfolio. The weakness in the housing market continues to have an adverse impact on wood prices. However, lumber prices in the top tier have remained surprisingly strong due to declining production. Also, markets for sawdust, chips and bark have been relatively good due to the demand for domestic pulp production, wood pellet fuel manufacturing and biomass alternative fuels. Wood pellet prices and demand recovered in 2011 and look to remain strong into 2012. Invasive pests, such as the Emerald Ash Borer, and subsequent quarantine zones, have inhibited the movement of logs in the Northeast. The cost of trucking continues to be a challenge.
Farm Services (5.1% of total loan volume): This segment consists of diverse agribusinesses that provide services and inputs to farmers. The primary economic drivers are the overall health of the farm economy and demand from nonfarm consumers. Price volatility in fertilizer, chemicals, seed and other farm inputs has been difficult and substantially raised this segment’s risk exposure. Equipment dealers report a good year in 2011. Pent up demand in traditional farming areas helped to boost sales, yet availability of equipment has become tighter.
Greenhouse (6.4% of total loan volume): 2011 was an average to slightly better year. Northeast greenhouse earnings are heavily concentrated in a 7-week window: April 15 thru May 31. However, last year’s fall and Christmas sales were improved over prior years, with mild weather perhaps playing a role. Revenues for wholesale greenhouses in 2011 were zero to 5% above 2010 on average. Retail greenhouse businesses had similar sales patterns, but more variation in 2011 revenues with some reporting sales decreases and others ahead by 5 to 10%. Energy and other input costs were stable compared to 2010; heating oil was up, but natural gas prices were down, and fall temperatures were generally mild. 2012 is expected to look a lot like 2011 and weather will dictate the success of the year.
All Other (23.0% of total loan volume): There are 17 other diverse loan types, with none accounting for more than 3.9% of total loan volume. Numerous factors, about 50% of which can be tied to general economic conditions and the remaining 50% to industry-specific conditions affect this segment of the portfolio. General Economy At this time, there are indications of continued gradual improvement in the US economy and a cautiously positive outlook through 2012. The overriding caution is that while the economy has been growing, it is not growing fast enough to reduce unemployment to pre-recession levels. Unemployment and underemployment are overriding political issues, creating continued pressure on Congress and the Obama Administration to “do something,” and for the Federal Reserve to manage short term interest rates with a strong bias toward economic growth. Also, high unemployment/underemployment affects consumer spending and housing which are critical components to accelerating economic growth.
Fruit (6.2% of total loan volume): This is a diverse category consisting of apples for fresh market and processing; New Jersey blueberries; Concord and Niagara grapes for juice in western New York; farm wineries in western and central New York, Long Island and southern New England; and New Jersey peaches. In terms of volume, most of this fruit enters wholesale channels, but in terms of value-added, many producers, especially smaller operations outside the major fruit belts rely on retail. The apple harvest was down in 2011, sending prices higher. Retail orchards saw steady sales given good fall weather. Yields along the Lake Erie grape belt were generally very good in 2011. Prices were solid depending upon the individual co-op or proprietary processor buyer. Wine sales increased in 2011, but so did supply. The 2012 outlook for the overall category is primarily dependent on weather. Availability of labor remains a concern.
Following another budget deficit of $1.3 trillion in 2011, the U.S. national debt now stands about $15.5 trillion, increasing rapidly over the past four years. From a long-term standpoint, the US government’s fiscal challenge has major implications for the future direction of interest rates, the value of the US dollar, the ability of the Federal government to meet its obligations and meet future challenges, and the role of the US in the global economy.
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FARM CREDIT EAST | 2011 ANNUAL REPORT
The Federal Reserve has made the unusual commitment not to raise interest rates for at least two more years, keeping the Federal Funds rate at the near-zero level of 0.25%. Subsequently, short-term borrowing rates remain at historical lows. This is reflective of both the sluggishness of the recovery, as well as the tremendous political pressure to stimulate the economy. This rate translates into a prime rate of 3.25%. Longterm rates for business loans, however, are higher, as there is growing investor sentiment that interest rates will increase down the road.
As of December 31
Nonaccrual 90 days past due still accruing interest Accruing restructured Total high-risk loans
New York New Jersey Massachusetts Connecticut Rhode Island, New Hampshire and other states Total
53% 15 8 7 17 100%
2010
51% 14 9 7 19 100%
2009
48,722
50,586
40,844
2,746
3,006
1,413
1,613
0
0
53,081
53,592
42,257
Other property owned
3,337
2,609
267
Total high risk assets
56,418
56,201
42,524
High-risk loans to total loans
1.2%
1.3%
1.4%
Nonaccrual loans to total loans Delinquencies as a % of total performing loans
1.1%
1.2%
1.3%
0.4%
0.4%
0.6%
For additional loan type information, see Note 3 to the consolidated financial statements “Loans and Allowance for Loan Losses”.
Loan Portfolio The loan portfolio consists primarily of agricultural real estate loans, agricultural production operating loans and intermediate installment loans. Loans are originated and serviced within the Local Service Area (LSA) in New York, New Jersey and throughout Southern New England, as well as outside the LSA through purchased loan participations. The geographic distribution of loans follows: 2011
2010
High Risk Loans:
National housing market conditions continue to be dismal entering 2012, with perhaps a glimmer of light at the end of the tunnel. Housing starts are beginning to show some signs of life, increasing towards the end of 2011, although they remain at a fraction of their pre-crash levels. Overall, median home prices are expected to fall another 3.6% by June 2012, although some markets are starting to see price increases. The weak housing market not only slows overall economic growth, but directly impacts demand for product from the timber, nursery and sod industries.
As of December 31
2011
Allowance for Loan Losses The allowance for loan losses was $64.6 million at December 31, 2011 as compared to $55.4 million at December 31, 2010. Net loan charge-offs were $5.8 million for the twelve months ended December 31, 2011 compared to net charge-offs of $5.4 million in 2010. The allowance for loan losses at each period end was considered by management to be adequate to absorb probable losses existing in and inherent to the loan portfolio. Management’s evaluations consider factors including loan loss experience, portfolio quality, loan portfolio composition, current production conditions and economic conditions.
2009
42% 19 11 9 19 100%
Comparative allowance coverage, as a percentage of key loan categories, follows:
Loan volume totaled $4.4 billion at December 31, 2011 an increase of $77.5 million (1.8%) from 2010. The modest growth we experienced was driven by the country living program while core farm and commercial lending volume was flat year over year.
As of December 31
2011
2010
2009
Allowance for loan losses
$64,586
$55,395
$40,764
1.5%
1.3%
1.3%
Nonaccrual loans
132.6%
109.5%
99.8%
High-risk loans
121.7%
103.4%
96.5%
Allowance as a percentage of:
The following table summarizes high risk assets and delinquency information:
Gross loans
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FARM CREDIT EAST | 2011 ANNUAL REPORT
For further discussion regarding the allowance for loan losses, refer to Note 3 to the consolidated financial statements, “Loans and Allowance for Loan Losses”.
Results of Operations Net income was $108.8 million for the twelve months ending December 31, 2011 an increase of $7.8 million (7.7%) from 2010.
Credit Quality Credit risk arises from the inability of an obligor to meet its repayment obligation and exists in our outstanding loans, unfunded loan commitments and letters of credit. We manage credit risk associated with our lending activities through an assessment of the credit risk profile of an individual borrower based on an analysis of the borrower’s credit history, repayment capacity, financial position and collateral. Repayment capacity focuses on the borrower’s ability to repay the loan based on cash flows from operations or other sources of income. The Association also manages single borrower hold positions and industry concentrations based on underlying risk. The geographic and commodity diversity in the loan portfolio, coupled with disciplined underwriting reduces the potential for significant credit losses. Also worth noting, Farm Credit East’s underwriting standards do not allow for subprime lending which is evident based on the current and historical delinquency percentages of the loan portfolio.
The following table reflects key performance results ($ in millions): Year ended December 31
2011
2010
2009
Net income
$
108.8
$ 101.0
$
66.2
Net interest income
$
141.4
$ 134.4
$
95.7
Net interest margin
3.3%
3.3%
3.2%
Return on average assets
2.4%
2.4%
2.1%
13.6%
13.6%
12.7%
Return on average members equity
Changes in the significant components impacting the results of operations are summarized in the following table ($ in millions):
To reduce portfolio risk, the Association participates in the USDA’s Farm Service Agency guarantee program and as of December 31, 2011 has guarantees totaling $310.7 million. The Association also participates in the Farmer Mac Long Term Standby Commitment to Purchase Program. As of December 31, 2011, commitments totaling $75.7 million were in this program.
Effect on change in net income: Increase in net interest income Decrease (Increase) in provision for loan losses (Decrease) Increase in noninterest income (Increase) in noninterest expenses Decrease (Increase) in provision for income taxes Total increase in net income
Nonaccrual loans totaled $48.7 million at December 31, 2011, a decrease of $1.9 million from $50.6 million at December 31, 2010. Nonaccrual loans as a percentage of total loans remained at a relatively low level of 1.1%.
2011 versus 2010
2010 versus 2009
$ 7.0 5.0 (2.5) (1.8) 0.1 $ 7.8
$ 38.8 (5.0) 14.0 (12.4) (0.6) $ 34.8
Net Interest Income Net interest income was $141.4 million for the year ended December 31, 2011, an increase of $7.0 million (5.2%) from 2010. The following table quantifies the changes in net interest income ($ in millions):
Other credit quality indicators remained generally favorable. Loan delinquencies (accruing loans 30 days or more past due) as a percentage of accruing loans at December 31, 2011 were 0.44%. Loans classified under the Farm Credit Administration’s Uniform Loan Classification System as “acceptable” or “other assets especially mentioned” as a percentage of total loans totaled 93.9% at December 31, 2011. During 2011 continued stress in key agricultural industries included timber, tobacco and green (greenhouse, nursery and sod). Adversely classified loans were 6.1% as of December 31, 2011. Adversely classified loans are loans with well-defined weaknesses identified outside our credit standards.
Changes in net interest income due to: Changes in volume Changes in nonaccrual and other income Changes in rates and margin Hedging activity Net change
While uncertainties continue to exist in national and some local economies, we anticipate credit quality should remain relatively stable in 2012.
7
2011 versus 2010 $ 3.8 2.4 2.1 (1.3) $ 7.0
2010 versus 2009 $
24.1 2.8 14.1 (2.2) $ 38.8
FARM CREDIT EAST | 2011 ANNUAL REPORT
In 2011, internal growth was the primary driver of net interest income. Both debt and equity investments in earning assets grew during 2011. Interest income as a percent of earning assets was stable at 4.46% from 2010 to 2011. Average cost of debt funding also fell from 1.55% in 2010 to 1.42% in 2011. Average interest rate spread increased from 2.91% in 2010 to 3.04% in 2011. Of the $7.0 million increase from 2010, $3.8 million was due to increased debt funded loan volume. $2.1 million was due to increased equity investment in loans and stable return on equity position. The Association’s hedging strategy also contributed $1.5 million to net interest income, a $1.3 million reduction from 2010.
$42.9 million in 2010. Included in 2010 noninterest income was the $4.4 million in refunds received for a portion of Farm Credit Insurance Fund premiums paid in prior years which did not occur in 2011. Without this non-recurring item, noninterest income increased by $1.9 million (5.1%). Patronage income from CoBank is a significant part of the Association’s noninterest income. Patronage income is based on the average balance of the Association’s note payable to CoBank. For the year ended December 31, 2011, CoBank patronage income totaled $18.0 million an increase of $0.7 million from $17.3 million in 2010. The increase in patronage income is a result of growth in CoBank earnings and the increase in Association’s borrowings. The patronage rates paid by CoBank on the Association’s note payable were 45 basis points in 2011, 2010 and 2009. The Association also receives patronage from other participating Farm Credit entities that purchased interests in loans originated by the Association. For the year ended December 31, 2011, this revenue totaled $0.2 million compared to $0.1 million in 2010.
In 2010, the primary driver for increased net interest income was the addition of approximately $1 billion of earning assets from the merger with Western New York. Information regarding the average daily balances and average rates earned and paid on our portfolio are presented in the following table: As of December 31
Net interest income
2011
$
141,396
2010
$
134,427
Noninterest income also includes fees for financial services, loan fees, compensation on participation loans and other noninterest income. These other noninterest income sources totaled $22.3 million for the twelve months ended December 31, 2011 an increase of $1.2 million compared to 2010. Financial services fee income is the largest component with $16.5 million in revenue for the year ended December 31, 2011 an increase of $1.1 million (7.1%) compared to 2010.
2009
$ 95,665
Average balances Average interest earning loans
$ 4,249,627
$ 4,043,857
$ 3,003,584
Average interest bearing liabilities
$ 3,627,208
$ 3,498,777
$ 2,609,889
Noninterest expense Noninterest expense increased $1.8 million (3.2%) to $57.5 million for the twelve months ended December 31, 2011, as compared to $55.7 million in 2010.
Average yields and rates Interest earning loan yield
4.46%
4.46%
4.50%
Rate paid on interest bearing liabilities
1.42%
1.55%
1.77%
Interest rate spread
3.04%
2.91%
2.73%
Net interest margin (interest income as a percentage of average earning loans)
3.33%
3.32%
3.19%
Salaries and employee benefits is the primary component of noninterest expense and totaled $36.8 million for the twelve months ended December 31, 2011 an increase of $0.6 million compared to 2010. The increase is a result of annual merit and incentive compensation increases and slightly higher staffing levels.
Provision for loan losses The Association recognized a provision for loan losses of $15.0 million for the twelve months ended December 31, 2011 as compared with a provision for loan losses of $20.0 million in 2010. The provision for loan losses was recorded primarily for inherent losses, yet unidentified due to credit conditions within the Association’s loan portfolio in a more volatile economic environment.
Fees paid to FPI, the Association’s technology service provider, were $5.3 million for the twelve months ended December 31, 2011, unchanged for the twelve months ended December 31, 2010. Insurance fund premiums were $2.0 million for the twelve months ended December 31, 2011, an increase of $0.4 million (24.3%) compared to 2010. Noninterest expenses also include occupancy and equipment expense, other operating expenses and other property owned expenses.
Noninterest income Noninterest income decreased $2.4 million (5.7%) to $40.5 million for the twelve months ended December 31, 2011 as compared to
8
FARM CREDIT EAST | 2011 ANNUAL REPORT
Income Taxes The provision for income taxes was $0.6 million for the twelve months ended December 31, 2011 as compared with a provision for income taxes of $0.7 million for the twelve months ending December 31, 2010. Patronage distributions to stockholders reduce the Association’s tax liability. For additional information, see Note 8 “Income Taxes” to the consolidated financial statements.
The interest rates charged to the Association on debt, by and large, have the same pricing characteristics as the loans funded. For example, fixed rate loans are funded with fixed rate debt with the same term. The Association’s goal is to fund fixed and indexed rate loans with 100% matching debt. The Association’s equity is invested in variable rate loans. The yield on equity funded loans is the average variable portfolio rate. As rates rise or fall, earnings on equity funded loans go up and down. The Association also uses interest rate contracts (swaps) with CoBank to better manage its equity investment in variable rate loans. When rates are low, the Association earns more on its interest rate contracts, offsetting lower earnings on its equity position and serving to stabilize net interest income. (Conversely, when rates rise, the Association will earn less on its contracts and more on its equity position). The average length of the Association’s contracts is about 12 months. The effect of this hedging strategy diminishes if rates stay stable for two or more years.
Patronage Distributions The Association has a patronage program that allows it to distribute its available net earnings to its stockholders. The patronage program consists of a qualified cash distribution and a non-qualified distribution. The distributions are sent to eligible customers shortly after the end of the year. For the year ended December 31, 2011, the Association declared a $35.5 million qualified patronage refund which will be distributed 100% cash. For the year ended December 31, 2010, the Association declared a $35.0 million qualified patronage refund which was distributed 100% in cash during February 2011.
The swaps also extend the duration of the Association’s equity position resulting in increased earnings from the normal yield curve and some change in the value of equity due to changes in interest rates. The Association’s interest rate hedging program is summarized in the following table ($ in millions):
Liquidity and Funding Sources The Association’s primary source of funding is CoBank. Funds are obtained through borrowing on a revolving line of credit governed by a General Financing Agreement. At December 31, 2011, the Association’s notes payable to CoBank totaled $3.6 billion which is unchanged from the prior year. The line of credit available to the Association is formula-driven based on Association loan volume and credit quality. Because of the funding relationship with CoBank, the Association does not maintain large balances in cash or other liquid investments. Substantially all of the Association’s assets are pledged as security to CoBank. The Association is in full compliance with its financing agreement with CoBank and has capacity under the agreement to borrow funds needed to meet anticipated loan demand.
2011
2010
62.6%
63.0%
63.9%
10.4%
10.1%
9.5%
Fixed rate loans
27.0%
26.9%
26.6%
2009
Swap notional amount
$ 340.0
$ 280.0
$ 240.0
Value
$
(0.2)
$
1.1
$
2.0
Cash Settlements
$
1.8
$
3.3
$
4.3
Total members’ equity totaled $811.4 million at December 31, 2011 an increase of $50.9 million (6.7%) from $760.5 million at December 31, 2010. Members’ equity at December 31, 2011 was comprised of unallocated surplus of $632.7 million, additional paid-in capital of $164.4 million, allocated surplus of $34.8
Pricing Type: Indexed loans (Prime, ARM, LIBOR)
2010
Members’ Equity In conjunction with its annual financial planning process, the Association’s Board of Directors reviews and approves a Capitalization Plan. The objective of the plan is to build and maintain adequate capital for continued financial viability and to provide for growth necessary to meet customer needs.
2009
Variable rate loans
2011
For additional information, see Note 15 to the consolidated financial statements “Derivative Instruments and Hedging Activities”.
The Association minimizes its interest rate risk by funding loans with debt from CoBank that has similar pricing characteristics. As a result, the Association is not subject to substantial interest rate risk. The Association’s loan portfolio consisted of the following breakdown by pricing type: As of December 31
As of December 31
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FARM CREDIT EAST | 2011 ANNUAL REPORT
million, customer capital stock and participation certificates of $12.2 million and accumulated other comprehensive loss of <$32.7> million. As discussed previously, a 2011 qualified distribution was declared totaling $35.5 million which is expected to be paid in cash subsequent to year end. Total accumulated allocated surplus was $34.8 million at December 31, 2011. The Association plans to redeem its existing allocated surplus by the year 2014, subject to the Association’s Capitalization Plan. In conjunction with that plan, the Association redeemed $10.6 million during 2011. The Association, along with other System institutions, is subject to regulatory oversight by FCA. In addition to the Association’s Board approved Capitalization Plan, a number of rules and regulations are imposed under the Farm Credit Act on the operations of System entities, including requirements to maintain a minimum permanent capital ratio, total surplus ratio and core surplus ratio. As displayed in the following table, the Association exceeded the minimum regulatory requirements, which are noted parenthetically.
As of December 31
2011
2010
Members’ equity as a % of assets
18.0%
17.1%
2009
16.5%
Permanent capital ratio (7.0%)
16.4%
15.8%
15.4%
Total surplus ratio (7.0%)
16.1%
15.5%
15.1%
Core surplus ratio (3.5%)
15.3%
14.7%
14.3%
Financial condition ratios for 2011 are consistent with the Association’s current Capitalization Plan and long term objectives. For a description of the Association’s capitalization requirements, equities and regulatory capitalization requirements and restrictions, see Note 7 to the consolidated financial statements, “Members’ Equity”. Association management knows of no reason that would cause the Association not to meet these standards in the foreseeable future.
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Report of Management We prepare the consolidated financial statements of Farm Credit East, ACA (Farm Credit East or the Association) and are responsible for their integrity and objectivity, including amounts that must necessarily be based on judgments and estimates. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America as appropriate in the circumstances. The consolidated financial statements, in our opinion, fairly present the financial position of the Association. Other financial information included in this Annual Report is consistent with that in the consolidated financial statements. To meet our responsibility for reliable financial information, we depend on the Associationâ&#x20AC;&#x2122;s accounting and internal control systems designed to provide reasonable, but not absolute, assurance that assets are safeguarded and transactions are properly authorized and recorded. The systems have been designed to recognize that the cost must be related to the benefits derived. To monitor compliance, the Associationâ&#x20AC;&#x2122;s internal auditors and risk management staff perform audits of the accounting records, review accounting systems and internal controls and recommend improvements as appropriate. The consolidated financial statements are audited by PricewaterhouseCoopers LLP, our independent auditors, who also conduct a review of internal controls to obtain sufficient understanding of the internal control structure in order to establish a basis for reliance thereon in determining the nature, extent, and timing of procedures applied in the audit of the financial statements. Farm Credit East is also examined by the Farm Credit Administration (FCA), regulator of the Farm Credit System. The chief executive officer, as delegated by the Board of Directors (the Board), has overall responsibility for the Associationâ&#x20AC;&#x2122;s system of internal controls and financial reporting. The Board has delegated responsibility to the Audit Committee, which is comprised entirely of directors who are independent of Farm Credit East management. The Audit Committee consults regularly with management and meets periodically with the independent auditors and internal auditors to ensure that they are carrying out their responsibilities. The independent auditors and the internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the adequacy of the internal control structure for financial reporting and any other matters that they believe should be brought to the attention of the committee. The undersigned certify that we have reviewed the 2011 Annual Report to Stockholders and it has been prepared in accordance with all applicable statutory or regulatory requirements and that the information contained herein is true, accurate, and complete to the best of our knowledge and belief.
William J. Lipinski CEO
Abbott W. Lee Chairman of the Board
Charles S. Herring President and Chief Operating Officer
Paul S. Bajgier Senior Vice President and Treasurer
March 5, 2012
11
FARM CREDIT EAST | 2011 ANNUAL REPORT
Report of Audit Committee The consolidated financial statements were prepared under the oversight of the Audit Committee. The Audit Committee is composed of five members from the Farm Credit East, ACA (the Association) Board of Directors. In 2011, the Audit Committee met five times in person and participated in several conference calls. The Audit Committee oversees the scope of the Association’s internal audit program, the independence of the outside auditors, the adequacy of the Association’s system of internal controls and procedures, and the adequacy of management’s action with respect to recommendations arising from those auditing activities. In addition, the Audit Committee approved the appointment of PricewaterhouseCoopers LLP (PwC) as our independent auditors for 2011. The Audit Committee’s responsibilities are described more fully in the Association’s Internal Control Policy and the Audit Committee Scope of Responsibility. Management is responsible for the Association’s internal controls and the preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the Untied States of America. PwC is responsible for performing an independent audit of the financial statements in accordance with generally accepted auditing standards in the United States of America and to issue their report based on the audit. The Audit Committee’s responsibilities include monitoring and overseeing these processes. In this context, the Audit Committee reviewed and discussed the audited consolidated financial statements for the year ended December 31, 2011, with management. The Audit Committee also reviewed with PwC the matters required to be discussed by Statement of Auditing Standards No. 114 The Auditor’s Communication With Those Charged With Governance, and both PwC and the internal auditors directly provided reports on significant matters to the Audit Committee. The Audit Committee had discussions with and received written disclosures from PwC in accordance with Independence Standards Board Standard No. 1 Independence Discussion with Audit Committees, and discussed with PwC its independence. The Audit Committee requires approval of all non-audit services provided by PwC. In 2011 PwC was engaged for tax services and the Audit Committee concluded these services were not incompatible with maintaining the auditors’ independence. The Audit Committee has discussed with management and PwC such other matters and received such assurances from them as the Audit Committee deemed appropriate. Based on the foregoing review and discussions, and relying thereon, the Audit Committee recommended that the Board of Directors include the audited consolidated financial statements in the Annual Report for the year ended December 31, 2011.
Benjamin J. Freund Chairman of the Audit Committee Farm Credit East, ACA Other Committee Members: Christine E. Fesko June W. Hoeflich Ann P. Hudson, CPA Henry L. Huntington
March 5, 2012
12
FARM CREDIT EAST | 2011 ANNUAL REPORT
Report on Internal Control over Financial Reporting The Association’s principal executives and principal financial officers, or persons performing similar functions, are responsible for establishing and maintaining adequate internal control over financial reporting for the Association’s combined financial statements. For purposes of this report, “internal control over financial reporting” is defined as a process designed by, or under the supervision of the Association’s principal executives and principal financial officers, or persons performing similar functions, and effected by its boards of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting information and the preparation of the combined financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Association, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial information in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Association, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Association’s assets that could have a material effect on its combined financial statements. The Association’s management has completed an assessment of the effectiveness of internal control over financial reporting as of December 31, 2011. In making the assessment, management used the framework in Internal Control — Integrated Framework, promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO” criteria. Based on the assessment performed, the Association concluded that as of December 31, 2011, the internal control over financial reporting was effective based upon the COSO criteria. Additionally, based on this assessment, the Association determined that there were no material weaknesses in the internal control over financial reporting as of December 31, 2011.
William J. Lipinski President & CEO
Abbott W. Lee Chairman of the Board
Paul S. Bajgier Senior Vice President & Treasurer
James D. Miller Senior Vice President of Finance
March 5, 2012
13
FARM CREDIT EAST | 2011 ANNUAL REPORT
Report of Independent Auditors
Report of Independent Auditors
To Board of Directors and Stockholders of Farm Credit East, ACA: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in members' equity and of cash flows present fairly, in all material respects, the financial position of Farm Credit East, ACA (the "Association") and its subsidiaries at December 31, 2011, 2010 and 2009, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Associationâ&#x20AC;&#x2122;s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As disclosed in Note 1 to the consolidated financial statements, the Association merged with Farm Credit of Western New York, ACA on January 1, 2010.
March 5, 2012
PricewaterhouseCoopers LLP, 185 Asylum Street, Suite 2400, Hartford, CT 06103 T: (860) 241 7000, F: (860) 241 7458, www.pwc.com/us
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Consolidated Balance Sheet (dollars in thousands)
2011
Assets Loans Less allowance for loan losses Net loans Cash Accrued interest receivable Investment in CoBank, ACB Investment in Rural Investments, LLC Premises and equipment, net Other property owned Other assets Total assets
Liabilities Notes payable to CoBank, ACB Patronage refunds payable Other liabilities Total liabilities
Members’ Equity Capital stock and participation certificates Additional paid-in capital Allocated surplus Unallocated surplus Accumulated other comprehensive loss Total members’ equity Total liabilities and members’ equity
$
4,352,586 64,586 4,288,000 13,592 14,918 149,828 4,189 16,582 3,337 29,230 4,519,676
$
$
3,645,745 35,500 27,010 3,708,255
12,242 164,369 34,846 632,697 (32,733) 811,421 4,519,676
$
The accompanying notes are an integral part of these statements.
15
As of December 31, 2010
$
$
$
$
4,275,104 55,395 4,219,709 12,493 14,963 144,139 6,385 17,564 2,609 29,306 4,447,168
3,633,787 35,000 17,925 3,686,712
11,962 164,369 45,488 559,424 (20,787) 760,456 4,447,168
2009
$
$
$
$
3,079,138 40,764 3,038,374 5,389 11,698 107,551 0 12,174 267 22,800 3,198,253
2,630,249 23,400 16,752 2,670,401
8,850 0 41,528 493,417 (15,943) 527,852 3,198,253
FARM CREDIT EAST | 2011 ANNUAL REPORT
Consolidated Statement of Income (dollars in thousands)
2011
Interest Income Loans Other Total interest income
$
Interest Expense Notes payable to CoBank, ACB Other Total interest expense
Year Ended December 31, 2010
185,350 5,270 190,620
$
183,839 1,292 185,131
$
2009
136,385 538 136,923
49,219 5 49,224
50,688 16 50,704
41,258 0 41,258
141,396 15,000
134,427 20,000
95,665 15,000
126,396
114,427
80,665
Noninterest Income Patronage income Financial services fee income Refunds from Farm Credit System Insurance Corporation Loan fees Compensation on participation loans Other income Total noninterest income
18,225 16,491 0 1,430 4,304 16 40,466
17,409 15,402 4,422 2,176 3,505 20 42,934
12,944 12,150 0 1,349 2,431 93 28,967
Noninterest Expense Salaries and employee benefits Occupancy and equipment Insurance fund premium Fees paid to technology service provider Other operating expenses Expenses and losses on other property owned Other expense Total noninterest expenses
36,758 2,802 1,970 5,284 10,288 329 19 57,450
36,205 2,647 1,585 5,288 9,799 76 61 55,661
25,189 2,052 4,635 3,985 7,276 76 93 43,306
109,412 628 108,784
101,700 693 101,007
66,326 136 66,190
Net interest income Provision for loan losses Net interest income after provision for loan losses
Income before income taxes Provision for income taxes Net income
$
The accompanying notes are an integral part of these statements.
16
$
$
FARM CREDIT EAST | 2011 ANNUAL REPORT
Consolidated Statement of Changes in Membersâ&#x20AC;&#x2122; Equity
(dollars in thousands)
Balance at December 31, 2008 Comprehensive Income: Net income Other comprehensive income, net of taxes Change in minimum pension liability Net change in cash flow hedge Comprehensive Income Capital stock and participation certificates issued Capital stock and participation certificates retired Allocated surplus retired Patronage distribution Cash Balance at December 31, 2009 Comprehensive Income: Net income Other comprehensive income, net of taxes Change in minimum pension liability Net change in cash flow hedge Comprehensive Income Capital stock and participation certificates issued Capital stock and participation certificates retired Equity re-characterized upon merger Allocated surplus retired Patronage Cash Balance at December 31, 2010 Comprehensive Income: Net income Other comprehensive income, net of taxes Change in minimum pension liability Net change in cash flow hedge
Capital Stock and Additional Paid-inParticipation Capital Certificates $ 8,763 $ -
Unallocated Surplus $ 450,627
Total Accumulated Other Members' Comprehensive Equity Income/(Loss) $ (13,994) $ 493,242
66,190
66,190 695 (2,644)
653 (566) (6,318)
$
8,850
$
-
$
41,528
$
(23,400) 493,417 $
(15,943) $
101,007
977 (767) 2,902
$
11,962
164,369
$
164,369
14,000 (10,040)
$
45,488
$
(35,000) 559,424 $
(20,787) $
108,784
1,216 (936)
$
164,369
The accompanying notes are an integral part of these statements.
17
$
34,846
(4,517) (327) 96,163 977 (767) 181,271 (10,040) (35,000) 760,456
(10,936) (1,010) 96,838 1,216 (936) (10,642)
(10,642)
12,242
(23,400) 527,852
108,784 (10,936) (1,010)
$
695 (2,644) 64,241 653 (566) (6,318)
101,007 (4,517) (327)
Comprehensive Income Capital stock and participation certificates issued Capital stock and participation certificates retired Allocated surplus retired Patronage Cash Balance at December 31, 2011
Allocated Surplus $ 47,846
$
(35,511) 632,697 $
(32,733) $
(35,511) 811,421
FARM CREDIT EAST | 2011 ANNUAL REPORT
Consolidated Statement of Cash Flows (dollars in thousands)
2011
Year Ended December 31, 2010 2009
Cash flows from operating activities:
Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Provision for loan losses (Increase) decrease in accrued interest receivable Decrease in other liabilities Decrease (increase) in other assets Loss (gain) from sales of other property owned (Gain) loss from sales of premises and equipment Total adjustments
$
108,784
$
2,122 15,000 (441) (2,861) 193 9 (33) 13,989
101,007
$
66,190
1,785 20,000 (477) (10,601) (275) (6) 7 10,433
1,073 15,000 1,449 (4,947) (474) 32 167 12,300
122,773
111,440
78,490
Increase in loans, net Increase in investment in CoBank Decrease (increase) in investments Expenditures for premises and equipment Proceeds from sales of other property owned Proceeds from sales of premises and equipment Net cash acquired in business combination
(89,384) (5,689) 2,080 (1,261) 5,842 154 0
(206,809) (1,852) 1,290 (2,325) 722 116 4,006
(108,210) (8,644) (302) (2,935) 1,092 1,017 0
Net cash used in investing activities
(88,258)
(204,852)
(117,982)
3,483,783 (3,471,825) 1,216 (936) (45,654)
3,667,196 (3,525,049) 977 (767) (41,841)
2,099,770 (2,047,831) 653 (566) (20,266)
Net cash provided by operating activities Cash flows from investing activities:
Cash flows from financing activities:
Advances on notes payable under financing agreement with CoBank, ACB Repayment of notes payable to CoBank, ACB Capital stock and participation certificates issued Capital stock and participation certificates retired Patronage distributions paid Net cash (used in) provided by financing activities
(33,416)
Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year
$
100,516
31,760
1,099
7,104
(7,732)
12,493
5,389
13,121
13,592
$
12,493
$
5,389
486 (11,946) 6,579 35,500
$
551 (4,844) 3,058 35,000
$
530 (1,949) 637 23,400
Supplemental schedule of non-cash investing and financing activities:
$
Accrued interest receivable transferred to loans Increase in other comprehensive income Loan amounts transferred to other property owned Patronage distribution declared Transfer of surplus to additional paid-in-capital related to Association merger
0
The accompanying notes are an integral part of these statements.
18
164,369
0
FARM CREDIT EAST | 2011 ANNUAL REPORT
Notes to Consolidated Financial Statements
(dollars in thousands except as noted)
Farm Credit Insurance Fund (Insurance Fund). The Insurance Fund is required to be used (1) to insure the timely payment of principal and interest on Systemwide debt obligations (insured debt), (2) to ensure the retirement of protected borrower capital at par or stated value, and (3) for other specified purposes. The Insurance Fund is also available for the discretionary uses by the Insurance Corporation of providing assistance to certain troubled System institutions and to cover the operating expenses of the Insurance Corporation. Each System Bank has been required to pay premiums, which may be passed onto the Associations, into the Insurance Fund, based on its annual average adjusted outstanding insured debt until the monies in the Insurance Fund reach the “secure base amount,” which is defined in the Farm Credit Act as 2.0% of the aggregate insured obligations (adjusted to reflect the reduced risk on loans or investments guaranteed by federal or state governments) or such other percentage of the aggregate obligations as the Insurance Corporation in its sole discretion determines to be actuarially sound. When the amount in the Insurance Fund exceeds the secure base amount, the Insurance Corporation is required to reduce premiums, as necessary to maintain the Insurance Fund at the 2% level. As required by the Farm Credit Act, as amended, the Insurance Corporation may return excess funds above the secure base amount to System institutions.
NOTE 1 – Organization, Business Combination and Operations Organization Farm Credit East, ACA, an Agricultural Credit Association (ACA) and its subsidiaries, Farm Credit East FLCA, a Federal Land Credit Association (FLCA), and Farm Credit East PCA, a Production Credit Association (PCA), (collectively called “the Association”), is a member-owned cooperative which provides credit and financially related services to or for the benefit of eligible borrowers/stockholders for qualified agricultural purposes in the counties of Belknap, Carroll, Hillsborough, Merrimack, Rockingham, and Strafford in the State of New Hampshire; all counties in the State of New York except Clinton and Essex, and in the States of Connecticut, Massachusetts, Rhode Island and New Jersey. The Association is a lending institution of the Farm Credit System (the System), a nationwide system of cooperatively owned Banks and Associations, which was established by Acts of Congress to meet the credit needs of American agriculture and is subject to the provisions of the Farm Credit Act of 1971, as amended (the Farm Credit Act).
Business Combination
At December 31, 2011, the System was comprised of four Farm Credit Banks (FCBs) and one Agricultural Credit Bank (ACB) and 83 affiliated Associations. With the merger of CoBank, ACB and U.S. AgBank, FCB effective January 1, 2012, the nation is currently served by three FCBs and the one ACB.
Effective January 1, 2010, Farm Credit of Western New York, ACA (Western New York) merged into First Pioneer Farm Credit, ACA (First Pioneer). The merged association operates under the name of Farm Credit East. As the accounting acquirer, First Pioneer accounted for the transaction under the acquisition method of accounting in accordance with the FASB Accounting Standards Codification (ASC) 805 Business Combinations (ASC 805). As the accounting acquirer, First Pioneer recognized the identifiable assets acquired and liabilities assumed in the Merger as of January 1, 2010 at their respective fair values. The fair values were measured based on various estimates using assumptions that First Pioneer management believed are reasonable utilizing information currently available.
CoBank, ACB (CoBank or ACB) and its related Associations are collectively referred to as the “District”. CoBank provides funding to all associations within the District and is responsible for supervising certain activities of the District Associations. The FLCA makes secured long-term agricultural real estate and rural home mortgage loans. The ACA makes short and intermediate-term loans for agricultural production or operating purposes.
As cooperative organizations, Farm Credit associations operate for the mutual benefit of our customer owners and other customers and not for the benefit of any other equity investors; capital stock provides no significant interest in corporate earnings or growth. Specifically, due to restrictions in applicable regulations and their bylaws, the Associations can issue stock only at its par value of $5 per share, the stock is not tradable, and the stock can be retired only for the lesser of par value or book value. In these and other respects, the shares of stock in one Association that were converted to shares of another Association had identical rights and attributes. For this reason,
The Association, along with other System Institutions, owns Farm Credit Financial Partners, Inc. (FPI) which provides technology and other operational services to its owners. The Farm Credit Administration (FCA) is delegated authority by Congress to regulate the System Banks and Associations. The FCA examines the activities of System Associations to ensure their compliance with the Farm Credit Act, FCA regulations and safe and sound banking practices. The Farm Credit Act established the Farm Credit System Insurance Corporation (Insurance Corporation) to administer the
19
FARM CREDIT EAST | 2011 ANNUAL REPORT
the conversion of stock pursuant to the merger occurred at a one-for-one exchange ratio.
believes are reasonable utilizing information currently available. The use of different estimates and judgments could yield materially different results.
Management believes that because the stock in each Association is fixed in value, the stock issued pursuant to the merger provides no basis for estimating the fair value of the consideration transferred pursuant to the merger. In the absence of a purchase price determination, the First Pioneer identified and estimated the acquisition date fair value of the equity interests of the acquired Association instead of the acquisition date fair value of the equity interests transferred as consideration. The fair value of the assets acquired, including specific intangible assets and liabilities assumed, were measured based on various estimates using assumptions that management
This evaluation produced a fair value of identifiable assets acquired and liabilities assumed that was substantially equal to the fair value of the member interests transferred in the merger. As a result, management recorded no goodwill. The excess value received, by the acquiring Association from the acquired Association, over the par value of capital stock and participation certificates issued in the merger is considered to be additional paid-in capital. The opening balance sheet below shows the fair value of the acquired assets and assumed liabilities as of January 1, 2010.
Farm Credit East, ACA Opening Balance Sheet As of January 1, 2010 Assets Loans Less - Allowance Nonaccretable loan credit mark Accretable loan yield mark Net Loans
First Pioneer $
Pro-Forma
3,079,138 40,764 3,038,374
$ 1,001,583 (7,023) 2,473 997,033
$ 4,080,721 40,764 (7,023) 2,473 4,035,407
5,389 11,698 107,551 12,174 267 22,800
4,006 3,339 34,736 7,937 4,973 5,968
9,395 15,037 142,287 7,937 17,147 267 28,768
$
3,198,253
$ 1,057,992
$ 4,256,245
$
2,630,249 2,630,249
$
855,567 5,824 861,391
$ 3,485,816 5,824 3,491,640
8,400 6,930
31,800 23,682
Cash Accrued Interest Receivable Investment in CoBank, ACB Investment in Rural Investments, LLC Premises and Equipment, net Other Property Owned Other Assets Total assets
Western New York
Liabilities Notes payable to CoBank, ACB Accretable note payable yield mark Net Notes payable to CoBank, ACB Patronage refunds payable Other Liabilities Total Liabilities
23,400 16,752 $
2,670,401
$
876,721
$ 3,547,122
$
8,850 (15,943) 41,528 493,417 -
$
2,902 14,000 164,369
$
527,852
181,271
709,123
$
3,198,253
$ 1,057,992
$ 4,256,245
Members' Equity Capital stock and participation certificates Accumulated other comprehensive loss Allocated surplus Unallocated surplus Additional paid-in capital Total Members' Equity Total Liabilities and Members' Equity
20
11,752 (15,943) 55,528 493,417 164,369
FARM CREDIT EAST | 2011 ANNUAL REPORT
NOTE 2 – Summary of Significant Accounting Policies
The fair value of the impaired loans acquired as of January 1, 2010 was $6.3 million and the gross contractual amount of these impaired loans was $13.3 million. The fair value of these impaired loans was $2.5 million at December 31, 2010, and $1.6 million at December 31, 2011 while the gross contractual amount of these impaired loans was $3.9 million at December 31, 2010 and $3.0 million at December 31, 2011. The amount of accretable yield relating to all loans acquired was $2.5 million at January 1, 2010, $2.2 million at December 31, 2010, and $1.9 million at December 31, 2011.
The accounting and reporting policies of the Association conform with accounting principles generally accepted in the United States of America (GAAP) and prevailing practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates are discussed in these footnotes, as applicable. Actual results may differ from these estimates.
The acquisition method of accounting requires the financial statement presentation of combined balances as of the date of the merger, but not for previous periods. The Consolidated Balance Sheet, Consolidated Statement of Income, Consolidated Statement of Changes in Members’ Equity and Consolidated Statement of Cash Flows reflect the merged balances as of December 31, 2011 and December 31, 2010 and the balances of First Pioneer only as previously presented for December 31, 2009.
The consolidated financial statements include the accounts of Farm Credit East, PCA and Farm Credit East, FLCA. All intercompany transactions have been eliminated in consolidation. Recently Issued or Adopted Accounting Pronouncements In September 2011, the Financial Accounting Standards Board (FASB) issued guidance entitled, “Compensation – Retirement Benefits – Multiemployer Plans.” The guidance is intended to provide more information about an employer’s financial obligations to a multiemployer pension plan and a postretirement benefits plan other than pension, which should help financial statement users better understand the financial health of significant plans that the employer participates. The additional disclosures include: a) a description of the nature of plan benefits, b) a qualitative description of the extent to which the employer could be responsible for the obligations of the plan, including benefits earned by employees during employment with another employer, and c) other quantitative information to help users understand the financial information about the plan. The amendments are effective for annual periods for fiscal years ending after December 15, 2011 for public entities or for annual periods for fiscal years ending after December 15, 2012 for nonpublic entities. The amendments should be applied retrospectively for all prior periods presented. The adoption of this guidance will not impact the Association’s financial condition or results of operations, but will result in additional disclosure requirements.
Operations The Farm Credit Act sets forth the types of authorized lending activity, persons eligible to borrow, and financial services which can be offered by the Association. The Association is authorized to provide, either directly or in participation with other lenders, credit, credit commitments and related services to eligible borrowers. Eligible borrowers include farmers, ranchers, producers or harvesters of aquatic products, rural residents and farm-related businesses. The Association provides additional services to borrowers such as financial recordkeeping and report generation, tax return preparation, tax planning, farm accounting software, fee appraisals, farm business consulting, and leasing. The Association also offers credit life insurance and multi-peril crop insurance to its borrowers, as an agent. Upon request, stockholders of the Association will be provided with a CoBank Annual Report to Stockholders, which includes the combined financial statements of the Bank and its related Associations. The Association’s financial condition may be impacted by factors which affect CoBank. CoBank’s Annual Report to Stockholders discusses the material aspects of its financial condition, changes in financial condition, and results of operations. In addition, the CoBank Annual Report identifies favorable and unfavorable trends, significant events, uncertainties and the impact of activities of the Insurance Corporation. The lending and financial services performed by CoBank are described in Note 1 of CoBank’s Annual Report to Stockholders.
In June 2011, the FASB issued guidance entitled, “Comprehensive Income – Presentation of Comprehensive Income.” This guidance is intended to increase the prominence of other comprehensive income in financial statements. The current option that permits the presentation of other comprehensive income in the statement of changes in equity has been eliminated. The main provisions of the guidance provides that an entity that reports items of other comprehensive income has the
21
FARM CREDIT EAST | 2011 ANNUAL REPORT
option to present comprehensive income in either one or two consecutive financial statements:
•
•
A single statement must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income.
In May 2011, the FASB issued guidance entitled, “Fair Value Measurement – Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” The amendments change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments include the following:
2.
3.
An exception to the requirement for measuring fair value when a reporting entity manages its financial instruments on the basis of its net exposure, rather than its gross exposure, to those risks.
5.
Clarifying that the application of premiums and discounts in a fair value measurement is related to the unit of account for the asset or liability being measured at fair value. Premiums or discounts related to size as a characteristic of the entity’s holding (that is, a blockage factor) instead of as a characteristic of the asset or liability (for example, a control premium), are not permitted. A fair value measurement that is not a Level 1 measurement may include premiums or discounts other than blockage factors when market participants would incorporate the premium or discount into the measurement at the level of the unit of account specified in other guidance.
6.
Expansion of the disclosures about fair value measurements. The most significant change will require entities, for their recurring Level 3 fair value measurements, to disclose quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements. New disclosures are required about the use of a nonfinancial asset measured or disclosed at fair value if its use differs from its highest and best use. In addition, entities must report the level in the fair value hierarchy of assets and liabilities not recorded at fair value but where fair value is disclosed.
In a two-statement approach, an entity must present the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income.
This guidance is to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance will not impact financial condition or results of operations, but will result in changes to the presentation of comprehensive income
1.
4.
Application of the highest and best use and valuation premise is only relevant when measuring the fair value of nonfinancial assets (does not apply to financial assets and liabilities.)
The amendments are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance will not impact the Association’s financial condition or results of operations, but will result in additional disclosure requirements.
Aligning the fair value measurement of instruments classified within an entity’s shareholders’ equity with the guidance for liabilities. As a result, an entity should measure the fair value of its own equity instruments from the perspective of a market participant that holds the instruments as assets.
In January 2011, the FASB issued guidance entitled, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings.” This guidance temporarily delayed the effective date of the disclosures about troubled debt restructurings required by the guidance previously issued on “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The effective date of the new
Clarifying that a reporting entity should disclose quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy.
22
FARM CREDIT EAST | 2011 ANNUAL REPORT
disclosures about troubled debt restructurings (TDR) coincides with the guidance for determining what constitutes a TDR as described below.
remainder of the loss amount recognized in other comprehensive income. Gains and losses on the sales of investments availablefor-sale are determined using the specific identification method. Premiums and discounts are amortized or accreted into interest income over the term of the respective issues. The Association did not hold any available-for-sale investment securities as of December 31, 2011, 2010 and 2009.
In April 2011, the FASB issued its guidance entitled, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring,” which provides for clarification on whether a restructuring constitutes a TDR. In evaluating whether a restructuring is a TDR, a creditor must separately conclude that both of the following exists: (1) the restructuring constitutes a concession, and (2) the debtor is experiencing financial difficulties. For nonpublic entities, the guidance is effective for annual periods ending on or after December 15, 2012, including interim periods within those annual periods. The adoption of this Standard did not have an impact on the Bank and Associations financial condition or results of operations, but did result in additional disclosures.
Loans and Allowance for Loan Losses Long-term real estate mortgage loans generally have maturities ranging from 5 to 40 years. Substantially all short-term and intermediate-term loans for agricultural production or operating purposes have maturities of 10 years or less. Loans are carried at their principal amount outstanding adjusted for charge-offs and deferred loan fees or costs. Loan origination fees and direct loan origination costs are capitalized and the net fee or cost is amortized over the life of the related loan as an adjustment to yield.
Cash
Loans acquired in a business combination are initially recognized at fair value, and therefore, no “carryover” of the allowance for loan losses is permitted. Those loans with evidence of credit quality deterioration at purchase are required to follow the authoritative accounting guidance on “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” This guidance addresses accounting for differences between contractual cash flows and cash flows expected to be collected from the initial investment in loans if those differences are attributable, at least in part, to credit quality. The initial fair values for these types of loans are determined by discounting both principal and interest cash flows expected to be collected using an observable discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value.
Cash, as included in the statement of cash flows, represents cash on hand and on deposit at banks. Investment Securities The Association, as permitted under the FCA regulations, can hold investments for purposes of maintaining a liquidity reserve, managing short-term surplus funds and managing interest rate risk. The Association’s investments may not necessarily be held to maturity and accordingly are classified as available-for-sale. These investments are reported at fair value with unrealized gains and losses that are netted and reported as a separate component of members’ equity (accumulated other comprehensive income (loss)) in the consolidated balance sheet. Changes in the fair value of these investments are reflected as direct charges or credits other comprehensive income, unless the investment is deemed to be other than temporarily impaired. Impairment is considered to be other-than-temporary if the present value of cash flows expected to be collected from the debt security is less than the amortized cost basis of the security (any such shortfall is referred to as a “credit loss”). If an entity intends to sell an impaired debt security or is more likely than not to be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the impairment is other-than-temporary and should be recognized currently in earnings in an amount equal to the entire difference between fair value and amortized cost. If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into (i) the estimated amount relating to credit loss, and (ii) the amount relating to all other factors. Only the estimated credit loss amount is recognized currently in earnings, with the
Impaired loans are loans for which it is probable that not all principal and interest will be collected according to the contractual terms of the loan and are generally considered substandard or doubtful which is in accordance with the loan rating model, as described below. A loan is considered contractually past due when any principal repayment or interest payment required by the loan instrument is not received on or before the due date. A loan shall remain contractually past due until it is formally restructured or until the entire amount past due, including principal, accrued interest, and penalty interest accrued as the result of past due status, is collected or otherwise discharged in full. Impaired loans are generally placed in nonaccrual status when principal or interest is delinquent for 90 days or more (unless adequately secured and in the process of collection) or circumstances indicate that collection of principal and/or interest
23
FARM CREDIT EAST | 2011 ANNUAL REPORT
is in doubt. When a loan is placed in nonaccrual status, accrued interest deemed uncollectible is either reversed (if accrued in the current year) and/or charged-off against the allowance for loan losses (if accrued in the prior year). Loans are charged-off at the time they are determined to be uncollectible.
default grows more rapidly as a loan moves from a “9” to other assets especially mentioned and grows significantly as a loan moves to a substandard (viable) level. A substandard (nonviable) rating indicates that the probability of default is almost certain.
A restructured loan constitutes a troubled debt restructuring if for economic or legal reasons related to the debtor’s financial difficulties the Association grants a concession to the debtor that it would not otherwise consider.
The credit risk rating methodology is a key component of the Association’s allowance for loan losses evaluation, and is generally incorporated into its loan underwriting standards and internal lending limit. The allowance for loan losses is maintained at a level considered adequate by management to provide for probable and estimable losses inherent in the loan portfolio. The allowance is based on a periodic evaluation of the loan portfolio by management in which numerous factors are considered, including economic conditions, loan portfolio characteristics and composition, collateral value, portfolio quality, current production conditions and economic conditions, and prior loan loss experience. The allowance for loan losses encompasses various judgments, evaluations and appraisals with respect to the loans and their underlying security that, by their nature, contain elements of uncertainty and imprecision. Changes in the agricultural economy and their impact on borrower repayment capacity will cause these various judgments, evaluations and appraisals to change over time. Accordingly, actual circumstances could vary significantly from the institutions’ expectations and predictions of those circumstances. Management considers the following factors in determining and supporting the level of allowance for loan losses: the concentration of lending in agriculture, combined with uncertainties associated with farmland values, commodity prices, exports, government assistance programs, regional economic effects and weather-related influences.
When loans are in nonaccrual status, the Association’s general practice is to apply and record on its financial records any payments received on nonaccrual loans in the following sequence: (1) to existing principal which includes outstanding principal, accounts receivable and accrued interest receivable as of the date of transfer plus any additional advances made since the loan was placed in nonaccrual status; (2) to recover any charged-off amount; and (3) to interest income. Nonaccrual loans may, at times, be maintained on a cash basis. Generally cash basis refers to the recognition of interest income from cash payments received on certain nonaccrual loans for which the collectibility of the recorded investment in the loan is no longer in doubt and the loan does not have a remaining unrecovered prior charge-off associated with it. Nonaccrual loans may be returned to accrual status when principal and interest are current and reinstatement is supported by a period of sustained performance in accordance with the contractual terms of the note and/or loan agreement and the loan is not classified “doubtful” or “loss”. The Association uses a two-dimensional loan rating model based on an internally generated combined system risk rating guidance that incorporates a 14-point risk-rating scale to identify and track the probability of borrower default and a separate scale addressing loss given default over a period of time. Probability of default is the probability that a borrower will experience a default within 12 months from the date of the determination of the risk rating. A default is considered to have occurred if the lender believes the borrower will not be able to pay its obligation in full or the borrower is past due more than 90 days. The loss given default is management’s estimate as to the anticipated economic loss on a specific loan assuming default has occurred or is expected to occur within the next 12 months.
The allowance for loan losses includes components for loans individually evaluated for impairment, loans collectively evaluated for impairment and loans acquired with deteriorated credit quality. Generally, for loans individually evaluated the allowance for loan losses represents the difference between the recorded investment in the loan and the present value of the cash flows expected to be collected discounted at the loan’s effective interest rate, or at the fair value of the collateral, if the loan is collateral dependent. For those loans collectively evaluated for impairment, the allowance for loan losses is determined using the risk-rating model.
Each of the probability of default categories carries a distinct percentage of default probability. The 14-point risk rating scale provides for granularity of the probability of default, especially in the acceptable ratings. There are nine acceptable categories that range from a borrower of the highest quality to a borrower of minimally acceptable quality. The probability of default between 1 and 9 is very narrow and would reflect almost no default to a minimal default percentage. The probability of
Investment in CoBank, ACB The Association’s investment in CoBank is in the form of Class E stock. Accounting for this investment is on the cost plus allocated equities basis.
24
FARM CREDIT EAST | 2011 ANNUAL REPORT
Other Property Owned
anticipated costs of these benefits are accrued during the period of the employee’s active service and are classified as employee benefit expense. However, substantially all participants pay the full premiums associated with these benefits.
Other property owned, consisting of real and personal property acquired through foreclosure or deed in lieu of foreclosure, is recorded at fair value less estimated selling costs upon acquisition. Any initial reduction in the carrying amount of a loan to be the fair value of the collateral received is charged to the allowance for loan losses. On at least an annual basis, revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Income and expenses from operations and carrying value adjustments are included in gains (losses) on other property owned in the consolidated Statement of Income.
Income Taxes As previously described, Farm Credit East, ACA operates two wholly owned subsidiaries. Farm Credit East, FLCA is exempt from federal and other income taxes as provided in the Farm Credit Act. Farm Credit East, ACA and its subsidiary Farm Credit East, PCA are subject to Federal and State income tax. All entities are eligible to operate as cooperatives that qualify for tax treatment under Subchapter T of the Internal Revenue Code. Accordingly, under specified conditions, the Association can exclude from taxable income amounts distributed as qualified patronage refunds in the form of cash, stock or allocated surplus. Provisions for income taxes are made only on those earnings that will not be distributed as qualified patronage refunds. The Association distributes patronage on the basis of book income. Operating expenses are allocated to each subsidiary based on estimated relative service. All significant transactions between the subsidiaries and the parent company have been eliminated in consolidation.
Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation. Land is carried at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets. Gains and losses on dispositions are reflected in current operations. Maintenance and repairs are charged to operating expense and improvements are capitalized. Employee Benefit Plans
Deferred taxes are recorded on the tax effect of all temporary differences. A valuation allowance is provided against deferred tax assets to the extent that it is more likely than not (over 50 percent probability), based on management’s estimate, that they will not be realized. The consideration of valuation allowances involves various estimates and assumptions as to future taxable earnings, including the effects of our expected patronage program, which reduces taxable earnings.
Substantially all employees of the Association may be eligible to participate in various retirement plans. Association employees hired prior to January 1, 2007 participate in a qualified defined benefit pension plan, which is noncontributory and covers substantially all employees. The net expense for this plan is recorded as employee benefit expense. The “Projected Unit Credit” actuarial method is used for financial reporting and funding purposes.
Deferred income taxes have not been provided by the Association on patronage stock distributions from the Farm Credit Bank of Springfield (FCB) prior to January 1, 1993, the adoption date of the FASB guidance on income taxes. Management’s intent is (1) to permanently invest these and other undistributed earnings in the FCB, thereby indefinitely postponing their conversion to cash, or (2) to pass through any distribution related to pre-1993 earnings to Association borrowers through qualified patronage allocations. CoBank is the successor to the FCB.
Effective January 1, 2007, the Association closed the existing defined benefit pension plan to new participants. All employees hired on or after January 1, 2007 are participants in a noncontributory defined contribution plan. Participants in this plan receive a fixed percentage of their eligible wages, based on years of service, to an investment account maintained for the employee. Costs for this plan are expensed as funded and recorded as employee benefit expense. Association employees are also eligible to participate in an employee savings plan (Thrift Plan). The Association matches a certain percentage of employee contributions with costs being expensed as funded. These costs are recorded as employee benefit expense.
The Association has not provided deferred income taxes on amounts allocated to the Association which relate to the FCB’s and CoBank’s post-1992 earnings to the extent that such earnings will be passed through to Association borrowers through qualified patronage allocations. Additionally, deferred income taxes have not been provided on the FCB’s and the CoBank’s post-1992 unallocated earnings. CoBank currently has no plans to distribute unallocated earnings and does not
The Association provides certain health care and life insurance benefits to eligible retired employees. Substantially all employees may become eligible for these benefits if they reach early retirement age while working for the Association. The
25
FARM CREDIT EAST | 2011 ANNUAL REPORT
contemplate circumstances that, if distributions were made, would result in taxes being paid at the Association level.
determines that 1) a derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; 2) the derivative expires or is sold, terminated, or exercised; 3) it is no longer probable that the forecasted transaction will occur; 4) a hedged firm commitment no longer meets the definition of a firm commitment; or 5) management determines that designating the derivative as a hedging instrument is no longer appropriate. The FASB guidance provides for various remedies in the event hedge accounting is discontinued. Due to the structure of the Association’s current swap transactions, management has no reason to believe that hedge accounting qualifications will not be met and believes the transactions will continue to be recorded in the manner described in Note 15 of these consolidated financial statements.
Patronage Income from CoBank, ACB The Association records patronage refunds from CoBank, ACB on the accrual basis. Derivative Instruments and Hedging Activity The Association is party to derivative financial instruments, primarily interest rate swaps, which are principally used to manage interest rate risk on assets, liabilities and anticipated transactions. Derivatives are recorded on the balance sheet as assets and liabilities at fair value. Changes in the fair value of a derivative are recorded in current period earnings or accumulated other comprehensive income (loss) depending on the use of the derivative and whether it qualifies for hedge accounting. For fair-value hedge transactions, which hedge changes in the fair value of assets, liabilities, or firm commitments, changes in the fair value of the derivative are recorded in earnings and will generally be offset by changes in the hedged item’s fair value. For cash-flow hedge transactions, which hedge the variability of future cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative will generally be deferred and reported in accumulated other comprehensive income (loss). The gains and losses on the derivative that are deferred and reported in accumulated other comprehensive income (loss) will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges is recorded in current period earnings. For derivatives not designated as a hedging instrument, the related change in fair value is recorded in current period earnings.
Fair Value Measurement The FASB guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It describes three levels of inputs that may be used to measure fair value: Level 1 — Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 asset and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets. Also included in Level 1 are assets held in trust funds, which relate to deferred compensation and our supplemental retirement plan. The trust funds include investments that are actively traded and have quoted net asset values that are observable in the marketplace. Pension plan assets that are invested in equity securities, including mutual funds, and fixedincome securities that are actively traded are also included in Level 1.
The Association formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value or cash flow hedges to (1) a portion of our long-term variable loans on the balance sheet or (2) firm commitments or forecasted transactions. The Association also formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. The Association uses regression analysis (or statistical analysis) to assess the effectiveness of its hedges. The Association discontinues hedge accounting prospectively when the Association
Level 2 — Observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly. Level 2 inputs include the following: (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active so that they are traded less frequently than exchange-traded instruments, the prices are not current or principal market information is not released publicly; (c) inputs other than quoted prices that are observable such as interest rates and yield curves, prepayment speeds, credit risks and default rates and (d) inputs derived principally from or corroborated by observable market data by correlation or other means. This category generally includes certain U.S. Government and agency mortgage-backed debt securities, corporate debt securities, and derivative contracts. Pension
26
FARM CREDIT EAST | 2011 ANNUAL REPORT
plan assets that are derived from observable inputs, including corporate bonds and mortgage-backed securities are reported in Level 2.
specifically to own and securitize the loans and subsequently sell the security to the Association as an investment. Rural Investments sole member is GSS Holdings, Inc. a Delaware special purpose entity created to own Rural Investments. The Association is the manager and through agreement controls Rural Investments and all its activities. All benefits and risks accrue to the Association as manager. The FLCA holds the investment security certificate.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These unobservable inputs reflect the reporting entity’s own assumptions about assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, retained residual interests in securitizations, asset-backed securities, highly structured or long-term derivative contracts, certain loans and other property owned. Pension plan assets such as certain mortgage-backed securities that are supported by little or no market data in determining the fair value are included in Level 3.
The investment is carried at the lower of cost or fair market value. A valuation to determine fair market value is performed monthly by management, taking into account cash flows and the underlying loans contained in the investment. Income is recorded on investments only as it relates to underlying loans contained in the security that would be classified as accruing had the Association owned the loans. Interest is accrued and credited to interest income based upon the daily investment value. Any difference between amortized cost and actual borrower balances on the underlying loans is accreted to interest income as payments are received over the life of the investment. Any reduction in value recognized through the ongoing fair market value determination is recorded as a current charge and will directly impact the income statement at the time of recognition. No valuation allowance is maintained. Income is not recognized on the underlying loans contained in the investment for loans that would be considered impaired if the loans were owned by the Association. The Association’s practice is to apply and record payments received on impaired underlying loans in the following sequence:
The fair value disclosures are presented in Note 11 of these consolidated financial statements. Off-Balance Sheet Credit Exposures Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. Commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These letters of credit are issued to facilitate commerce and typically result in the commitment being funded when the underlying transaction is consummated between the customer and third party. The credit risk associated with commitments to extend credit and commercial letters of credit is essentially the same as that involved with extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s creditworthiness.
1. To existing principal until all principal is paid, and then 2. To interest income Underlying loans contained in the investment may be returned to accrual status once performance criteria are met. Upon reinstatement, previously unrecognized income will be recognized as payments are received over the remaining life of the investment. See Note 14 for additional information regarding the rural investment. The Association may also hold additional investments in accordance with mission-related and other investment programs, approved by the Farm Credit Administration. These programs allow the Association to make investments that further the System’s mission to serve rural America. The Association held mission related investments which are classified as loans totaling $7,593, $7,013 and $6,807 at December 31, 2011, 2010 and 2009, respectively. The Association also held an equity investment in FarmStart, LLP of $1,088, $999 and $817 that is accounted for on the equity method and is classified as other assets at December 31, 2011, 2010 and 2009, respectively.
Pilot Investment Program and Mission Related Investments On July 1, 2005 the Farm Credit Administration approved a pilot investment program for the Association designed to provide an opportunity for the Association to invest in Western New York agriculture. The approval provided for the ability to purchase investments in a securitized pool of agricultural loans from Rural Investments, LLC for a period of up to one year. On August 26, 2005 the Association entered into an agreement with Rural Investments, LLC (Rural Investments) a special purpose entity created by the Association and GSS Holdings, Inc. to hold loans sold by a commercial lender. Rural Investments was formed
27
FARM CREDIT EAST | 2011 ANNUAL REPORT
NOTE 3 – Loans and Allowance for Loan Losses A summary of loans follows: As of December 31
2011
Real estate mortgage Production and intermediate term Loans to cooperatives Processing and marketing Farm related business Communication Energy Rural residential real estate Water/Waste disposal Lease receivables Total Loans
2010
$ 2,094,202 1,658,760 123,320 195,700 214,856 112 5,855 59,781 0 0 $ 4,352,586
2009
$ 2,037,448 1,631,880 152,205 180,241 198,059 159 7,054 61,918 6,140 0 $ 4,275,104
$ 1,614,844 1,073,633 62,042 119,421 146,519 216 3,283 52,858 6,237 85 $ 3,079,138
The Association may purchase or sell participation interests with other parties in order to diversify risk, manage loan volume and comply with Farm Credit Administration regulations. The following table presents information regarding participations purchased and sold as of December 31, 2011 which are also included in the table above:
Other Farm Credit Institutions Participations Purchased Real estate mortgage Production and intermediate
$
Agribusiness Energy Total Loans
178,472 203,393
Participations Sold
Participations Purchased
$
$
265,426 5,855 $
653,146
Non-Farm Credit Institutions
$
38,817 218,337
Total
Participations Sold 0 0
121,540 0
106,486 0
378,694
$ 106,486
$
Participations Purchased 0 0
$
11,250 0 $
11,250
$
178,472 203,393
Participations Sold $
38,817 218,337
371,912 5,855
132,790 0
759,632
$ 389,944
The Association’s concentration of credit risk in various agricultural commodities is shown in the following table. While the amounts represent the Association’s maximum potential credit risk as it relates to recorded loan principal, a substantial portion of the Association’s lending activities is collateralized and the Association’s exposure to credit loss associated with lending activities is reduced accordingly. An estimate of the Association’s credit risk exposure is considered in the determination of the allowance for loan losses.
28
FARM CREDIT EAST | 2011 ANNUAL REPORT
As of December 31 Commodity Dairy Cash Field Livestock Timber Greenhouse Fruit Nursery Farm Services Processing & Marketing Vegetables Aquatic Cranberries All Other Total
2011
2010 Amount
2009
Amount
%
$ 1,035,651 484,176 420,631 405,343 278,867 272,026 233,120 222,171 198,983 168,823 116,620 86,986 429,189
23.8% 11.1% 9.7% 9.3% 6.4% 6.2% 5.4% 5.1% 4.6% 3.9% 2.7% 2.0% 9.8%
$ 1,048,085 483,581 415,685 417,541 269,489 251,938 232,961 209,974 174,189 150,273 110,834 93,552 417,002
24.5% 11.3% 9.7% 9.8% 6.3% 5.9% 5.4% 4.9% 4.1% 3.5% 2.6% 2.2% 9.8%
$
632,503 298,369 355,991 351,108 255,735 170,203 227,396 146,864 60,075 105,871 80,110 82,207 312,706
20.5% 9.7% 11.6% 11.4% 8.3% 5.5% 7.4% 4.8% 2.0% 3.4% 2.6% 2.7% 10.1%
$ 4,352,586
100%
$ 4,275,104
100%
$ 3,079,138
100%
The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but typically includes farmland and income-producing property, such as crops and livestock as well as receivables. Long-term real estate loans are secured by the first liens on the underlying property. Federal regulations state that long-term real estate loans are not to exceed 85% (97% if guaranteed by a government agency) of the property’s appraised value. However, a decline in a property’s market value subsequent to loan origination or advances, or other actions necessary to protect the financial interest of the Association in the collateral, may result in the loan to value ratios in excess of the regulatory maximum.
%
Amount
%
The following table presents information relating to impaired loans:
As of December 31
2011
2010
2009
$ 14,551 34,171
$ 22,033 28,553
$
12,148 28,696
$ 48,722
$ 50,586
$
40,844
Total impaired accrual loans
$ $
$ $
0 0
$ $
0 0
Total impaired loans
$ 50,335
$ 50,586
$
40,844
Nonaccrual loans: Current as to principal and interest Past due Total nonaccrual loans Impaired accrual loans: Restructured accrual loans
Impaired loans are loans for which it is probable that all principal and interest will not be collected according to the contractual terms. Interest income recognized and payments received on nonaccrual impaired loans are applied in a similar manner as for nonaccrual loans, as described in Note 2.
1,613 1,613
Accruing loans 90 days or more past due were $2,746, $3,006, and $1,413 at December 31, 2011, 2010, 2009, respectively. Management does not consider these loans to be impaired.
29
FARM CREDIT EAST | 2011 ANNUAL REPORT
Nonperforming assets (including related accrued interest) and related credit quality statistics are as follows: As of December 31 Nonaccrual loans: Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Water/Waste disposal Total nonaccrual loans Accruing restructured loans: Agribusiness Total restructured loans
2011
2010
2009
$
$
$
$
26,189 16,643 5,477 413 0 48,722
$
25,541 17,354 5,893 450 1,348 50,586
$
19,193 12,686 8,428 537 0 40,844
$ $
1,614 1,614
$ $
0 0
$ $
0 0
$
$
$
$
697 2,937 3,094
$
0 1,441 1,441
Accruing loans 90 days or more past due: Real estate mortgage Production and intermediate term Total accruing loans 90 days or more past due
$
1,554 1,307 2,861
Total nonperforming loans
$
53,197
$
53,680
$
42,285
Other owned property
$
3,337
$
2,609
$
267
Total nonperforming assets
$
56,534
$
56,289
$
42,552
One credit quality indicator utilized by the Bank and Associations is the Farm Credit Administration Uniform Loan Classification System that categorizes loans into five categories. The categories are defined as follows: • Acceptable – assets are expected to be fully collectible and represent the highest quality, • Other assets especially mentioned (OAEM) – assets are currently collectible but exhibit some potential weakness, • Substandard – assets exhibit some serious weakness in repayment capacity, equity, and/or collateral pledged on the loan, • Doubtful – assets exhibit similar weaknesses to substandard assets; however, doubtful assets have additional weaknesses in existing factors, conditions and values that make collection in full highly questionable, and • Loss – assets are considered uncollectible.
30
FARM CREDIT EAST | 2011 ANNUAL REPORT
The following table shows loans and related accrued interest classified under the Farm Credit Administrationâ&#x20AC;&#x2122;s Uniform Loan Classification System as a percentage of total loans and related accrued interest receivable by loan type as of December 31:
As of December 31 Real estate mortgage Acceptable OAEM Substandard/doubtful Production and intermediate term Acceptable OAEM Substandard/doubtful Loans to cooperatives Acceptable OAEM Substandard/doubtful Processing and marketing Acceptable OAEM Substandard/doubtful Farm related business Acceptable OAEM Substandard/doubtful Energy and Water/waste disposal Acceptable OAEM Substandard/doubtful Rural residential real estate Acceptable OAEM Substandard/doubtful Total loans Acceptable OAEM Substandard/doubtful
2011
2010
2009
42.4% 2.3% 3.4% 48.1%
41.6% 3.4% 2.7% 47.7%
46.1% 3.1% 3.4% 52.6%
34.0% 1.6% 2.5% 38.1%
32.2% 3.1% 2.8% 38.1%
29.3% 3.4% 2.1% 34.8%
2.8% 0.0% 0.1% 2.9%
3.3% 0.3% 0.1% 3.7%
2.0% 0.0% 0.0% 2.0%
4.3% 0.2% 0.0% 4.5%
3.8% 0.3% 0.1% 4.2%
3.1% 0.5% 0.2% 3.8%
4.7% 0.1% 0.1% 4.9%
4.2% 0.3% 0.1% 4.6%
4.3% 0.3% 0.2% 4.8%
0.1% 0.0% 0.0% 0.1%
0.3% 0.0% 0.0% 0.3%
0.3% 0.0% 0.0% 0.3%
1.3% 0.0% 0.1% 1.4%
1.3% 0.0% 0.1% 1.4%
1.6% 0.0% 0.1% 1.7%
86.7% 7.4% 5.9% 100.0%
86.7% 7.3% 6.0% 100.0%
89.6% 4.2% 6.2% 100.0%
31
FARM CREDIT EAST | 2011 ANNUAL REPORT
The following table provides an age analysis of past due loans as of December 31, 2011:
30-89 Days Past Due
Real estate mortgage Production and intermediate term Loans to cooperatives Processing and marketing Farm related business Communication Energy and water/waste disposal Rural residential real estate Total Loans
90 Days or More Past Due
$ 13,013 5,191 0 0 431 0 0 592 $ 19,227
Not Past Due or less than 30 Days Past Due
Total Past Due
$ 16,360 14,694 0 0 2,870 0 0 57 $ 33,981
$ 29,373 19,885 0 0 3,301 0 0 649 $ 53,208
Recorded Investment >90 days and accruing
Total Loans
$ 2,064,829 1,638,875 123,320 195,700 211,555 112 5,855 59,132 $ 4,299,378
$ 2,094,202 1,658,760 123,320 195,700 214,856 112 5,855 59,781 $ 4,352,586
$
1,539 1,207 0 0 0 0 0 0 $ 2,746
Note: The recorded investment in the receivable is the face amount increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges, or acquisition costs and may also reflect a previous direct write-down of the investment.
A restructuring of debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtorâ&#x20AC;&#x2122;s financial difficulties grants a concession to the debtor that it would not otherwise consider. As of December 31, 2011 the Association has troubled debt restructurings of $8,946. The Association had one troubled debt restructuring that occurred during the year ended December 31, 2011. The pre-modification and post-modification investment outstanding was $3,517. During 2011, $0 troubled debt restructurings subsequently defaulted. Additional impaired loan information is as follows: Recorded Investment at 12/31/11
Impaired loans with a related allowance for loan losses: Real estate mortgage $ 10,347 Production and intermediate term 4,552 Loans to cooperative 2,263 Farm-related business 163 Rural residential real estate 368 Total $ 17,693 Impaired loans with no related allowance for loan losses: Real estate mortgage $ 15,842 Production and intermediate term 12,091 Loans to cooperatives 174 Processing and marketing 1,613 Farm-related business 2,877 Energy and water/ waste disposal 0 Rural residential real estate 45 Total $ 32,642 Total Impaired loans: Real estate mortgage Production and intermediate term Loans to cooperatives Processing and marketing Farm-related business Energy and water/ waste disposal Rural residential real estate Total
a
$ 26,189 16,643 2,437 1,613 3,040 0 413 $ 50,335
Unpaid Principal Balancea
$
$
$
$
$
$
Related Allowance
15,054 5,902 2,444 179 444 24,023
$
20,120 25,123 190 1,613 4,850 0 94 51,990
$
35,174 31,025 2,634 1,613 5,029 0 538 76,013
$
$
1,371 1,627 600 22 165 3,785
9,718 4,947 1,636 187 382 $ 16,870
$ 15,741 11,226 140 2,163 3,642 781 48 $ 33,741
1,371 1,627 600 0 22 0 165 3,785
$ 25,459 16,173 1,776 2,163 3,829 781 430 $ 50,611
Unpaid principal balance represents the borrowerâ&#x20AC;&#x2122;s contractual balance of the loan
32
$
0 0 0 0 0 0 0 0
$
$
Average Impaired Loans
Interest Income Recognized
$
(60) (60) (59) (30) 0 (209)
$
$
823 400 0 198 (26) (34) 32 1,393
$
763 340 (59) 198 (56) (34) 32 1,184
$
$
FARM CREDIT EAST | 2011 ANNUAL REPORT
There were no material commitments to lend additional funds to debtors whose loans were classified as impaired at December 31, 2011.
Interest income which would have been recognized under the original loan terms Less: interest income recognized Forgone interest income
Interest income on nonaccrual loans that would have been recognized under the original terms of the loans at December 31, 2011 are as follows:
$
4,696
$
3,643 1,053
A summary of the changes in the allowance for loan losses and the ending balance of loans outstanding are as follows:
Real estate mortgage
Production and intermediate
Agribusiness
Communications
Energy & water/waste disposal
Rural residential real estate
Total
Allowance for Loan Losses: Balance at December 31, 2010
$
Charge-offs Recoveries Provision for loan losses Balance at December 31, 2011
Ending Balance: individually evaluated for impairment Ending Balance: collectively evaluated for impairment
14,612
$
(2,347)
21,360
$
(1,086)
18,761
$
(1,337)
5
$
360
0
$
297
(1,264)
$
0
55,395 (6,034)
0
64
161
0
0
0
225
4,007
3,843
6,086
(4)
981
87
15,000
$
16,272
$
24,181
$
23,671
$
1
$
77
$
384
$
64,586
$
1,371
$
1,627
$
622
$
0
$
0
$
165
$
3,785
$
14,901
$
22,554
$
23,049
$
1
$
77
$
219
$
60,801
$
533,876
$
112
$
5,855
$
59,781
$
4,352,586
2,426
$
0
0
$
368
$
17,693
531,450
$
112
5,855
$
59,413
$
4,334,893
Recorded Investments in Loans Outstanding: Ending Balance at December 31, 2011
$ 2,094,202
$ 1,658,760
Ending balance for loans individually evaluated for impairment
$
$
Ending balance for loans collectively evaluated for impairment
$ 2,083,855
10,347
4,552
$ 1,654,208
$
$
To mitigate the risk of loan losses, the Association may enter into long-term standby commitments to purchase agreements with the Federal Agricultural Mortgage Corporation (Farmer Mac). The agreements, which are effectively credit guarantees that will remain in place until the loans are paid in full, give the Association the right to sell the loans identified in the agreements to Farmer Mac in the event of default (typically four months past due), subject to certain conditions. The balance of loans under long-term standby commitments was $75,724, $87,896 and $63,608 at December 31, 2011, 2010 and 2009 respectively. Fees paid to Farmer Mac for such commitments totaled $419, $466 and $315 for the years ended December 31, 2011, 2010 and 2009, respectively. These amounts are classified as noninterest expense.
$
$
NOTE 4 – Investment in CoBank, ACB At December 31, 2011, the Association’s investment in CoBank, ACB is in the form of Class E stock. The Association is required to invest in the ACB for two purposes. First, the Association is required to invest in the ACB to capitalize the Association’s loan from the ACB. The capitalization requirement for this purpose is 4% of the average borrowings for the previous year. For 2011, the required investment in the ACB for this purpose was $144.6 million and the actual investment was $144.6 million. When the Association’s investment meets or exceeds the required amount, the ACB pays patronage to the
33
FARM CREDIT EAST | 2011 ANNUAL REPORT
Association 100% in cash. If the Association’s investment in the ACB is less than the required amount, the ACB will issue additional equity through their patronage program until we reach the required amount. The Association elected to purchase $5.1 million of Class E stock in December 2011 to meet the required capitalization level and continue to receive cash patronage.
advanced by CoBank. The interest rate is periodically adjusted by CoBank. The weighted average interest rate was 1.38% at December 31, 2011. CoBank, consistent with FCA regulations, has established limitations on the Association’s ability to borrow funds based on specified factors or formulas relating primarily to credit quality and financial condition. At December 31, 2011, the Association’s notes payable are within the specified limitations.
Second, the Association is required to invest in the ACB to capitalize any participation loans sold to the ACB. The capitalization requirement for this purpose is 8% of the previous ten years’ average participations sold. For 2011, the required investment in the ACB for this purpose was $8.9 million and the actual investment was $4.9 million. When the Association’s investment is less than the required amount, the ACB pays patronage to the Association 65% in cash and 35% in stock.
NOTE 7 – Members’ Equity A description of the Association’s capitalization requirements, protection mechanisms, regulatory capitalization requirements and restrictions, and equities are provided below. Members’ equity is described and governed by the Association’s capitalization policies. Farm Credit East’s capitalization policies are specified in the Bylaws and in the Capitalization Plan approved by the Board of Directors. Copies of the Association’s Bylaws and Capitalization Plan are available to members at any time.
In addition to the required stock investment, the Association purchased during 2004 and 2003 an investment of participation certificates in the ACB with a balance of $292 at December 31, 2011. This equity, which does not count toward either capitalization requirement above, is expected to be redeemed in cash in the future. The Association owns 9.3% of the issued stock of the ACB as of December 31, 2011. As of that date, the ACB’s assets totaled $63.3 billion and members’ equity totaled $4.9 billion. The ACB earned net income of $707 million during 2011.
The components of Association capital that are allocated directly to members are capital stock, participation certificates, and allocated surplus. Capital stock and participation certificates In accordance with the Farm Credit Act, and the Association’s capitalization Bylaws and Capitalization Plan, each Association borrower, as a condition of borrowing, is required at the time the loan is made, to invest in Class B Stock for agricultural loans or Class B Participation Certificates for country home and farm related business loans. Association Bylaws require that borrowers acquire capital stock or participation certificates, as a condition of borrowing, at least the lesser of $1,000 or 2% of the amount of the loan, and not more than 10% of the amount of the loan.
NOTE 5 – Premises and Equipment Premises and equipment consists of the following:
As of December 31 Land Buildings and improvements Furniture and equipment Autos Less: accumulated depreciation Total
2011 $
1,039 17,626 6,392 3,838 28,895 12,313 $ 16,582
2010 $
1,039 17,432 6,360 3,419 28,250 10,686 $ 17,564
2009 $
828 12,081 4,220 1,422 18,551 6,377 $ 12,174
Pursuant to the Association Capitalization Plan, the Association Board has determined that Class B stock and Class B participation certificates shall be issued as follows: For all loans (except where indicated below) Class B stock and Class B participation certificates shall be issued equal to one thousand dollars per customer as a condition of borrowing from this Association. For purposes of borrower stock, a customer is defined as the primary borrower on a loan. The intent of this policy is for each primary customer to have one thousand dollars of stock, regardless of the number of loans or balance on those loans to that customer. Stock shall be purchased at the beginning of a customer’s relationship and will not be retired
NOTE 6 – Notes Payable to CoBank, ACB The Association’s indebtedness to CoBank represents borrowings by the Association to fund its loan portfolio. Under terms of a general financing agreement with CoBank, which provides the Association an open-end revolving line of credit, loans made by the Association, as well as substantially all its assets are assigned to CoBank as primary collateral for funds
34
FARM CREDIT EAST | 2011 ANNUAL REPORT
per share, 241,900 shares of Class B participation certificates outstanding at a par value of $5 per share, and 708 shares of Class C stock outstanding at a par value of $5 per share.
until all loans to that customer are paid in full and there are no funds available for advances. Exceptions to this policy are:
•
At the time of the Farm Credit East merger (January 2010), certain customers with less than one thousand dollars of stock were “grandfathered” at the stock level at conversion. Grandfathered customer stock will be frozen at converted levels until all loans are repaid, at which time the stock will be retired, or increased to one thousand dollars at the time of a future advance or credit action.
•
Certain small borrowers (customers with total commitment less than ten thousand dollars initially) will be issued at 10% of the initial commitment, consistent with By-Law limitations.
•
Certain interests in loans sold to other financial institutions.
•
Loans to be sold into the secondary market
Ownership of stock, participation certificates, or allocated surplus is sometimes subject to certain risks that could result in a partial or complete loss. These risks include excessive levels of loan losses experienced by the Association, losses resulting from contractual and statutory obligations, impairment of ACB stock owned by the Association, losses resulting from adverse judicial decisions or other losses that may arise in the course of business. In the event of such impairment, borrowers would remain liable for the full amount of their loans. Any losses which result in impairment of capital stock and participation certificates would be allocated to such purchased capital on a pro rata basis impairing Class B stock and participation certificates. In the case of liquidation or dissolution of the Association, capital stock, participation certificates and allocated surplus would be utilized as necessary to satisfy any remaining obligations in excess of the amounts realized on the sale or liquidation of assets. Patronage distributions Subject to the Farm Credit Act and Regulations there under, and the Association’s Capitalization Plan, each Association’s Board of Directors may authorize the distribution of Association earnings in the form of patronage refunds. Patronage dividends based on one year’s operating results are distributed in the subsequent year. The table below summarizes the patronage distributions since 2009. Earnings not distributed are retained as unallocated surplus.
The borrower acquires ownership of the capital stock or participation certificates at the time the loan is made, but usually does not make a cash investment. The aggregate par value is added to the principal amount of the related loan obligation. The Association retains a first lien on the stock or participation certificates owned by borrowers. Retirement of such equities will generally be at the lower of par or book value, and repayment of a loan does not automatically result in retirement of the corresponding stock or participation certificates. All stock and participation certificates are retired at the discretion of the Association’s Board of Directors after considering the capitalization plan as well as regulatory and other requirements. Subject to the Farm Credit Act and Regulations thereunder, and the Association’s Capitalization Plan, each Association’s Board of Directors may declare a dividend on the Association’s stock and participation certificates. The Association has not declared a dividend on stock and participation certificates and has no plan to do so in the immediate future.
Earnings Year
Cash Distribution
Total Patronage
2011 2010 2009
$ 35,500 $ 35,000 $ 23,400
$ 35,500 $ 35,000 $ 23,400
As outlined in the Farm Credit East Capitalization Plan, if the Association continues to meet its financial goals, it plans to redeem its existing allocated surplus by the year 2014. Planned redemptions have occurred in May of 2011, 2010 and 2009. Allocated surplus is retired at the discretion of the Association’s Board of Directors after considering the capitalization plan as well as regulatory and other requirements.
Description of equities Each owner or joint owners of Class B stock are entitled to a single vote, while Class B participation certificates provide no voting rights to their owners. Voting stock may not be transferred to another person unless such person is eligible to hold voting stock. At December 31, 2011, the Association had 2,205,698 shares of Class B stock outstanding at a par value of $5
Regulatory capitalization requirements and restrictions FCA’s capital adequacy regulations require the Association to achieve permanent capital of seven percent (7.0%) of risk-
35
FARM CREDIT EAST | 2011 ANNUAL REPORT
adjusted assets and off-balance-sheet commitments. Failure to meet the 7.0% capital requirement can initiate certain mandatory and possibly additional discretionary actions by FCA that, if undertaken, could have a direct material effect on the Associationâ&#x20AC;&#x2122;s financial statements. The Association is prohibited from reducing permanent capital by retiring stock or making certain other distributions to shareholders unless prescribed capital standards are met. FCA regulations also require that additional minimum standards for capital be achieved. These standards are summarized below:
Permanent Capital Ratio Total Surplus Ratio Core Surplus Ratio
FCA Regulatory Minimum
Ratios at December 31, 2011
7.0% 7.0% 3.5%
16.39% 16.11% 15.29%
As of December 31
2011
Current: Federal State Total current provision for income taxes Deferred: Federal State Total deferred (benefit) expense from income taxes
$
2010
478 150 628
$
2009
832 175 1,007
$
59 77 136
3,236 486
(3,821) (562)
5,696 1,131
3,722
(4,383)
6,827
Increase (decrease) in deferred tax asset valuation allowance
(3,722)
4,069
(6,827)
Provision for income taxes
$ 628
$ 693
$
136
The provision for income tax differs from the amount of income tax determined by applying the applicable U.S. statutory federal tax rate to pretax income as follows: As of December 31
With respect to participation loans, the amount of participation certificates purchased and sold between Associations or an Association and CoBank may be negotiated within bylaw limits or may be undercapitalized with suitable negotiated compensation to the participating entity.
Federal tax at statutory rate State tax, net Effect of nontaxable activities Patronage distribution Write-off of loss carryforwards Change in valuation allowance Other
An FCA regulation empowers it to direct a transfer of funds or equities by one or more System institutions to another System institution under specified circumstances. The Association has not been called upon to initiate any transfers and is not aware of any proposed action under this regulation.
2011
2010
$ 38,294 98 (23,815) (11,403) 0 (3,722) 1,176
$ 35,595 114 (24,963) (13,186) 0 4,069 (936)
Provision for income taxes
$
628
$
2009 $ 23,214 50 (15,810) (8,190) 8,040 (6,827) (341)
693
$
136
Deferred tax assets and liabilities are comprised of the following: As of December 31
Other Comprehensive Income Other comprehensive income is comprised of 1) net income, 2) certain changes in cash flow hedges and 3) changes in the minimum pension liability. Other comprehensive income was $96,838, $96,163 and $64,241 for the years ended December 31, 2011, 2010 and 2009, respectively.
Deferred income tax assets: Allowance for loan losses Nonaccrual loan interest Credit Mark Annual leave Health reserve Long term incentive Deferred compensation Pensions Postretirement benefits other than pensions Other Gross deferred tax assets Less: valuation allowance Gross deferred tax assets, net
NOTE 8 â&#x20AC;&#x201C; Income Taxes The provision for income taxes consists of the following:
Deferred income tax liabilities: Bank patronage after December 31, 1992 CoBank patronage Depreciation Deferred gain Gross deferred tax liability Net deferred tax asset
36
2011
2010
2009
$ 9,165 1,125 498 666 209 689 609 4,806
$ 10,555 779 501 457 255 676 518 2,884
$ 5,355 525 0 434 236 345 433 1,602
512 55 18,334 (12,842) 5,492
554 211 17,390 (12,334) 5,056
165 24 9,119 (6,454) 2,665
(622) (3,409) (1,369) (92) (5,492)
(625) (3,427) (922) (82) (5,056)
(467) (1,880) (236) (82) (2665)
$
0
$
0
$
0
FARM CREDIT EAST | 2011 ANNUAL REPORT
Based on the Association’s strategic financial plan, primarily expected future patronage programs and the tax benefits of the FLCA subsidiary, management believes that as of the end of 2011, none of the Association’s net deferred tax assets will be realizable in future periods. Accordingly, a valuation allowance is provided against the net deferred tax assets since it has been determined that it is more likely than not (over 50 percent probability), based on management’s estimate, that they will not be realized.
were $1.6 million, $1.6 million and $1.1 million for 2011, 2010 and 2009, respectively. All retirement-eligible employees are also currently eligible for other postretirement benefits, which primarily include access to health care benefits. Substantially all participants pay the full premiums associated with these other postretirement health care benefits. Participant contributions are adjusted annually. The following table provides a summary of the changes in the Retirement Plans’ projected benefit obligations and fair values of assets over the three-year period ended December 31, 2011 as well as a statement of funded status as of December 31 of each year.
The Association has no unrecognized tax benefits for which liabilities have been established for the years ended December 31, 2011, 2010 and 2009. The Association recognizes interest and penalties related to unrecognized tax benefits as an adjustment to income tax expense. The amount of interest recognized was $0 and the amount of penalties recognized was $0 for 2011. The total amount of unrecognized tax benefits that, if recognized would affect the effective tax rate is $0. The Association did not have any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next 12 months. The tax years that remain open for federal and state income tax jurisdictions are 2008 and forward.
As of December 31 Change in projected benefit obligation: Projected benefit obligation at beginning of year Service cost Interest cost Plan amendments Actuarial loss Special termination benefits Acquisitions
The Association has employer-funded, qualified defined benefit pension plans, which are noncontributory and cover employees hired prior to January 1, 2007. Depending on the date of hire, benefits are determined by a formula based on years of service and final average pay. Effective January 1, 2007, the Association closed the remaining qualified defined benefit pension plan to new participants.
2010
2009
$ 82,368 2,340 4,208 3,362 5,712 0 0
$ 50,327 2,253 4,046 1,596 3,302 420 22,237
$ 43,569 1,397 2,719 0 4,272 0 0
0 (3,977)
440 (2,253)
0 (1,630)
Projected benefit obligation at end of year
$ 94,013
$ 82,368
$ 50,327
Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer Contributions Benefits paid Acquisitions Transfers
$ 77,853 3,193 4,900 (3,977) 0 0
$ 46,548 6,288 6,000 (2,253) 20,830 440
$ 35,318 8,460 4,400 (1,630) 0 0
Fair value of plan assets at end of year
$ 81,969
$77,853
$ 46,548
Net amount recognized in the balance sheet
$ (12,044)
$ (4,515 )
$ (3,779)
Amounts recognized in accumulated other comprehensive income Unrecognized prior service cost (credit)
$ 4,472
$ 1,174
$
26,855
19,240
17,347
$ 31,327
$ 20,414
$ 16,892
Transfers Benefits paid
NOTE 9 – Employee Benefit Plans
2011
Funded status of the plan
The Association also has a noncontributory, unfunded nonqualified supplemental executive retirement plan (SERP) covering the CEO. The defined benefit pension plans and SERP are collectively referred to as Retirement Plans. The Association holds assets in a trust fund related to the SERP; however, such funds remain Association assets and are not included as plan assets in the accompanying disclosures.
Unrecognized net actuarial loss Total
The Association has a 401(k) retirement savings plan pursuant to which the Association matches 100% of employee contributions up to a maximum employee contribution of 6% of compensation. In addition, under this plan, employees hired on or after January 1, 2007 receive additional employer defined contributions. The Association contributions to the 401(k) retirement savings plan and the employer defined contribution plan, which are recorded as employee compensation expense,
37
(455)
FARM CREDIT EAST | 2011 ANNUAL REPORT
The projected benefit obligation and the accumulated benefit obligation for the Retirement Plans as of year-end are as follows:
As of December 31 Projected Benefit Obligation: Funded plans Unfunded SERP
2011
2011
$
92,034 1,979 94,013
$ 75,514 1,317 $ 76,831
$
80,760 1,608 82,368
$ 50,327 0 $ 50,327
$ 65,342 984 $ 66,326
$ 39,927 0 $ 39,927
$
2010
2009
Net periodic benefit cost
2009
Service cost
$
Interest cost
$ Accumulated Benefit Obligation: Funded plans Unfunded SERP
2010
As of December 31
Expected return on plan assets
2,340
$
2,253
$
1,397
4,208
4,046
2,719
(6,110)
(5,510)
(3,619)
(32)
(95)
Amortization of unrecognized: Prior service credit
65
Actuarial loss Net periodic benefit cost
The $82.0 million in fair value of plan assets shown in a previous table relates only to the qualified retirement plans. As depicted in the preceding table, such plans had a projected benefit obligation and an accumulated benefit obligation of $92.0 million and $75.5 million, respectively, as of December 31, 2011.
1,014 $
1,517
630 $
1,387
285 $
687
Plan merger purchase accounting
0
7,577
0
Special termination benefits
0
420
0
Total expense
$
1,517
$
9,384
$
687
$ 8,629
$ 2,523
$
(569)
3,362
1,597
Other Changes in Plan Assets and Benefit Obligation Recognized in Other Comprehensive Income Net actuarial loss (gain) Prior service cost
The Association holds assets in trust accounts related to its SERP plan. Such assets had a fair value of $0.9 million as of December 31, 2011, which is included in “Other Assets” in the accompanying consolidated balance sheet. Unlike the assets related to the qualified plans, those funds remain Association assets and would be subject to general creditors in a bankruptcy or liquidation. Accordingly, they are not included as part of the assets shown in a previous table. As depicted in the preceding table, the SERP plan has a projected benefit obligation and an accumulated benefit obligation of $2.0 million and $1.3 million, respectively, as of December 31, 2011.
0
Amortization of: Prior service cost Net actuarial gain Total recognized in other comprehensive income
(65) (1,014) $ 10,912
32
95
(630) $ 3,522
(285) $
(759)
The Association anticipates that its total pension expense for all retirement plans will be approximately $3.1 million in 2012 compared to $1.5 million in 2011. Assumptions The Association measures plan obligations and annual expense using assumptions designed to reflect future economic conditions. As the bulk of pension benefits will not be paid for many years, the computations of pension expenses and benefits are based on assumptions about discount rates, estimates of annual increases in compensation levels, and expected rates of return on plan assets.
The following table represents the components of net periodic benefit cost and other amounts recognized in other comprehensive income as of December 31 as follows:
The weighted-average rate assumptions used in the measurement of the Association’s benefit obligations are as follows:
38
As of December 31
2011
2010
2009
Discount rate Rate of compensation increase (qualified plans only)
4.80% 4.75%
5.35% 5.00%
5.70% 5.00%
FARM CREDIT EAST | 2011 ANNUAL REPORT
The weighted-average rate assumptions used in the measurement of our net periodic benefit cost are as follows: As of December 31
2011
2010
Discount rate Expected rate of return on plan assets (qualified plans only) Rate of compensation increase (qualified plans only)
5.35%
5.35%
6.35%
8.00%
8.00%
8.00%
5.00%
5.00%
5.00%
As of December 31, 2011
Level 2
Total
Asset category
2009
Cash
$
Domestic Equity: Large-cap growth fund Large-cap equity fund Small-cap growth fund International Equity: International fund
Plan Assets The asset allocation target ranges for the defined benefit retirement plans follow the investment policy adopted by the Association’s retirement trust committee. This policy provides for a certain level of trustee flexibility in selecting target allocation percentages. The actual asset allocations at December 31, 2011, 2010 and 2009 are shown in the following table along with the adopted range for target allocation percentages by asset class. The actual allocation percentages reflect the quoted market values at year-end and may vary during the course of the year. Plan assets are generally rebalanced to a level within the target range each year at the direction of the trustees.
Domestic Fixed Income: Bond fund Emerging Markets: Equity and fixed income fund Real Assets: Gold fund Total
Percentage of Plan Assets as of December 31, Target Allocation Range
Level 1
As of December 31, 2010
256
$
0
$
256
18,913 0 0
0 14,254 4,435
18,913 14,254 4,435
6,367
0
6,367
29,391
0
29,391
0
3,655
3,655
4,698
0
4,698
$ 59,625
$ 22,344
$ 81,969
Level 1
Level 2
Total
Asset category 2011
2010
2009
Cash
$
340
$
0
$
340
Asset Category Domestic Equity
40 – 50%
46%
43%
43%
Domestic Fixed Income
35 – 50
36
37
48
International Equity
0 – 10
8
10
9
Emerging Markets Equity and Fixed Income
0 – 10
4
4
0
Real Assets Total
0–5 100%
6 100%
6 100%
Domestic Equity: Large-cap growth fund Large-cap equity fund Small-cap growth fund International Equity: International fund Fixed Income: Bond fund
0 100%
Emerging Markets: Equity and fixed income fund
The assets of the defined benefit retirement plans consist primarily of investments in various domestic equity, international equity and bond funds. These funds do not contain any significant investments in a single entity, industry, country or commodity, thereby mitigating concentration risk.
Real Assets: Gold fund Total
16,560 0 0
0 12,971 4,228
16,560 12,971 4,228
7,530
0
7,530
28,049
0
28,049
0
3,872
3,872
4,303
0
4,303
$ 56,782
$ 21,071
$ 77,853
Level 1 plan assets are funds with quoted daily net asset values that are directly observable by market participants. The fair value of these funds is the net asset value at close of business on the reporting date.
The following table presents major categories of plan assets that are measured at fair value at December 31, 2011 and December 31, 2010 for each of the fair value hierarchy levels as defined in Note 2:
39
FARM CREDIT EAST | 2011 ANNUAL REPORT
Level 2 plan assets are funds with quoted net asset values that are not directly observable by market participants. A significant portion of the underlying investments in these funds have individually observable market prices, which are utilized by the plan’s trustee to determine a net asset value at close of business on the reporting date. There were no Level 3 plan assets at December 31, 2011.
Substantially all postretirement healthcare plans have no plan assets and are funded on a current basis by employer contributions and retiree premium payments. NOTE 10 – Related Party Transactions In the ordinary course of business, the Association enters into loan transactions with directors and senior officers of the Association, their immediate families and other organizations with which such persons may be associated. Such loans are subject to special approval requirements contained in the FCA regulations and are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated borrowers.
Contributions In 2012 the Association expects to contribute $2.0 million to its defined benefit retirement plans and $0.4 million to its trust fund related to the SERP. The actual 2012 contributions could differ from the estimates. Estimated Future Benefit Payments The Association expects to make the following benefit payments, which reflect expected future service, as appropriate.
Total loans to such persons at December 31, 2011 amounted to $20,017. During 2011, $20,057 of new loans were made and repayments totaled $21,530. Additionally, other changes to the related party loan balance totaling <$3,560> represent changes in the composition of Association employees and/or directors during 2011. In the opinion of management, none of these loans outstanding at December 31, 2011 involved more than a normal risk of collectibility and none of these loans are in nonaccrual status.
Estimated Benefit Payouts 2012 Payouts 2013 Payouts 2014 Payouts 2015 Payouts 2016 Payouts 2017 Payouts to 2021 Payouts
$
5,544 8,155 6,689 7,260 8,576 38,860
At December 31, 2011, the Association owned a 20.6% interest in Farm Credit Financial Partners, Inc. (FPI). The Association records this investment on the equity method of accounting. FPI currently provides accounting, information technology, and other services to the Association on a fee basis. Fees paid to FPI for the years ended December 31, 2011, 2010 and 2009 were $5,284, $5,288 and $3,985 respectively.
Other Postretirement Benefits Postretirement benefits other than pensions (primarily health care benefits) are also provided to retirees of the Association. The following table sets forth the funding status and weighted average assumptions used to determine post retirement health care benefit obligations.
As of December 31
2011
2010
Accumulated benefit obligation
$
$
Net liability recognized in the balance sheet Net periodic expense (income) Discount rate
135
$
264
$ 1,310
$ 1,345
$
421
$
$
$
(80)
4.80%
Accounting guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability. See Note 2 – Summary of Significant Accounting Policies for additional information.
2009
193
156
NOTE 11 – Fair Value Measurements
2 5.35%
5.70%
40
FARM CREDIT EAST | 2011 ANNUAL REPORT
Valuation Techniques As more fully discussed in Note 2 – Summary of Significant Accounting Policies, accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following represent a brief summary of the valuation techniques used for the Association’s assets and liabilities.
Assets and liabilities measured at fair value on a recurring basis at December 31, 2011 and December 31, 2010 are summarized below:
As of December 31, 2011 Assets: Derivative assets Assets held in trust Total assets Liabilities: Derivative liabilities Total liabilities
As of December 31, 2010
Level 1
$
Level 2
$
$
0 2,552 2,552
$ $
0 0
Level 3
$
$
201 0 201
$ $
415 415
$
$
0 0 0
$
201 2,552 2,753
$ $
0 0
$ $
415 415
Level 1
Level 2
Level 3
$
$
$
$
1,159 0 1,159
$ $
9 9
Assets: Derivative assets Assets held in trust Total assets
$
0 2,283 2,283
Liabilities: Derivative liabilities Total liabilities
$ $
0 0
Total Fair Value
$
$ $
Assets Held in Trust Assets held in trust funds related to deferred compensation and supplemental retirement plans and are classified within Level 1. These assets include investments that are actively traded and have quoted net asset values that are observable in the marketplace. Derivatives Exchange-traded derivatives valued using quoted prices are classified within Level 1 of the valuation hierarchy. However, few classes of derivative contracts are listed on an exchange; thus, the Association’s derivative positions are valued using internally developed models that use as their basis readily observable market parameters and are classified within Level 2 of the valuation hierarchy. Such derivatives include basic interest rate swaps. Derivatives that are valued based upon models with significant unobservable market parameters and that are normally traded less actively or have trade activity that is one way are classified within Level 3 of the valuation hierarchy. The Association does not have any derivatives classified within Level 3.
Total Fair Value
0 0 0
$ $
1,159 2,283 3,442
0 0
$ $
9 9
Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2011 and December 31, 2010 for each of the fair value hierarchy values are summarized below:
As of December 31, 2011
Level 1
Level 2
Assets: Impaired loans Other Property Owned Rural Investments, LLC
$ $ $
As of December 31, 2010
Level 1
Assets: Impaired loans Other Property Owned Rural Investments, LLC
$ $ $
0 $ 0 $ 0 $
0 0 0
Level 2 0 $ 0 $ 0 $
0 0 0
Level 3 $ $ $
44,937 3,586 4,189
Level 3 $ $ $
46,473 2,802 6,385
The models used to determine the fair value of derivative assets and liabilities use an income approach based on observable market inputs, primarily the LIBOR swap curve and volatility assumptions about future interest rate movements.
Total Fair Value $ $ $
44,937 3,586 4,189
Total Fair Value $ $ $
46,473 2,802 6,385
41
Impaired Loans For certain loans evaluated for impairment under FASB impairment guidance, the fair value is based upon the underlying collateral since the loans are collateral-dependent loans for which real estate is the collateral. The fair value measurement process uses independent appraisals and other market-based information, but in many cases it also requires significant input based on management’s knowledge of and judgment about current market conditions, specific issues relating to the collateral and other matters. As a result, these fair value measurements fall within Level 3 of the hierarchy. When the value of the real estate, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established.
FARM CREDIT EAST | 2011 ANNUAL REPORT
Other Property Owned Other property owned is generally classified as Level 3. The process for measuring the fair value of the other property owned involves the use of appraisals or other market-based information. Costs to sell represent transaction costs and are not included as a component of the asset’s fair value. As a result, these fair value measurements fall within Level 3 of the hierarchy.
Since many of these commitments are expected to expire without being drawn upon, the total commitments do not necessarily represent future cash requirements. However, these creditrelated financial instruments have off-balance- sheet credit risk because their amounts are not reflected on the Balance Sheet until funded or drawn upon. The credit risk associated with issuing commitments and letters of credit is substantially the same as that involved in extending loans to borrowers and management applies the same credit policies to these commitments. Upon fully funding a commitment, the credit risk amounts are equal to the contract amounts, assuming that borrowers fail completely to meet their obligations and the collateral or other security is of no value. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the borrower. Reserves related to unfunded commitments to extend credit are included in the calculation of the allowance for loan losses.
Rural Investments, LLC For these investments, the fair value is based upon the underlying loans contained in the investment. The fair value measurement process uses independent appraisals and other market-based information, but in many cases it also requires significant input based on management’s knowledge of and judgment about current market conditions, specific issues relating to the collateral and other matters. As a result, these fair value measurements fall within Level 3 of the hierarchy. When the value of the collateral is less than the principal balance of the investment a loss is realized.
In addition, actions are pending against the Association in which claims for monetary damages are asserted. Based on current information, management and legal council are of the opinion that the ultimate liability, if any, resulting there from, would not be material in relation to the financial position of the Association.
NOTE 12 – Commitments and Contingencies The Association has various commitments outstanding and contingent liabilities. The Association may participate in financial instruments with off-balance-sheet risk to satisfy the financing needs of its borrowers and to manage their exposure to interest-rate risk. These financial instruments include commitments to extend credit and commercial letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the financial statements. Commitments to extend credit are agreements to lend to a borrower as long as there is not a violation of any condition established in the contract. Commercial letters of credit are agreements to pay a beneficiary under conditions specified in the letter of credit. Commitments and letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. At December 31, 2011, $1,418,140 of commitments to extend credit, $22,004 of commercial letters of credit and $15,145 of standby letters of credit were outstanding.
NOTE 13 – Disclosures about Fair Value of Financial Instruments The following table presents the carrying amounts and fair values of the Association’s financial instruments at December 31, 2011, 2010 and 2009. Quoted market prices are generally not available for certain System financial instruments, as described below. Accordingly, fair values are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates involve uncertainties and matters of judgment, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The estimated fair values of the Associations’ financial instruments are as follows: As of December 31
Financial assets: Loans, net Cash Financial liabilities: Notes payable to ACB
2011
2010
2009
Carrying Amount
Fair Value
Carrying Amount
Fair Value
Carrying Amount
Fair Value
$4,288,000 $ 13,592
$4,386,340 $ 13,592
$4,219,709 $ 12,493
$4,290,986 $ 12,493
$3,038,374 $ 5,389
$3,100,527 $ 5,389
$3,645,745
$3,677,471
$3,633,787
$3,667,833
$2,630,249
$2,655,191
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FARM CREDIT EAST | 2011 ANNUAL REPORT
A description of the methods and assumptions used to estimate the fair value of each class of the Association’s financial instruments for which it is practicable to estimate that value follows:
securities for a period of one year from the date of initial purchase. Additional purchases totaling $704 were made under the authority during 2006. Rural Investments, LLC invested $490 as a minority member of Genesee Agribusiness LLC (GALLC) on November 7, 2008. GALLC is an agribusiness industrial development park located in town of Batavia, Genesee County, NY. The fair market value of securities and investment in Rural Investment, LLC at December 31, 2011 is $4,189 and the Association recorded $4,776 of interest income on the investment in 2011.
Loans Fair value is estimated by discounting the expected future cash flows using CoBank’s and/or the Association’s current interest rates at which similar loans would be made to borrowers with similar credit risk. The discount rates are based on the District’s current loan origination rates as well as management estimates of credit risk. Management has no basis to determine whether the estimated fair values presented would be indicative of the assumptions and adjustments that a purchaser of the Association’s loans would seek in an actual sale, which could be less.
The quality of the investment is acceptable based on current valuations performed by management. In addition, the Association makes monthly assessments regarding the performance status of each of the underlying loans contained in the security purchased from Rural Investments, LLC. This quality assessment is made in a similar manner as that made on loans in the Association’s core portfolio. Investments performing according to the contractual terms of the underlying notes are carried in accruing status. Investments that are not performing or where there is some question as to the full collectability of the underlying loans are carried as nonaccrual/ impaired.
Cash The carrying value of cash is a reasonable estimate of fair value. Notes payable to CoBank, ACB The notes payable are segregated into pricing pools according to the types and terms of the loans (or other assets) which they fund. Fair value of the note payable is estimated by discounting the anticipated cash flows of each pricing pool using the current rate that would be charged for additional borrowings. For purposes of this estimate it is assumed the cash flow on the notes is equal to the principal payments on the Association’s loan receivables plus accrued interest on the notes payable. This assumption implies that earnings on the Association’s interest margin are used to fund operating expenses and capital expenditures.
Underlying impaired loans contained in the investment are those where it is probable that not all principal and interest will be collected according to the terms of the underlying loan. Impaired investments include those identified as nonaccrual or 90 days past due. No allowance is provided on the investment. The valuation determines the fair market value of the underlying loan contained in the investment and if it is less than the current carrying value of the underlying loan contained in the investment no additional income is recorded until all payments are received under the terms of the loan.
NOTE 14 – Investments On August 26, 2005, the Association entered into an agreement with Rural Investments, LLC (a Delaware Limited Liability Company) to service and collect a securitized pool of agricultural loans sold by a commercial lender located in the Association’s territory (the investment). The investment is comprised of loans with characteristics similar to loans contained in the Association’s loan portfolio. To effect this agreement, the Association purchased a security issued by Rural Investments, LLC which is collateralized by all the assets (loans) and the underlying collateral securing the loans purchased by Rural Investments, LLC. The agreement assigns all the benefits and risk associated with the investment and names the Association as the sole Manager of the LLC. The security purchased on August 26, 2005 totaled $20,702. Subsequent to the initial purchase additional purchases were made and the total investments purchased through December 31, 2005 were $22,646. The Association was given authority to purchase additional
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FARM CREDIT EAST | 2011 ANNUAL REPORT
The Association’s interest-earning assets, to the degree they are funded with debt, are matched with similarly priced and termed liabilities. Volatility in net interest income, comes from equity funded, variable priced assets. To the degree that variable priced assets are funded with equity, interest rate swaps in which the Association pays the floating rate and receives the fixed rate (receive fixed swaps) are used to reduce the impact of market fluctuations on the Association’s net interest income.
The following table presents information illustrating the investment amounts and the performance status of the underlying loans contained in the investment that would have been included in the Association’s performance categories had the loans been owned by the Association:
As of December 31 Fair Value of Investments Investment in Genesee Agribusiness LLC Accruing investments Nonaccrual/Impaired investments Total investment value
Allowance on underlying impaired loans Underlying impaired loans with a related allowance Underlying impaired loans with no related allowance Total underlying impaired loans
2011 $ $
490 3,309 390 4,189
$
0 390 390
By using derivative instruments, the Association exposes itself to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, the Association’s credit risk will equal the fair value gain in a derivative. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes the Association, thus creating a repayment risk for the Association. When the fair value of the derivative contract is negative, the Association owes the counterparty and, therefore, assumes no repayment risk. The Association minimizes the credit (or repayment) risk by entering into transactions only with CoBank. Cash flow hedges The Association uses interest rate swaps to hedge the risk of overall changes in the cash flows of an asset. The asset is defined as a pool of long term variable rate loans equal to the notional amount of the swaps, and not exceeding the Association’s equity position. These swaps, which qualify for hedge accounting, have up to a three-year term, with a pay rate indexed to three month LIBOR.
NOTE 15 – Derivative Instruments and Hedging Activities The Association maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. The Association’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets so that the net interest margin is not adversely affected by movements in interest rates. As a result of interest rate fluctuations, the interest income and interest expense of hedged variable-rate assets, will increase or decrease. The effect of this variability in earnings is expected to be substantially offset by the Association’s gains and losses on the derivative instruments that are linked to these hedged assets. The Association considers its strategic use of derivatives to be a prudent method of managing interest rate sensitivity, as it prevents earnings from being exposed to undue risk posed by changes in interest rates.
As of December 31, 2011, the Association has executed interest rate swap contracts with CoBank, ACB having a notional amount of $340 million. The fair value of the swap contracts at December 31, 2011 is <$214> of which <$231> is reflected in accumulated other comprehensive income due to the highly effective nature of the hedge transaction and $17 of income is recorded in interest expense due to the ineffectiveness of the hedge transactions. The carrying value of the hedged assets was $201 and the carrying value of the hedged liabilities was $415. The Association is exposed to credit loss in the event of nonperformance by other parties to the interest rate swap agreement; however, the Association does not anticipate nonperformance by CoBank, ACB.
The Association enters into interest rate swaps to stabilize net interest income on variable priced loan assets, to the degree they are funded with equity. Under interest rate swap arrangements, the Association agrees with other parties (CoBank) to exchange, at specified intervals, payment streams calculated on a specified notional principal amount, with at least one stream based on a specified floating rate index.
NOTE 16 – Subsequent Events The Association has evaluated subsequent events through March 5, 2012 which is the date the financial statements were issued or available to be issued.
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Board of Director Disclosures Board Structure
The committee is primarily responsible for providing input and direction to management on the development and implementation of the Association’s strategic plan, policies and other significant matters requiring attention between board meetings. The committee also acts as the liaison with the Association’s regulator, the FCA.
The Board is in its final stage of a downsizing process resulting from the 2010 Merger to form Farm Credit East. The Board currently consists of 14 elected and 3 appointed directors. In 2012, three Western region seats are being combined into one. There will be three open director seats in the 2012 election cycle: one from each of the three Nominating Regions. At the close of 2012 Director Elections, the Board will consist of 12 elected directors - four directors from each of the three nominating regions and up to four appointed directors.
The Executive Committee, along with another appointed director, also functions as the Board’s Compensation Committee. The function of this committee is to review the Association’s overall compensation and benefits packages, including the performance and compensation for the Chief Executive Officer, and the funding of these programs.
The Farm Credit East Bylaws specify 4-year terms with a limit of four consecutive terms. There will be one seat from each Region open for election each year. The Bylaws also specify the director candidates be nominated by Region and be elected by the entire membership. There are three approximately equal Nominating Regions as shown on the map on the inside back cover of this Annual Report. The Board may appoint up to four directors, two of which must be outside directors, i.e., not have a borrowing or other business relationship with Farm Credit East.
Audit Committee The audit committee members are appointed by the Board chairman in consultation with the board officers. All members of the Audit Committee are independent of management of Farm Credit East and any other System entity. All committee members are expected to have practical knowledge of finance and accounting, be able to read and have a working understanding of financial statements, or develop that understanding within a reasonable period of time after being appointed to the Committee. Ann P. Hudson was appointed to the Board of Directors in May 2006. Her current term expires in 2012. The Board has determined that Ms. Hudson has the qualifications and experience necessary to serve as the Audit Committee “financial expert,” as defined by FCA regulations, and has been designated as such.
The Board is independent of management. The CEO reports to the Board and no management or employees may serve as directors within one year of employment. The Board generally has seven regularly scheduled meetings each year and has established a number of committees to provide concentrated focus and expertise in particular areas and to enhance the overall efficiency of scheduled Board meetings. Each committee created by the Board prepares a charter outlining the committee’s purpose, its duties, responsibilities and authorities. All Committees report on their meetings at the regular meeting of the full Board. Minutes of each Committee meeting are documented and approved at the following meeting. The full text of each committee charter is available on our website under “Board Committees” at www.Farmcrediteast.com.
The Audit Committee has unrestricted access to representatives of the internal audit and risk management departments, financial management and our independent auditors. The primary purpose of the Audit Committee is to assist the Board in fulfilling its oversight responsibilities related to accounting policies, internal controls, financial reporting practices and regulatory requirements.
Association bylaws also established an Executive Committee which also functions as the Board’s Executive Compensation Committee. The Board has established the following standing committees: an Audit Committee, Governance Committee, and an Ag Initiatives Committee. The primary responsibilities of each Board Committee are described as follows:
The Audit Committee pre-approves all audit and audit-related services and permitted nonaudit services (including the fees and terms thereof) to be performed for the Association by its independent auditors, as negotiated by management. Aggregate fees incurred by the Association for services rendered by its independent auditors, PricewaterhouseCoopers, LLP for the years ended December 31, 2011 and 2010 follow:
Executive Committee The Executive Committee members consist of the board chairman, vice chairman and two other directors designated by the Board, each representing a nominating region other than those represented by the chairman or vice chairman. If the chairman and vice chairman are from different regions then one of the other directors will be at-large.
Audit Fees Audit - Related Tax Fees Total
45
Year ended December 31, 2011 2010 $ 93,600 $ 90,000 5,000 8,000 41,837 86,123 $ 140,437 $ 184,123
FARM CREDIT EAST | 2011 ANNUAL REPORT
The 2011 and 2010 tax fees include services rendered in connection with an IRS examination. The 2010 tax fees also include services rendered in connection with a transfer pricing study. The 2011 and 2010 audit related fees include services rendered in connection with the merger.
Governance Committee The Governance Committee members are appointed by the board chairman in consultation with the board officers. The committee is primarily responsible for the training and education of Board members, the outside director election process, director compensation, ethics, and conflict of interest matters.
Ag Initiatives Committee The Ag Initiative Committee members are appointed by the board chairman in consultation with the board officers. The committee is primarily responsible for directing the Associationâ&#x20AC;&#x2122;s lending and financial services program for Young, Beginning, and Small farmers to support the development of agriculture with financial incentives and educational opportunities.
Other Committees Nominating Committee The Nominating Committee is comprised of one member and an alternative member from each branch office, who are elected each year by the membership at the annual stockholder meeting. This committee, which consists of customers who are not seated on the Board of Directors, proactively identifies qualified candidates for Board membership and reviews director nominations, helping to ensure that the Association continues to attract a highly qualified and diverse Board. The Nominating Committee makes a best effort to recommend at least two candidates for each open Board position. Stockholders and interested candidates may gather signatures for petitions to run for the Board following the conclusion of the Nominating Committeeâ&#x20AC;&#x2122;s work.
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Eric and son Bobby, operate Orchard Dale Fruit Farms, Inc., growing 300 acres of fruits and berries. Bob and his wife Deborah also operate Brown’s Berry Patch with pick-your-own berries, apples and a variety of other products. Bob is a partner in Lake Ontario Fruit Company that stores, packs and ships western New York apples.
Farm Credit East Directors Information regarding directors who served as of December 31, 2011, including business experience in the last five years and any other business interest where a director serves on the board of directors or as a senior officer follows: Abbott W. Lee, Chatsworth, NJ, became Chairman of the Farm Credit East Board in 2010, having previously served as Chairman of the First Pioneer Board. He was first elected as Director in 2001 and he will reach his term limit in 2013. He is a member of the Board’s Executive and Compensation Committees. Abbott is the founder and owner of Integrity Propagation, LLC the cranberry industry’s only foundation level nursery. Previously he was a partner in Lee Brothers, Inc., a six generation family blueberry-cranberry farm.
Samuel G. Conard, Hillsborough, NJ has served as director since 2011 with his current term expiring in 2014. He serves on the AgInitiative Committee. Sam owns and operates S.R. Conard & Sons, a 1,100 acre hay and grain farm which includes a transportation business. He also serves on the boards of directors for the Belle Mead Co-op, a local farm supply business, and the Somerset County Farm Bureau. He also serves on the Somerset County Board of Agriculture, Princeton Agricultural Society and the Hillsborough Township Planning Board.
Richard P. Janiga, East Aurora, NY became Vice Chairman of the Farm Credit East Board in 2011. He has served as director since 2000 with his current term expiring in 2014. He is a member of the Board’s Executive and Compensation Committees. He was previously Vice Chairman of the Board of Farm Credit of Western New York Board. Rick owns and operates R + D Janiga Enterprises, LLC a 300-cow dairy, cash crop and custom harvest operation. He serves on the Town of Marilla Planning Board and the Upstate Niagara Milk Cooperative Board of Delegates.
Christine E. Fesko, Skaneateles, NY, has served as a director since 2003 with her current term expiring in 2012. She serves on the Board’s Audit Committee. Chris, along with her daughter Kim and son in law Eric Brayman operate Fesko Farms, Inc., a 600-cow dairy. Chris Fesko Enterprises produces educational videos for schools and the general public nationwide. Chris owns the Farm Discovery Center, an educational facility for urban children to experience math, science and language arts in a working farm setting as a school field trip.
Henry Adams III, Shortsville, NY has served as director since 1997 and he will reach his term limit in 2013. He served as Vice Chairman of the Farm Credit East Board in 2010-11, having previously served as Chairman of the Farm Credit of Western New York Board. He is currently a member of the Board’s Governance Committee. Hal and his wife Kerry operate Black Brook Farm, a 175-cow dairy with 490 crop acres. He is a delegate and Finance Committee member of the Upstate Niagara Cooperative, Inc.
Benjamin J. Freund, East Canaan, CT, has served as director since 2001 and his current term expires in 2014. He had previously served as Vice Chairman of the First Pioneer Board and currently serves as Chair of the Audit Committee. Ben and his brother Matthew own and operate Freund’s Farm, Inc., a 250cow dairy farm with 650 acres of pasture, corn, and hay, and also manufacture CowPotstm, a horticultural planting container manufactured from composted manure solids. Ben serves as Secretary/Treasurer of the Canaan Valley Agricultural Cooperative.
Matthew W. Beaton, East Sandwich, MA, has served as director since 2006 and his current term expires in 2012. He is a member of the Board’s Executive, Compensation, and Governance Committees. Matt is president and owner of Sure-Cran Services, Inc., a custom management company managing over 550 acres of cranberry bogs in southeastern Massachusetts. Matt is also president and co-owner of Beaton’s, Inc., which owns and manages 150 acres of cranberry bogs. Matt is Chairman of the Cape Cod Growers Association’s Environmental Committee.
Andrew J. Gilbert, Potsdam, NY, has served as a director since 2005 with his current term expiring in 2014. He is a member of the Board’s Executive and Compensation Committees and is Chairman of the Governance Committee. He also serves as director of the Farm Credit Council, a national trade association. Andy and his brother Tony own and operate Adon Farms, a 1,200-cow dairy. They grow corn for grain, grow all their forages, and haul their own milk. They also own and operate Parishville Sand and Gravel with their cousin Donald Snyder, also a Farm Credit member.
Robert R. Brown II, Waterport, NY was first elected to the Board in 2002 and his current term expires in 2015. He is chairman of the Board’s AgInitiative Committee. Bob along with his brother
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Laurie K. Griffen, Schuylerville, NY has served as director since 2011 with her current term expiring in 2015. She is a member of the AgInitiative Committee. Laurie and her husband Steve are coowner-operators of Saratoga Sod Farm, Inc., a 600-acre farm which also provides installation services as well as sales of seed and fertilizer. She also serves on the Town of Saratoga Planning Board, Schuyler Park Committee (Co-chair), LEAD New York Board of Directors, Northeast Golf Course Superintendents Association Board of Directors, and the New York State Ag Experiment Station Advisory Committee.
Charlie Miller, Alexander, NY has served on the board since 1999 and has reached his term limit in 2012. He is a member of the Board’s Governance and Compensation Committees and has served in a variety of roles including vice chairman of Farm Credit of Western New York and on the Merger Committee which negotiated the Farm Credit East consolidation. Charles operates Willow Ridge Farms, LLC, a 6,000 sow farrow-to-finish hog farm with 1000 acres of grain and vegetable crops in Genesee County. He is also director of the New York Pork Producers Association.
June W. Hoeflich, Williamsville, NY has served as outside director since 2006 with her current term expiring in 2012. June is a member of the Board’s Audit Committee. She is a retired senior bank executive with HSBC Bank, USA in Upstate New York, and former CEO and President of Sheehan Memorial Hospital in Buffalo. June currently serves on the Board of Community Health Foundation, Roswell Park Cancer Institute Board of Trustees, Blue Cross Blue Shield of WNY and the SUNY Buffalo President’s Council.
Sandra K. Prokop, Middleburgh, NY, was first elected Director in 2000 and reaches her term limit in 2012. She is a member of the Board’s AgInitiative Committee, and had previously served as chair for a number of years. Sandie, her husband Richard, and son Jon own and operate Crossbrook Farm, a dairy farm with 375 milkers and 900 acres of crops. Sandie is a Director Emeritus for the Cobleskill Agricultural Society and past President and Director of the NYS Ag Society. She is employed as Managing Director, the New York Farm Bureau Foundation for Agricultural Education, Inc.
Ann P. Hudson, CPA, Suffield, CT, was first appointed as outside director in 2006 with her current term expiring in 2012. She is a member of the Board’s Audit Committee. Ann has had a career in public accounting starting with Price Waterhouse and progressing as partner with tax expertise through two other accounting firms. She is currently self-employed as a consultant and part-time farmer. Ann also serves on the Board of Directors and is chairwoman of the Audit Committee at The New England College of Optometry.
Peter J. Russell, Appleton, NY has served as director since 1998 with his current term expiring in 2012. He is a member of the Board’s Governance Committee. Pete is president of Russell Farms, Inc. which grows 300 acres of apples, 150 acres of cabbage, and 50 acres of tomatoes. He also owns and operates a 500,000 bushel controlled atmosphere storage. Pete serves as chairman of the board of Agricultural Affiliates, member of the Niagara County Agricultural Program Committee, and member of the Town of Newfane Planning Board.
Henry L. Huntington, Loudon, NH has served as director since 2011 with his current term expiring in 2015. He is a member of the Board’s Audit Committee. Henry is CEO of Pleasant View Gardens, Inc., co-owned with his brother Jeffrey, which is a 12-acre wholesale greenhouse operation specializing in young plant propagation with finished annuals and perennials. They are also partners in Proven Winners, LLC; Plant 21, LLC; and Ticoplant of Costa Rica. Henry is co-chair of the New Hampshire Ornamental Horticulture Endowment and a 12-year member of the Town of Loudon Planning Board. Peggy Jo Jones, Boise, ID, was appointed as outside director in 2008 and reappointed to a term expiring in 2015. She serves on the Board’s Compensation and AgInitiative Committees. She is a consultant providing training and human resources services to Albertsons, LLC, and a major Northwest and West Coast food and drug retailer. In addition to extensive management experience in the food retailing industry, Peggy’s experience includes having previously been a director and chair of the board of directors for Northwest Farm Credit Services, ACA.
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Director Compensation Directors were compensated at a per diem rate of $600 for each day or any part thereof served, $600 for each day traveled before and after the meeting, $600 for board meeting preparation time ($900 for Board Chairman) and a per diem rate of $600, approved in advance, for special assignments. Directors also received an annual retainer of $10,850 ($13,700 and $12,550 respectively for Board Chairman and Vice Chairman) plus reimbursement of related travel expenses. Total cash compensation paid to the directors as a group during 2011 was $607,750. Additional information for each director who served during 2011 is provided below. Current Farm Credit East policy regarding reimbursements for travel, subsistence, and other related expenses provides for reimbursement of actual reasonable out of pocket expenses incurred while traveling on official Association business. Directors who use their own automobiles for Association business purposes will be reimbursed at a rate that has been established in accordance with IRS guidelines. The aggregate amount of reimbursement for travel, subsistence and other related expenses for all directors as a group was $239,897, $259,858 and $213,037 for 2011, 2010, and 2009, respectively. A copy of the Association travel policy is available to stockholders upon request. 2011 Director Compensation
Director
Henry Adams III Matthew W. Beaton Robert R. Brown II Samuel G. Conard 2 John J. Dickinson 1 Christine E. Fesko Benjamin J. Freund Andrew J. Gilbert * Laurie K. Griffen 2 June W. Hoeflich Ann P. Hudson Henry L. Huntington 2 Richard P. Janiga Donald N. Jensen II 1 Peggy Jo Jones Bruce L. Kidder 1 Abbott W. Lee John Lyman, III 1 Gary Mahany 1 Charles R. Miller Sandra K. Prokop Peter J. Russell Lyle C. Wells 1 Total 1 2
*
Days Served Other Board Official Meetings Activities
14 14 14 11 2 14 14 14 11 14 14 11 14 3 14 3 14 3 2 14 14 13 3
Compensation
11 7 6 5 3 9 19 41 1 14 9 3 10 4 12 2 24 3 0 2 11 7 2 $
34,850 29,150 32,450 25,850 6,600 32,450 36,050 46,250 22,250 37,850 33,650 24,050 35,950 7,200 39,650 6,000 50,600 6,000 3,000 28,250 33,600 30,650 5,400 607,750
Term ended during year Term began during year This director represented Farm Credit Eastâ&#x20AC;&#x2122;s interest by serving on boards of other organizations important to the Association. Days of service related to these activities and any compensation received (if any) are not included in this report.
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Transactions with Directors At December 31, 2011, the Association had loans outstanding with directors individually and to the business organizations of directors. All of the loans were in the ordinary course of business and remain on the same terms, including interest rates, amortization schedules, and collateral as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk collectability. Information regarding related party transactions is incorporated herein by reference from Note 10 of the consolidated financial statements included in this annual report to stockholders.
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Senior Officer Disclosures David W. Boone serves as Executive Vice President and Regional Manager, a position held since July 1998. He provides senior management oversight and coaching to the Bridgeton, Claverack, Cobleskill, Flemington and Middletown offices in credit, financial services, consulting and customer service. David is a Farm Credit veteran having joined in 1978 and been promoted through a variety of positions. He is a member of Farm Credit East’s Credit, Human Resources and Financial Services Committees. He has also active in the New Jersey farm community having served on several boards. David is a Trustee of the Warren County Community College.
Senior Officers Listed below are the CEO and senior officers of Farm Credit East, ACA. Information is provided on their experience, as well as on any business for which they serve on the board of directors or act as a senior officer and the primary business that organization is engaged in. William J. Lipinski serves as Chief Executive Officer a position held since Farm Credit East was formed on January 1, 2010. He was previously President and CEO of First Pioneer Farm Credit. He reports to and works closely with the Board of Directors. He sets strategic direction with the Board and directs human resources, credit and services delivery, finance and customer service. Bill is a graduate of Cornell University with a degree in Agricultural Economics. Bill began his Farm Credit career in 1979 and was promoted through a number of positions before becoming CEO. Bill is a current director and past Chairman of the Board of Farm Credit Financial Partners, a service company owned by Farm Credit East and other ACAs. He is a member of the Farm Credit System Presidents Planning Committee, a national leadership group. Bill was a former member of the Board of Directors of Pro-Fac Cooperative, Inc. He also served as director of the Farm Credit Leasing Corporation for a number of years.
William S. Bathel holds the title of Executive Vice President and has held the position of Chief Risk Officer since 1995. Bill is responsible for measuring and monitoring risk in Farm Credit East’s loan portfolio. He provides reports to the Board and management to help assure the ACA’s financial safety. Bill administers the ACA’s credit review, appraisal review and internal audit. He leads the Association’s internal technology committee and coordinates technology efforts with Financial Partners Inc. (FPI). Bill also co-directs the ACA’s business planning process and coordinates matters with our federal examiner, the Farm Credit Administration. Bill joined the Farm Credit System in 1987 and advanced through several positions. Bill is a graduate of the University of Nebraska with a degree in Accounting. He serves on the Farm Credit East Credit Committee and works closely with the Board’s Audit Committee.
Charles S. Herring serves as President and Chief Operating Officer. Scott chairs Farm Credit East’s Credit Committee, which acts on large and complex credit decisions. He is responsible for balancing sound extension of credit and services with high quality customer service. All branch credit and financial services operations as well as finance and internal control report through Scott. Scott is a graduate of Alfred University with a degree in Business Administration. He joined Farm Credit in 1976 and was promoted through several positions including CEO of the Farm Credit of Western New York prior to its merger into Farm Credit East. He serves on the Risk Management Work Group a subcommittee of the Presidents Planning Committee and also the CoBank, ACB Retirement Trust Committee. He also sits on the Farm Credit East Human Resources Committee.
Gary R. Bradley has served as Executive Vice President and Regional Manager since 1998. He provides senior management oversight and coaching to the Burrville, Cortland, Greenwich, Potsdam, and Sangerfield offices in credit, financial services, consulting and customer service. Gary joined Farm Credit in 1977 and progressed through several positions. He serves on the Credit and Human Resources Committees. He also works closely with the Board’s Ag Initiatives Committee and is a member of the Farm Credit Fellows Committee at Cornell University. Gary holds a Cornell University degree in Business Management and Marketing.
John R. Batchellor (“Jack”) is Executive Vice President, a position held since June 1998. Jack is secretary of Farm Credit East’s Credit Committee, which acts on large and complex credit decisions. The Commercial Lending and Country Living groups report through Jack. He is a Cornell University graduate with a degree in Agricultural Economics. He joined Farm Credit in 1975 and was promoted through several positions, including CEO of Garden State Farm Credit, ACA prior to its merger into Farm Credit East. He also sits on the Human Resources Committee.
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FARM CREDIT EAST | 2011 ANNUAL REPORT
James D. Miller has served as Senior Vice President of Finance since 1995. He is responsible for the patronage dividend program, loan pricing, asset liability management including funding relationship with COBANK, budgeting, internal management information, capital projects and technology implementation. Since joining Farm Credit in 1981, Jim has had diverse experience in credit, appraisal, risk management and finance. He is a graduate of Cornell University with a BS in Agricultural Economics and an MBA in Finance and Accounting. He serves on the CoBank, ACB Retirement Trust Committee and is a Director of the Connecticut Farmland Trust.
John P. Caltabiano who serves as Executive Vice President and Regional Manager, joined Farm Credit East in 2002. He provides senior management oversight and coaching for the Bedford, Dayville, Enfield, Middleboro and Riverhead offices in credit, financial services, consulting and customer service. John joined Farm Credit in 1983 and progressed through a variety of positions, including Southern New England Farm Credit, the Farm Credit Banks in Springfield, MA and COBANK in Denver, Colorado. He is a member of Farm Credit East’s Credit and Human Resources Committees. John holds a BS in Agricultural Economics/Plant Science from Cornell University and an MBA from Duke University. He is a graduate of LEAD New York having recently served as President of its Board. He is also a Director of the Northeast Agricultural Education Foundation.
Roger E. Murray serves as Senior Vice President - Crop Insurance and has been part of the senior management team since 1995. Roger manages risk management services, including crop and credit life insurance. He also provides program leadership for leasing and sales training. He serves on the Farm Credit East’s Human Resources Committee. Roger holds a Cornell University degree in Agricultural Economics and is a licensed insurance agent. He joined Farm Credit in 1981 and has advanced through several positions.
Brian Monckton serves as Executive Vice President and Regional Manager. He provides senior management oversight and coaching to the Batavia, Geneva, Hornell, and Mayville offices in credit, financial services, consulting and customer service. Brian joined Farm Credit in 1981 and progressed through several positions including Farm Credit of Bridgeton, Farm Credit of Olean, and Farm Credit of Western New York. He is a graduate of Cornell with a BS in Agricultural Economics and a graduate of LEAD New York.
Michael J. O’Connor, III serves as Senior Vice President, General Counsel and Corporate Secretary having joined First Pioneer in February 1999. He serves the Board as Corporate Secretary, manages all Farm Credit East’s legal matters and provides support on complex and innovative loan issues. Mick is a member of the Human Resources Committees and frequently serves on regional and national task forces. He came to Farm Credit in 1988 with the Farm Credit Banks of Springfield and later worked for COBANK. He is a graduate of Amherst College and the University of Connecticut School of Law.
James N. Putnam, II is Executive Vice President for Marketing and Planning, a position held since 1995. Jim codirects the ACA’s business planning process. He is practice manager for business consulting services and program leader for farm records, farm software, tax services and new product development. Knowledge Exchange, Customer Communications and Public Affairs also report through this position. Jim started with Farm Credit in 1975 after earning a BS (University of Massachusetts) and an MS (Iowa State University), both in Agricultural Economics.
Robert H. Reid, Jr. serves as Senior Vice President and Human Resources Director, a position held since March 1998. He leads Farm Credit East’s human resource programs, administers insurance programs and is the Association’s auto fleet manager. Bob is Chairman of Farm Credit East’s Human Resources Committee and serves on the COBANK Welfare Benefits Committee. He joined Farm Credit in 1979 and has been promoted through diverse positions within Farm Credit East and its predecessors. He is a graduate of the University of Maine with a degree in accounting.
Paul S. Bajgier serves as Senior Vice President and Treasurer, a position he has held since 1995. He is responsible for the financial administration of the Association including general ledger and loan accounting, operational procedures, Association tax filings and external reporting. He also works closely with the Board Audit Committee to manage Farm Credit East’s relationship with PricewaterhouseCoopers, the Association’s independent auditor. Prior to joining Farm Credit in 1992, he began his career as an auditor with Price Waterhouse. Paul is a graduate of Western New England College with a degree in Accounting. He is a CPA and member of the American Institute of Certified Public Accountants.
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Robert A. Smith serves as Senior Vice President for Public Affairs and Knowledge Exchange and Acting Corporate Secretary. Bob joined Farm Credit East in January 2007. He has responsibility for public policy, marketing and communications and Farm Credit Eastâ&#x20AC;&#x2122;s Knowledge Exchange initiative. Prior to joining Farm Credit East, he served as Vice President for Governmental Relations for COBANK and was responsible for COBANKâ&#x20AC;&#x2122;S Washington, DC office. Prior to COBANK, Bob worked as a Deputy Commissioner in the NYS Department of Agriculture and Markets, and Assistant Secretary to the Governor of New York. Before joining the Department of Agriculture and Markets, Bob served as Director of Governmental Relations and Communications for New York Farm Bureau. He is a graduate of Cornell University and LEAD NY and currently serves on the New York State Fair Advisory Board and the American Farmland Trust NY Advisory Council.
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Compensation of CEO and Senior Officers
employees are also eligible to participate in a 401(k) retirement savings plan, which includes a matching contribution by the Association. For a detailed description of the various benefit plans, see Note 9 “Employee Benefit Plans” to the consolidated financial statements.
Farm Credit East’s (the Association) compensation strategy is to attract and retain highly talented employees to fulfill our mission as the premier credit and financial services provider in the Northeast. The compensation philosophy seeks to achieve the appropriate balance among market-based salaries, benefits and variable incentive compensation designed to incent and reward both the current and long term achievement of our business objectives and business financial plans. We believe this philosophy fosters a performance-oriented, results-based culture wherein compensation varies on the basis of results achieved.
CEO Compensation The CEO’s compensation is benchmarked to a select peer group of financial institutions. The Board hires an outside consultant to help benchmark total compensation. This evaluation helps ensure that such compensation is competitive with positions of similar scope at similar financial institutions. The Board’s executive compensation committee reviews the performance of the CEO semi-annually and reviews it with the Board. The Board of Directors annually approves the CEO compensation level.
Salaries are market based, as determined in consultation with an independent executive compensation consultant. The determination of market salaries consists of a comparison of salary levels to positions of similar scope at select peer group financial institutions, coupled with an evaluation of individual performance, competencies and responsibilities.
In addition to the base salary, the CEO can earn both a shortterm bonus and a long term incentive each year based on preestablished performance goals. The short term bonus potential for 2011 ranged from 0% to 50% of base salary. The 2011 long term award was 50% of base salary. The short term bonus shown in the chart below reflects the amount earned and actually paid in each year. The long term incentive shown in the chart below reflects the amount earned and actually paid in accordance with any deferral elections made before the start of the plan year. The compensation that is deferred is invested in any number of investment alternatives selected by the participant. The participant is subject to all risks and returns of amounts invested.
Annual short term incentive payments are based on a combination of Association and individual performance. The plan focuses on achieving near-term, annual results. Substantially all employees in the Association are eligible to participate in this plan at various levels. Criteria used to determine amounts payable were established by the Board of Directors and include the achievement of certain Association financial targets and strategic business objectives. Payments are typically made in February following the end of the year to which the award is applicable.
The CEO’s compensation in excess of the Internal Revenue Code is made up for via participation in a nonqualified deferred compensation plan. Contributions are made at the same percentages as available under the 401K plan. The compensation that is deferred is invested in any number of investment alternatives selected by the participant. The participant is subject to all risks and returns of amounts invested. The nonqualified deferred compensation plan payment is shown in the chart below.
The Association also utilizes a long-term incentive plan and long term retention plan that provides senior officers and other key employees the opportunity for financial rewards tied to Farm Credit East’s sustained success. Eligibility for participation is limited to those individuals who clearly have the ability to drive the success of strategies critical to long term value creation for stockholders. The plan payouts are based on Association performance in the achievement of key financial metrics over a three-year performance period. The cash awards are to be paid subsequent to completion the performance period cycle, subject to approval by the Board of Directors. Participants forfeit those amounts if they resign prior to being paid.
As of December 31, 2011, the CEO is employed pursuant to a three year employment contract which runs through December 31, 2012. The employment agreement provides specified compensation and related benefits in the event employment is terminated, except for termination with cause. The significant provisions of the agreement are that the CEO would be entitled to severance benefits of two years base salary plus any incentives earned in the year of termination. The employment agreement is automatically renewed unless either party notifies the other of termination.
The Association has a funded, qualified defined benefit pension plan which is noncontributory and cover employees hired prior to January 1, 2007. Benefits are determined by a formula based on years of service and eligible compensation. All senior officers are fully vested in the defined benefit pension plan. There is also a noncontributory, unfunded, nonqualified supplemental executive plan (SERP) covering the CEO. All
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Senior Officer Compensation 2011
The CEO is responsible for setting the compensation levels of the senior officers, who, in turn are responsible for the compensation of all other employees. The Association’s short term incentive compensation plan features annual payments based on calendar year performance periods. The annual short term incentive targets are set for all employees at the beginning of the year. For the 2011 performance period, the short term incentive levels for senior officers ranged from 5% to 17% of base salary. Individual performance is also considered in the determination of the amount payable. The short term bonuses shown in the chart below are paid in February following the end of the year to which the award is applicable.
2010
2009
William J. Lipinski, CEO Salary Short-term incentive Long-term incentive Long-term incentive – deferred Nonqualified compensation – deferred Perquisites/Other *** Total
$ 520,000 197,000 150,000 100,000 21,420 8,520 $ 996,940
$ 500,000 225,000 147,000 100,000 23,040 6,237 $ 1,001,277
494,000 237,500 137,500 100,000 41,438 6,936 $ 1,017,374
Senior Officers (excluding CEO) * Salary Short-term incentive Retention incentive ** Perquisites/Other *** Total
$ 2,551,338 319,500 399,638 64,902 $ 3,335,378
$ 2,351,246 325,093 382,080 60,211 $ 3,118,630
$ 1,830,958 291,750 258,447 49,525 $ 2,430,680
$
* The number of senior officers in 2011 and 2010 and reflected in this
The Association’s long-term retention plan provides senior officers and other key employees the opportunity for financial rewards tied to Farm Credit East’s sustained success over a three-year performance period. The three-year performance metrics are established at the beginning of each three-year performance period by the Board of Directors in connection with the annual business and financial plan. For the 2011 performance period, the retention plan incentive reward was 19% of base salary. The retention incentives shown in the chart below are not funded or held in trust but contractually obligates the Association to make future payments in specified amounts. The cash awards are to be paid subsequent to completion of the three-year performance period cycle. In February 2011, the 2008 through 2010 performance period cash awards were paid to senior officers totaling $397,987. Participants in the long-term retention plan can elect to defer incentive plan payments if the election is made before the start of the plan year.
chart was fourteen; the number of senior officers in 2009 and reflected in this chart was twelve. ** The retention incentive reflects the amount awarded to these senior officers. The amounts are held as a general obligation of the Association and are subject to forfeiture. *** Amount represents the taxable benefit of a company automobile for personal use, as determined by IRS regulations, and the taxable benefit of company paid group term life insurance.
Current Association policy regarding reimbursements for travel, subsistence, and other related expenses provides for reimbursement of actual reasonable out of pocket expenses incurred while traveling on official Association business. Employees who use their own automobiles for Association business purposes will be reimbursed at a rate that has been established in accordance with IRS guidelines. The Association provides automobiles to exempt employees with credit or Association-wide management responsibilities. Association employees are allowed to use assigned cars for personal use. All miles other than those driven for business purposes, as defined by the IRS, are considered personal miles and are accounted for as a taxable benefit to the employee. A copy of the Association travel policy is available to stockholders upon request.
Compensation earned by the CEO and aggregate compensation of the senior officers for the years ended December 31, 2011, 2010 and 2009, respectively is disclosed in the accompanying table. Disclosure of the total compensation during the last fiscal year to any senior officer included in the aggregate whose compensation exceeds $50,000 is available to stockholders upon request in writing.
Transactions with Senior Officers At December 31, 2011, there was one loan outstanding to a Senior Officer and there were loans outstanding to an immediate family member of another senior officer. All of the loans approved were in the ordinary course of business and remain on the same terms, including interest rates, amortization schedules, and collateral as those prevailing at the time for comparable
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FARM CREDIT EAST | 2011 ANNUAL REPORT
transactions with other persons and did not involve more than the normal risk of collectibility. Information regarding related party transactions is incorporated herein by reference from Note 10 of the consolidated financial statements included in this annual report to stockholders.
Code of Ethics The Association sets high standards for honesty, ethics, integrity, impartiality and conduct. Each year, every employee certifies compliance with the Association’s Employee Standard of Conduct Policy which establishes the ethical standards of the Association. Additionally, all employees certify compliance with the Code of Ethics. The Code of Ethics supplements the Employee Standard of Conduct Policy and establishes additional responsibilities related to the preparation and distribution of the Association’s financial statements and related disclosures. For details about the Association’s Code of Ethics, visit Farmcrediteast.com and click on About Us. A copy of the Association’s Code of Ethics is available to stockholders upon request.
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Disclosure Information Required by Farm Credit Administration Regulations Management’s Discussion and Analysis “Management’s Discussion and Analysis” included in this annual report to stockholders, is incorporated herein by reference.
In accordance with Farm Credit Administration (FCA) regulations, Farm Credit East, ACA has prepared this Annual Report to Stockholders for the year ended December 31, 2011 in accordance with all applicable statutory or regulatory requirements.
Financial Statements The “Report of Management”, “Report of Audit Committee”, “Management’s Report on Internal Control over Financial Reporting”, “Report of Independent Auditors”, “Consolidated Financial Statements”, and “Notes to Consolidated Financial Statements” included in this annual report to stockholders, is incorporated herein by reference.
Description of Business General information regarding the business is incorporated herein by reference to Note 1 of the financial statements included in this annual report to stockholders. The description of significant developments, if any, required to be disclosed in this section is incorporated herein by reference to “Management’s Discussion and Analysis of Financial Position and Results of Operations” included in this annual report to stockholders.
Director and Senior Officer Disclosures “Director Disclosures” and “Senior Officer Disclosures” included in this annual report to stockholders, is incorporated herein by reference.
Description of Property Farm Credit East, ACA is headquartered in Enfield, CT. A listing of Association offices owned and/or occupied are on the inside back cover of this annual report. The Cobleskill, NY and Cortland, NY offices are leased. All other properties listed are owned by Farm Credit East.
Involvement in Certain Legal Proceedings There were no matters that came to the attention of the Board of Directors or management regarding involvement of current directors or senior officers in specified legal proceedings that require to be disclosed.
Legal Proceedings Information regarding legal proceedings is incorporated herein by reference to Note 12 of the consolidated financial statements included in this annual report to stockholders. The Association was not subject to any enforcement actions at December 31, 2011.
Relationship with Independent Auditors There were no changes in independent auditors since the prior annual report to stock holders and there has been no material disagreement with our independent auditors on any matter of accounting principles or financial statement disclosure during this period.
Description of Capital Structure Information required to be disclosed in this section is incorporated herein by reference to Note 7 of the consolidated financial statements included in this annual report to stockholders.
CoBank, ACB Annual Report and Quarterly Reports As an Association Stockholder, your equity investment in the Association is materially affected by the financial condition and results of operations of the CoBank, ACB (CoBank). Regulations require that CoBank’s Annual and Quarterly Reports be made available to you upon request at no charge. Accordingly, you may pick-up a copy of CoBank’s Annual and Quarterly Reports at one of our offices, or you may call the office to have a copy sent to you. A listing of the Association offices and telephone numbers are listed on the inside back cover of this Annual Report.
Description of Liabilities Information required to be disclosed in this section is incorporated herein by reference to Notes 6, 8, 9, 11, 12 and 15 of the consolidated financial statements included in this annual report to stockholders. Selected Financial Data “Five Year Summary of Selected Financial Data” included in this annual report to stockholders, is incorporated herein by reference.
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Customer Privacy Customer financial privacy and the security of your other nonpublic information are important to us. Farm Credit East holds your financial and other non-public information in strictest confidence. Federal regulations allow disclosure of such information by us only in certain situations. Examples of these situations include law enforcement or legal proceedings or when such information is requested by a Farm Credit System institution with which you do business. In addition, as required by Federal laws targeting terrorism funding and money laundering activities, we collect information and take actions necessary to verify your identity.
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Description and Status Report on the Young, Beginning and Small Farmers (YBS) Program Overview Farm Credit East, ACA (the Association) takes great pride that it’s founding Board of Directors (Board) made young, beginning and small farmers a special focus since its founding in 1994. The Board maintains a standing committee of directors to oversee young, beginning and small farmer service and initiatives, as well as to plan further to serve these groups.
Services Provided There are several credit and other related services offered through the Board approved YBS Program that allows Farm Credit East to effectively serve the needs within the young, beginning and small customer segments: • Special incentives that may be offered at a discount for a period of up to five years include:
Mission The Association’s Board recognizes that the long range strength and soundness of the future of Farm Credit East and of the agricultural community in the area it serves depends on the individuals entering the industry. It further recognizes that demands for capital and farm and financial management skills make it exceedingly difficult to become established in the business. Therefore, we believe that it is in the Association’s best interest to assist young, beginning and small farmers by providing loans and credit related services, and help to provide and encourage their participation in activities that improve farm and financial management skills.
o o o o o o
Farm accounting and management software fees Tax preparation fees Consulting fees Appraisal fees FSA guaranteed loan fees Interest rate assistance
Farm Credit East’s special incentives were $221,240, $201,964 and $238,285 for the years ended December 31, 2011, 2010 and 2009 respectively. • Since 2006, incentives are offered to organizations, schools, and universities for special training and educational programs utilizing the Farm Credit East developed Harvesting a Profit guide.
Program Definitions The definitions of young, beginning, and small farmers and ranchers as developed by the Farm Credit Administration follow: • Young - A farmer, rancher, producer or harvester of aquatic products who is 35 years or younger as of the loan transaction date.
• Farm Credit East provides support, funding, and staff involvement in Dairy Fellows, Farm Credit Fellows, Ag Ambassadors, North East Dairy Challenge, and other programs at educational institutions.
• Beginning - A farmer, rancher, producer or harvester of aquatic products who has 10 years or less farming experience as of the loan transaction date.
• Representation by YBS farmers on Farm Credit East’s Customer Service Councils. These councils provide customer feedback and function as a liaison to association management.
• Small Farmer: A farmer, rancher, producer or harvester of aquatic products who normally generates less than $250,000 in annual gross sales of agricultural or aquatic products.
• A portion of the young, beginning and small loan portfolio is supported by government guarantees, including guarantees by the Farm Services Agency (FSA) and USDA’s Business and Industry guaranteed loan program. Provided below are statistics related to government guarantees usage among the young, beginning and small portfolio.
Objectives Young, beginning and small farmers are a vital part of agriculture and Farm Credit East is proud to provide innovative products and services that contribute to their success. In 1995, the Board created a committee to develop and then oversee a program to assist young, beginning and small farmers, regarding this as one of the core values of the Farm Credit East association.
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Demographics The local service area of Farm Credit East, ACA includes the states of New Jersey, Rhode Island, Connecticut, Massachusetts, and parts of the states of New York and New Hampshire. Demographic data for Young, Beginning, and Small farmers was taken from the USDA’s 2007 Census of Agriculture. The census is conducted every five years. It showed the following:
Government Guaranteed Young, Beginning and Small Farmer Loans Number
Volume *
Young
406
$76,145
Beginning
420
$81,097
Small
447
$53,349 Percentage Levels in Farm Credit East Lending Territory Expressed as a % of Total Farms
New Government Guaranteed YBS Loans (Originated in 2011) Number
Volume *
Young
67
$9,678
Beginning
71
$8,205
Small
65
$7,324
Farm Credit East works closely with the New York State Link Deposit Program which reduces the effective interest rate paid on loans for qualifying projects.
•
Farm Credit East’s Scholarship program awards scholarships to 28 students with an emphasis towards those students with “ag” backgrounds and pursuing interests related to agriculture.
•
The Association works with the Northeast Cooperative Council (NECC) to develop and host young cooperators programs along with sponsoring attendance by customers.
•
Farm Credit East provides a series of annual seminars that focus on developing skill sets of YBS farmers.
•
Receiving regulatory authority in late 2005, Farm Credit East secured a partner (CoBank, ACB) and chartered FarmStart, LLP (FarmStart). At December 31, 2011, Farm Credit East has an equity investment in FarmStart of $1,088,387. FarmStart assists beginning farmers and new cooperatives by providing investments in working capital of up to $50,000. At December 31, 2011, FarmStart has 71 investments with an outstanding balance of $2.2 million.
Beginning
Small
10.6%
35.5%
92.1%
Farm Credit East has annually undertaken a study of the young, beginning, small farmer segment. This study makes a determination of Association penetration of young, beginning and small farmers utilizing information reported in the 2007 Census of Agriculture to better ascertain Farm Credit East’s penetration of these farmer segments. The following table shows Farm Credit East’s penetration in each market segment:
* in thousands
•
Young
Penetration Levels in Farm Credit East Lending Territory December 31, 2011 Young
Beginning
Small
19%
27%
41%
Farm Credit East penetration is determined based on the number of loans to a specified group as a percentage of total loans.
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Young, Beginning and Small Farmer Volume in Farm Credit Eastâ&#x20AC;&#x2122;s Loan Portfolio The following table outlines the percentage of young and beginning farmer and rancher loans in the loan portfolio (by number and volume) as of December 31, 2011 compared to total number of loans in the portfolio:
Category
Number of Loans
% of Total Loans
Volume Outstanding *
% of Total Volume
$ 5,710,046
100%
Total Loans and Commitments
16,573
100%
Young Farmers and Ranchers
3,132
19%
$
696,857
12%
Beginning Farmers and Ranchers
4,309
26%
$
921,764
16%
* in thousands
The following table provides a breakdown of small farmer and rancher loans by size as of year-end 2011:
Number / Volume Outstanding
$0 - $50,000
$50,000 $100,000
Total # of Loans and Commitments
4,961
3,284
4,175
4,153
Total # of Loans to Small Farmers / Ranchers
2,585
1,699
1,692
788
# of Small Loans as a % of Total # of Loans
52%
52%
41%
19%
Total Loans and Commitments Outstanding
$ 101,760
$ 252,956
$ 687,780
$ 4,667,550
Total Volume and Commitments to Small Farmers / Ranchers *
$
$ 128,809
$ 268,875
$
66,499
Loan Volume to Small Farmers / Ranchers as a % of Total Loan Volume
65%
51%
$100,000 $250,000
>$250,000
414,638
39%
9%
* in thousands
The numbers listed above do not include any investments made under FarmStart, LLP.
Goals and Results As part of Farm Credit Eastâ&#x20AC;&#x2122;s planning process, annual quantitative and qualitative goals are established.
Farm Credit East has established the following quantifiable and quantitative goals for 2012:
The table below outlines the Association quantifiable goals for 2011 and compares actual results to those goals:
Quantitative goals under YBS loan commitments 12/31/2010 ACTUAL 12/31/2011 GOAL 12/31/2011 ACTUAL 2011 as a % of GOAL
Young
Beginning
Small
3,139 3,140 3,107 99%
4,280 4,350 4,274 98%
6,852 6,900 6,729 98%
Quantitative goals under YBS loan commitments 12/31/2011 ACTUAL 12/31/2012 GOAL 12/31/2013 12/31/2014 12/31/2015 12/31/2016
61
Young
Beginning
Small
3,107 3,150 3,200 3,260 3,325 3,400
4,274 4,350 4,435 4,520 4,610 4,700
6,729 6,600 6,700 6,840 6,980 7,100
FARM CREDIT EAST | 2011 ANNUAL REPORT
Farm Credit East YBS 2012 qualitative goals address credit, collaboration, financial services and educational assistance, to include:
• Incentive programs including interest rate incentives, payment of FSA guarantee fees, and fee reductions on certain financial services (record keeping, taxes, appraisal and consulting) in order to facilitate the entry of new farmers and to make Farm Credit their lender of choice
•
Scholarships for students pursuing a career in agriculture
• Working with organizations, schools and universities delivering special training and educational programs for students
• Adult education program supporting agricultural leadership and excellence
•
Local grass roots involvement by branch staff in organizations and groups such as FFA, etc.
•
Advertisements geared to YBS and using publications such as the Small Farm Quarterly
•
Continued support and collaboration with state FarmLink and FarmNet programs
• Continued representation by YBS farmers on Association Customer Service Councils
• Support, funding, and staff involvement in Dairy Fellows, Farm Credit Fellows, Ag Ambassadors, and other programs at educational institutions
• AgEnhancement grants to foster agriculture’s youth, leadership and viability
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Customer Service Councils The Farm Credit East Board of Directors has established a system of Customer Service Councils (CSC) for each of the 19 branch offices. These are composed of a cross section of stockholders and other members of the agricultural community who meet three times annually with their local Branch Office Manager to provide feedback and input on a variety of topics. This is in keeping with Farm Credit East’s strategic vision of retaining a strong grass roots network and having strong, highly empowered branch offices. The track record of the CSCs has been very positive as Farm Credit East Branch Office Managers have received invaluable feedback on a wide variety of topics. The Board and Management sincerely appreciate the contribution of the CSC members listed below and look forward to building on this Farm Credit East tradition in 2012. Batavia, NY Maryjo Bedford, Bedford’s Greenhouse, Inc., Akron, NY Tom Corcoran, HR and W Harvesting, P/S, Caledonia, NY Rod Farrow, Lamont Fruit Farms, Waterport, NY Tom Jeffres, R.L. Jeffres & Sons, Inc., Wyoming, NY Brett Kreher, Kreher’s Poultry Farm, Clarence, NY Matthew Lamb, Lamb Farms, Inc., Oakfield, NY Jeffrey Mulligan, Mulligan Farm, LLC, Avon, NY John Reynolds, Reyncrest Farms Inc., Corfu, NY Patty Riner, MY T Acres, Inc., Batavia, NY Jason Schwab, Schwab Dairy Farm, Delvan, NY Jason Swede, Swede Farms, LLC, Piffard, NY Wendy Wilson, Lynoken Farms, Inc., Lyndonville, NY Patrick Woodworth, Sandy Knoll Farms, Inc., Medina, NY
Burrville, NY Eric Behling, Behling Orchards, LLC, Mexico, NY Jonathan Beller, Beller Farms, LLC, Carthage, NY Kristina Burger, Deer Run Dairy, Adams, NY Lynn Murray, Murcrest Farms, Watertown, NY Ronald Robbins, North Harbor Dairy LLC, Sackets Harbor, NY David Rudd, Lacona, NY Douglas Shelmidine, Sheland Farms, A Partnership, Adams, NY Greg Steiner, Burrville Cider Mill, Rensselaer, NY
Claverack, NY Peter Barton, Lime Ridge Farms/Barton Orchards, Poughquag, NY David W. Becker, Becker’s Farm, Rensselaer, NY Jonathan Chiaro, Yonder Fruit Distributors, Hudson, NY Bedford, NH Robert Graves, Faddegon’s Nursery, Inc., Latham, NY Nick Brunet, Green Crow Corporation, Auburn, NH Christine Jones, Sunrise Farm, Inc., Catskill, NY Robert A. Johnson, II, Pittsfield, NH Michael Lischin, Dutchess View Farm, Pine Plains, NY Lisa Mason, Punch Brook Farm/Barn Store of New England, Franklin, NH Phil Trowbridge, Trowbridge Farms, Ghent, NY Peter Mullen, Irish Venture, Inc., Gloucester, MA Lloyd Vaill, Jr., Lo-Nan Farm, LLC, Pine Plains, NY Ellen Parlee, Parlee Farms, Tyngsborough, MA Robert F. Verstandig, Verstandig’s Florist, Selkirk, NY Jamie Robertson, Bohanan Farm, Contoocook, NH Vitor Silva, Sons of the Wind, Merrimac, MA Cobleskill, NY Charles Souther, Apple Hill Farm, Concord, NH John Balbian, Grober Nutrition, Amsterdam, NY Richard Ball, Schoharie Valley Farms, Schoharie, NY Bridgeton, NJ Raymond J. Dykeman, Dykeman Farms, Fultonville, NY Michael Brooks, Dusty Lane Farm, LLC, Elmer, NJ Luke Johnson, Joleanna Holsteins, Unadilla, NY David K. Johnson, D. Johnson Farms, Inc., Bridgeton, NJ Russell J. Kelly, Jr., Glenvue Farm, Fultonville, NY Edward Overdevest, Overdevest Nurseries, Inc., Bridgeton, NJ Brent Leonard, Carefree Gardens, Cooperstown, NY Mark Panco, C&M Flower Growers, Vineland, NJ M. Victoria McCaffrey, Oxkill Farm, Schoharie, NY Wayne Reichle, Lunds Fisheries, Inc., Cape May, NJ Michael D. Phelan, Boulder Brook Farm, Warnerville, NY Louis Sepers, Sepers Nursery, LLC, Newfield, NJ Edward Slicer, Diversified Ag, Jefferson, NY Thomas Sheppard, Sheppard Farms, Inc., Cedarville, NJ Donald C. Strang, Farm Rite, Inc., Elmer, NJ Frank Tedesco, Safeway Freezer Store Company, LLC, Vineland, NJ
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Geneva, NY Doug DeBadts, Jay R. DeBadts & Sons Fruit Farm, Sodus, NY John Fowler, Fowler Brothers, Inc., North Rose, NY Jackie Fox, Fox Fruit Farms, LLC, Williamson, NY Dawn Hansen, Hansen Farms, LLC, Stanley, NY Marcia Hatfield, Hatfield Farms, LLC, Scipio Center, NY John Karszes, Heifer Haven Farms, Stanley, NY James Kennedy, Willow Pond Aqua Farms, Canandaigua, NY John Knopf, FA-BA Farms, LLC, Canandaigua, NY Gary Lilyea, Lilyea Farms, Penn Yan, NY Dale Mattoon, Pine Hollow Farms, LLC, Locke, NY Julie Pellett, Linholm Dairy LLC, Bloomfield, NY Mark Wagner, Lamoreaux Landing Wine Cellars, Lodi, NY
Cortland, NY Dennis Birdsall, Homer, NY Walt Blackler, Apple Acres, LaFayette, NY Carl Dennis, Manlius, NY Paul Fouts, Fouts Farm, Cortland, NY John Gates, Seneca Valley Farms, Burdett, NY Lee Hudson, Hudson Egg Farms, Camillus, NY James Loomis, Fabius, NY Edie McMahon, McMahon’s E-Z Acres, Homer, NY George Schaefer, Schaefer’s Gardens, Chenango Forks, NY Judith Whittaker, Whittaker Farms, Whitney Point, NY Dayville, CT Arthur Armstrong, A-Way Nurseries, Harrisville, RI John Bennett, John Bennett Stables, Putnam, CT Allyn Brown, III, Maple Lane Farms, Preston, CT Robin Chesmer, Graywall Farms, Lebanon, CT Jan Eckhart, Sweet Berry Farm, Middletown, RI Sharon Hewes, Holdridge Farm Nursery, Ledyard, CT Samuel Hull, N.E. Timberland Investments, Union, CT James Koebke, Walnut Lane Farm, Dudley, MA Wilhelm Maya, Franklin Farms, N. Franklin, CT Geir Monsen, Seafreeze Limited, North Kingstown, RI John Nunes, Jr., Newport Vineyards, Middletown, RI Sarah Partyka, The Farmer’s Daughter, South Kingstown, RI Linda Rich, We-Li-Kit Farm, Pomfret, CT Suzanne Sankow, Sankow’s Beaver Brook Farm, Lyme, CT Clark Woodmansee, Woodmansee Farm, Preston, CT
Greenwich, NY James Chambers, Chambers Valley Farms, Inc., Salem, NY Nathan Darrow, Saratoga Apple, Schuylerville, NY Charles Hanehan, Hanehan Family Dairy, Saratoga Springs, NY David D. Horn, DVM, Greenwich, NY Jan King, King Ransom Farms, LLC, Schuylerville, NY Anne McMahon, McMahon Thoroughbreds, Saratoga Springs, NY Ian C. Murray, Brookside Farms, Inc., Ballston Spa, NY Jennifer Thomas, Thomas Poultry Farm of Schuylerville, Inc., Schuylerville, NY Hornell, NY Jeff Baker, Val Dale Farms Partnership, Friendship, NY Chuck Deichmann, Belmont, NY Bryan Dickson, Dickson Trucking LLC, Savona, NY Rod Karr, Karr Dairy Farms, LLC, Hornell, NY Ed Merry, Lismore Dairy, LLC, Arkport, NY John Schumacher, Schum-Acres & Associates, Inc., Naples, NY Greg Squires, J&G Squires, Prattsburg, NY Joe Trappler, JT Logging, Addison, NY Phil Weaver, Bluegill Farms Partnership/J.P. Swine Enterprises, LLC, Bath, NY
Enfield, CT John Casertano, N. Casertano Greenhouses & Farms, Chesire, CT Albert Hager, Hager Brothers Dairy & Farm Market, Colrain, MA Alexander Gondek, Jr., AJ Gondek Farms, LLC, Portland, CT Raymond F. Horn, Jr., Rivers Edge Farm, LC, Bethany, CT Marc Laviana, Sunny Border Nurseries, Inc., Kensington, CT Ronald LeClerc, LeClerc & Sons Logging, Belchertown, MA Kurt Lindeland, Connecticut Mulch Distributors, Enfield, CT Peter Melnik, Bar Way Farms, Old Deerfield, MA Charles Newman, Planters Choice, LLC, Newtown, CT Don Patterson, Patterson Farm, Sunderland, MA Karen Randall, Randall’s Farm, Inc., Ludlow, MA Bill Van Wilgen, Van Wilgen’s Garden Center, N. Brandford, CT
Mayville, NY Ed Barger, Donald E. Barger, Jr., Westfield, NY Eric Dunnewold, Dunnewold Farms, LLC, Clymer, NY Chad Fredd, Grape View Dairy, LLC, Westfield, NY Rich Hill, Hill Valley Farm, LLC, Cattaraugus, NY Kris Ivett, Halocrest Farms P/S, South Dayton, NY Ted LeBaron, M&L Trucking, LLC, Sinclariville, NY Craig McCray, McCray Farms, Clymer, NY Jamie Militello, Militello Farms, LLC, Forestville, NY Dennis/Sue Rak, Double A Vineyards, Inc., Fredonia, NY Jody Waterman, Kevin and Jody Waterman, Forestville, NY
Flemington, NJ Lisa Applegate, Battleview Orchards, Freehold, NJ Lawrence Ashley, Ashley Farms, Flanders, NJ Stephen Barlow III, Barlow Flower Farm, Ocean, NJ Steve Gambino, Villa Milagro Vineyards, Finesville, NJ Walter Hughes, United Seacoast Corp., Atlantic Highlands, NJ Steven R. Jany, Rustin Farms, West Windsor, NJ Richard D. Klevze, Ringoes, NJ Michael Puglisi, Puglisi Egg Farms, Howell, NJ
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FARM CREDIT EAST | 2011 ANNUAL REPORT
Middleboro, MA Dawn M. Allen, Freetown Farm, LLC, Freetown, MA John W. Bartlett, Bartlettâ&#x20AC;&#x2122;s Ocean View Farm, Nantucket, MA Michael Dubuc, Morse Brothers, Inc., North Easton, MA E. Daniel Eilertsen, Nordic, Inc., Fairhaven, MA Kevin McLaughlin, Fairhaven Shipyard Co., Inc., Fairhaven, MA Matthew Piscitelli, Olson Greenhouses, Raynham, MA William B. Stearns IV, Southers Marsh Golf Club, Plymouth, MA Middletown, NY Wisner Buckbee, Jr., Warwick, NY Paul Burke, Russell Orchards, Wyckoff, NJ Richard Byma, Sussex, NJ Steven Clarke, Prospect Hill Orchard, Inc., Milton, NY Eileen Frangione, Westtown, NY Charles Lain, Jr., Pine Island Turf Nursery, Inc., Pine Island, NY John Lupinski, Goshen, NY Anthony Moriello, Moriello Brothers, New Paltz, NY Neal Needleman, Westtown, NY Potsdam, NY Daniel Chambers, Chambers Farms, LLC, Heuvelton, NY Harry Fefee, Brushton, NY Allan Friend, Burke, NY Blake Gendebien, Twin Mill Farms, LLC, Ogdensburg, NY Allen Kelly, Rensselaer Falls, NY LouAnne King, Mapleview Farms, Madrid, NY Steven Morrill, Gebarten Acres, Dekalb Junction, NY Keith Pierce, Royal J Acres, Ogdensburg, NY Riverhead, NY Jeff Batch, North Fork Greenhouses, Inc., Riverhead, NY Louis Caracciolo, Jr., Shade Tree Nursery, Jamesport, NY John Halsey, Milk Pail, LLC, Water Mill, NY Norman Keil, N & O Horticultural Products, Inc., St. James, NY Jeffrey Mayer, Mayflo, Inc., Patchogue, NY Janice McClellan, DeLalio Sod Farm, Inc., Dix Hills, NY Robert W. Nolan, Deer Run Farms, LLC, Patchogue, NY Sangerfield, NY Johannes Barendse, River Road Farm & Greenhouses, Utica, NY Cedric Barnes, Gatehouse Farm, DeRuyter, NY William Bennis, The Davis Tree Farm, Edmeston, NY Patricia Bikowsky, Madison, NY Rob Collins, Collins Knoll Farm, Sauquoit, NY James Frazee, Cazenovia Equipment Company, Cazenovia, NY Joseph Guzik, Beeline Farms, Richfield Springs, NY George Joseph, Northstar Orchards, Clinton, NY Amy Kelsey, Monanfran Farms, Inc., Canastota, NY John Marshman, Tiger Lily Farms, Oxford, NY Hubert Pritchard, Rome, NY
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Management William J. Lipinski .................................................................................................... Chief Executive Officer Charles S. Herring .............................................................................. President and Chief Operating Officer John R. Batchellor ................................................................................................. Executive Vice President William S. Bathel ................................................................. Executive Vice President and Chief Risk Officer David W. Boone ................................................................ Executive Vice President and Regional Manager Gary R. Bradley ................................................................. Executive Vice President and Regional Manager John P. Caltabiano ............................................................ Executive Vice President and Regional Manager Brian K. Monckton ............................................................ Executive Vice President and Regional Manager James N. Putnam II ..................................................... Executive Vice President for Marketing and Planning Paul S. Bajgier ...................................................................................... Senior Vice President and Treasurer James D. Miller ......................................................................................... Senior Vice President of Finance Roger E. Murray .............................................................................. Senior Vice President - Crop Insurance Michael J. Oâ&#x20AC;&#x2122;Connor, III ............................. Senior Vice President, General Counsel and Corporate Secretary Robert H. Reid, Jr. ...................................................... Senior Vice President and Human Resources Director Robert A. Smith ........................................... Senior Vice President, Public Affairs and Knowledge Exchange
Board of Directors Abbott W. Lee ........................................................................................................................... Chairman Richard P. Janiga .................................................................................................................. Vice Chairman Henry Adams, III .......................................................................................................................... Director Matthew W. Beaton ..................................................... .......................................................................... Director Robert R. Brown, II ......................................................................................................................... Director Samuel G. Conard ............................................................................................................................ Director Christine E. Fesko......................................................................................................................... Director Benjamin J. Freund ......................................................................................................................... Director Andrew J. Gilbert ............................................................................................................................ Director Laurie K. Griffen ............................................................................................................................. Director June W. Hoeflich ............................................................................................................... Outside Director Ann P. Hudson ................................................................................................................. Outside Director Henry L. Huntington ...................................................................................................................... Director Peggy Jo Jones ................................................................................................................ Outside Director Charles R. Miller ............................................................................................................................. Director Sandra K. Prokop ......................................................................................................................... Director Peter J. Russell ............................................................................................................................... Director
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on the Farm, in the oFFice, over the telephone or on the internet, our entire Farm credit eaSt team iS readY to help You. BATAVIA, NY Bill Kappus, Manager 4363 Federal Drive Batavia, NY 14020-4105 800.929.1350 / 585.815.1900
COUNTRY LIVING David Pugh, Director 2668 State Route 7, Suite 36 Cobleskill, NY 12043-9707 800.327.6588 / 518.296.8188
MAYVILLE, NY James Warner, Manager 28 E. Chautauqua Street Mayville, NY 14757-0163 800.929.2144 / 716.753.2144
POTSDAM, NY Michael Haycook, Manager One Pioneer Drive Potsdam, NY 13676-3273 800.295.8431 / 315.265.8452
BEDFORD, NH David Bishop, Manager 2 Constitution Drive Bedford, NH 03110-6010 800.825.3252 / 603.472.3554
DAYVILLE, CT Lynn Weaver, Manager 785 Hartford Pike Dayville, CT 06241-1739 800.327.6785 / 860.774.0717
MIDDLEBORO, MA Cynthia Stiglitz, Manager 67 Bedford Street Middleboro, MA 02346-0720 800.946.0506 / 508.946.4455
RIVERHEAD, NY Stephen Weir, Manager 1281 Route 58 Riverhead, NY 11901-2097 800.890.3028 / 631.727.2188
BRIDGETON, NJ Scott Andersen, Manager 29 Landis Avenue Bridgeton, NJ 08302-4396 800.219.9179 / 856.451.0933
ENFIELD, CT Keith Stechschulte, Manager 240 South Road Enfield, CT 06082-4451 800.562.2235 / 860.741.4380
MIDDLETOWN, NY Blane Allen, Manager 669 East Main Street Middletown, NY 10940-2640 888.792.3276 / 845.343.1802
SANGERFIELD, NY Craig Pollock, Manager 995 State Route 12 Sangerfield, NY 13455-0060 800.762.3276 / 315.841.3398
BURRVILLE, NY Kathryn Canzonier, Manager 25417 NYS Route 12 Watertown, NY 13601-5730 800.626.3276 / 315.782.6050
FLEMINGTON, NJ Michael Reynolds, Manager 9 County Road 618 Lebanon, NJ 08833-3028 800.787.3276 / 908.782.5215
CLAVERACK, NY Blane Allen, Manager 190 State Route 9H Hudson, NY 12534-3819 800.362.4404 / 518.851.3313
COBLESKILL, NY Robert Yurkewecz, Manager 2668 State Route 7, Suite 21 Cobleskill, NY 12043-9707 800.327.6588 / 518.296.8188
GENEVA, NY Dale Foley, Manager 1450 Route 14 Phelps, NY 14532-9542 800.929.7102 / 315.781.7100
CORTLAND, NY Janice Bitter, Manager One Technology Place, Suite 2 Homer, NY 13077-1526 800.392.3276 / 607.749.7177
GREENWICH, NY Christopher Truso, Manager 394 State Route 29 Greenwich, NY 12834-2650 800.234.0269 / 518.692.0269 HORNELL, NY David Van Lieshout, Manager 1155 Airport Road Hornell, NY 14843-9144 800.929.2025 / 607.324.2020
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FarmCreditEast.com
2/27/12 3:55 PM
Farm Credit East, ACA 240 South Road Enfield, CT 06082-4451
PRSRT-STD U.S. Postage
PAID
Permit No. 1225 Hartford, CT
Woodstock, Conn. dairy farmers prove the benefit of working together It began as a collaboration of necessity. At Valleyside Farm in Woodstock, Conn., harvesting equipment broke down one day leaving Tim Young and his son, Lucas, in a bind. Neighbors Todd and Diane Morin, of Fairholm Farm, stepped in to help — and the two families, working together, were surprised to discover how fast the job was done with teamwork. For the next few years, they continued working together. So began Big Iron Farm, LLC, a two-family collaboration that shares ownership of equipment and the labor to run and repair it. Co-ownership allowed for a bigger, more modern chopper and mower, and better justified costs across two businesses. That in turn cut field time in half, improved feed quality and slashed overhead. Instead of repeating the same fieldwork on their individual farms, they work together for the benefit of both. “We are proud we had the common sense to do something practical for both farms,” notes Tim. He also proudly points to their other collaboration: the marriage of Lucas to the Morins’ oldest daughter, Angela. The partners credit their loan officers, Eric Pohlman and Nick Gardner, and business consultant, Rick Hermonot, for supporting their plans. “Farm Credit East has the right tools for agriculture. They know our history and are confident in our goals,” Todd added. Todd and Diane Morin, Tim Young and Lucas Young
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