Equity

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements [Abstract]

Equity

EQUITY

Common Stock

Farmer Mac has three classes of common stock outstanding:

• Class A voting common stock, which may be held only by banks, insurance companies and other financial institutions or similar entities that are not institutions of the FCS.  By federal statute, no holder of Class A voting common stock may directly or indirectly be a beneficial owner of more than 33 percent of the outstanding shares of Class A voting common stock;

• Class B voting common stock, which may be held only by institutions of the FCS.  There are no restrictions on the maximum holdings of Class B voting common stock; and

• Class C non-voting common stock, which has no ownership restrictions.

During 2009 through 2011, Farmer Mac paid a quarterly dividend of $0.05 per share on all classes of the Corporation's common stock.  On February 2, 2012, Farmer Mac's board of directors declared a quarterly dividend of $0.10 per share on the Corporation's common stock payable on March 31, 2012.  Farmer Mac's ability to declare and pay a dividend could be restricted if it failed to comply with regulatory capital requirements.

Preferred Stock

Farmer Mac has had three series of preferred stock outstanding.  The first, Series A, was repurchased and retired on December 15, 2008.  The second, Series B, was repurchased and retired on January 25, 2010. Farmer Mac recognized a loss on the retirement of that preferred stock of $5.8 million.

Series C Preferred Stock has a par value of $1,000 per share, an initial liquidation preference of $1,000 per share and shall consist of up to 100,000 shares.  Series C Preferred Stock ranks senior to Farmer Mac's outstanding Class A voting common stock, Class B voting common stock, Class C non-voting common stock and any other common stock of Farmer Mac issued in the future.

Dividends on Series C Preferred Stock compound quarterly at an annual rate of 5.0 percent of the then-applicable liquidation preference per share.  The annual rate will increase to (1) 7.0 percent on the January 1 following the fifth anniversary of the applicable issue date and (2) 9.0 percent on the January 1 following the tenth anniversary of the applicable issue date.  Dividends on Series C Preferred Stock will accrue and cumulate from the applicable issue date whether or not declared by the board of directors and will be payable quarterly in arrears out of legally available funds when and as declared by the board of directors on each dividend payment date—March 31, June 30, September 30 and December 31 of each year.  Farmer Mac may pay dividends on Series C Preferred Stock without paying dividends on any outstanding class or series of stock that ranks junior to Series C Preferred Stock.

Farmer Mac has the right, but not the obligation, to redeem some or all of the issued and outstanding shares of Series C Preferred Stock at a price equal to the then-applicable liquidation preference beginning on the first anniversary of the applicable issue date and on each subsequent dividend payment date.  Farmer Mac's redemption right with respect to Series C Preferred Stock is subject to receipt of the prior written approval of FCA, if required.

Farmer Mac did not sell any shares of Series C Preferred Stock in 2011 or 2010.  This was due to the elimination of the requirement for business partners to purchase an equity interest in Farmer Mac in the fourth quarter of 2009.  Farmer Mac had 57,578 shares of Series C Preferred Stock outstanding as of December 31, 2011 and 2010, all held by CFC, a related party.

Non-Controlling Interest in Farmer Mac II LLC

On January 25, 2010, Farmer Mac completed a private offering of $250.0 million of securities issued by a newly formed Delaware statutory trust.  The trust securities represent undivided beneficial ownership interests in 250,000 shares of non-cumulative perpetual preferred stock (the "Farmer Mac II LLC Preferred Stock") of Farmer Mac's subsidiary, Farmer Mac II LLC, a Delaware limited liability company.  The Farmer Mac II LLC Preferred Stock has a liquidation preference of $1,000 per share.

Dividends on the Farmer Mac II LLC Preferred Stock will be payable if, when and as declared by Farmer Mac II LLC's board of directors, quarterly, on a non-cumulative basis, on March 30, June 30, September 30, and December 30 of each year.  For each quarterly period from the date of issuance to but excluding the payment date occurring on March 30, 2015, the dividend rate on the Farmer Mac II LLC Preferred Stock will be 8.875 percent per annum.  For each quarterly period from March 30, 2015 to but excluding the payment date occurring on March 30, 2020, the dividend rate on the Farmer Mac II LLC Preferred Stock will be 10.875 percent per annum.  For each quarterly period beginning on March 30, 2020, the dividend rate on the Farmer Mac II LLC Preferred Stock will be an annual rate equal to three-month LIBOR plus 8.211 percent.  Dividends on the Farmer Mac II LLC Preferred Stock are non-cumulative, so dividends that are not declared for a payment date will not accrue.  The Farmer Mac II LLC Preferred Stock is permanent equity of Farmer Mac II LLC and is presented as "Non-controlling interest – preferred stock" within permanent equity on the consolidated balance sheets of Farmer Mac.  Farmer Mac II LLC incurred $8.1 million of direct costs related to the issuance of the Farmer Mac II LLC Preferred Stock, which reduced the amount of non-controlling interest – preferred stock.  The accrual of declared dividends is presented as "Net income attributable to non-controlling interest – preferred stock dividends" on the consolidated statements of operations on a pre-tax basis.  The consolidated tax benefit is included in income tax expense.

Farmer Mac used part of the proceeds from the sale of $250.0 million of the Farmer Mac II LLC Preferred Stock to repurchase and retire the outstanding Series B Preferred Stock.

Equity-based Incentive Compensation Plans

Farmer Mac's 2008 Omnibus Incentive Compensation Plan authorizes the grants of restricted stock, stock options and SARs, among other alternative forms of equity-based compensation, to directors, officers and other employees.  SARs awarded to officers and employees vest annually in thirds and SARs awarded to directors vest fully after approximately one year.  If not exercised or terminated earlier due to the termination of employment or service on the Board, SARs granted to officers or employees expire after 10 years and those granted to directors expire after 7 years.  For all SARs granted, the exercise price is equal to the closing price of the Class C non-voting common stock on the date of grant.  SARs granted during 2011 have exercise prices ranging from $18.14 to $18.77 per share, SARs granted during 2010 have exercise prices ranging from $10.43 to $12.20 per share and SARS granted during 2009 have exercise prices ranging from $5.93 to $7.78 per share.  During 2011, 2010 and 2009, restricted stock awards were granted to directors with a vesting period of one year, and restricted stock awards were granted to officers vesting in three years provided certain performance targets are met.

The following tables summarize stock options, SARs and non-vested restricted stock activity for the years ended December 31, 2011, 2010 and 2009:

	For the Year Ended December 31,
	2011				2010				2009
	Stock Options and SARs		Weighted- Average Exercise Price		Stock Options and SARs		Weighted- Average Exercise Price		Stock Options and SARs		Weighted- Average Exercise Price
Outstanding, beginning of year	1,924,133		$	21.16	1,799,465		$	22.68	2,237,711		$	25.54
Granted	146,000		18.63		302,000		11.88		210,000		6.33
Exercised	(32,001	)	6.99		(26,998	)	11.96		—		—
Canceled	(711,066	)	25.83		(150,334	)	22.34		(648,246	)	27.27
Outstanding, end of year	1,327,066		$	18.72	1,924,133		$	21.16	1,799,465		$	22.68
Exercisable at end of year	914,743		$	21.12	1,434,544		$	24.59	1,398,262		$	25.17
	For the Year Ended December 31,
	2011				2010				2009
	Non-vested Restricted Stock		Weighted- Average Grant Date Fair Value		Non-vested Restricted Stock		Weighted- Average Grant Date Fair Value		Non-vested Restricted Stock		Weighted- Average Grant Date Fair Value
Outstanding, beginning of year	182,609		$	9.63	200,548		$	5.93	—		$	—
Granted	73,060		18.77		115,807		12.21		200,548		5.93
Canceled	(2,003	)	18.77		(11,599	)	8.15		—		—
Vested and issued	(57,590	)	12.33		(122,147	)	6.14		—		—
Outstanding, end of year	196,076		$	12.15	182,609		$	9.63	200,548		$	5.93

The cancellations of stock options, SARs and non-vested restricted stock during 2011, 2010 and 2009 were due either to unvested awards terminating in accordance with the provisions of the applicable stock option plans upon directors' or employees' departures from Farmer Mac, by voluntary forfeiture, or vested awards terminating unexercised on their expiration date.  

Farmer Mac receives cash when stock options are exercised. Cash is not received from exercises of SARs or the vesting and issuance of restricted stock. There were no exercises of stock options in 2011 or 2009. Farmer Mac received $0.2 million from the exercise of stock options during 2010.  During 2011 and 2010, the reduction of income taxes payable as a result of the deduction for the exercise of stock options and SARs and the vesting or accelerated tax elections of restricted stock was $0.5 million and $0.8 million, respectively.

During 2011 and 2010, Farmer Mac recorded reductions to additional paid-in capital of $0.2 million and $0.2 million, related to stock-based compensation awards.

During 2011, pursuant to Farmer Mac's policy that permits directors of Farmer Mac to elect to receive shares of Class C non-voting common stock in lieu of their cash retainers, Farmer Mac issued 1,283 shares of Class C non-voting common stock with a fair value of $24,000 to the four directors who elected to receive such stock in lieu of their cash retainers.  During 2010, Farmer Mac issued 4,417 shares of Class C non-voting common stock with a fair value of $44,000 to the seven directors who elected to receive such stock in lieu of their cash retainers.  During 2009, Farmer Mac issued 9,566 shares of Class C non-voting common stock with a fair value of $41,000 to the five directors who elected to receive such stock in lieu

of their cash retainers.  Fair values are determined based on the closing price of the Class C non-voting common stock as of each quarter end date.

The following tables summarize information regarding stock options, SARs and non-vested restricted stock outstanding as of December 31, 2011:

	Outstanding		Exercisable		Vested or Expected to Vest
Range of Exercise Prices	Stock Options and SARs	Weighted- Average Remaining Contractual Life	Stock Options and SARs	Weighted- Average Remaining Contractual Life	Stock Options and SARs	Weighted- Average Remaining Contractual Life
$5.00 - $ 9.99	236,999	7.3 years	172,004	7.2 years	227,499	7.3 years
10.00 - 14.99	300,333	8.3 years	99,005	8.3 years	272,865	8.3 years
15.00 - 19.99	196,786	7.6 years	50,786	2.6 years	181,945	7.5 years
20.00 - 24.99	168,789	3.2 years	168,789	3.2 years	168,789	3.2 years
25.00 - 29.99	400,159	3.8 years	400,159	3.8 years	400,159	3.8 years
30.00 - 34.99	24,000	5.8 years	24,000	5.8 years	24,000	5.8 years
	1,327,066		914,743		1,275,257
	Outstanding		Expected to Vest
Weighted- Average Grant-Date Fair Value	Non-vested Restricted Stock	Weighted-Average Remaining Contractual Life	Non-vested Restricted Stock	Weighted-Average Remaining Contractual Life
$5.00 - $ 9.99	75,000	0.2 years	67,500	0.2 years
10.00 - 14.99	51,000	1.2 years	45,900	1.2 years
15.00 - 19.99	70,076	1.1 years	60,577	1.1 years
	196,076		173,977

The weighted average exercise price of the 1,275,257 options and SARs vested or expected to vest as of December 31, 2011 was $18.97.

As of December 31, 2011 and 2010, the intrinsic value of options, SARs and non-vested restricted stock outstanding, exercisable and vested or expected to vest was $7.4 million and $6.2 million, respectively.  During 2011, the total intrinsic value of SARs exercised was $0.5 million.  During 2010, the total intrinsic value of options and SARs exercised was $0.2 million.  There were no exercises during 2009.  As of December 31, 2011, there was $2.6 million of total unrecognized compensation cost related to non-vested stock options, SARS and restricted stock awards.  This cost is expected to be recognized over a weighted-average period of 1.3 years.

The weighted-average grant date fair values of options, SARs and restricted stock awards granted in 2011, 2010 and 2009 were $15.35, $9.24 and $5.11 per share, respectively.  Under the fair value-based method of accounting for stock-based compensation cost, Farmer Mac recognized compensation expense of $3.0 million, $2.8 million and $2.7 million during 2011, 2010 and 2009, respectively.  

The fair values of stock options and SARs were estimated using the Black-Scholes option pricing model based on the following assumptions:

	For the Year Ended December 31,
	2011	2010	2009
Risk-free interest rate	2.2%	2.9%	1.6%
Expected years until exercise	6 years	7 years	7 years
Expected stock volatility	102.5%	91.5%	103.6%
Dividend yield	1.1%	1.8%	3.2%

The risk-free interest rates used in the model were based on the U.S. Treasury yield curve in effect at the grant date.  Farmer Mac used historical data to estimate the timing of option exercises and stock option cancellation rates used in the model.  Expected volatilities were based on historical volatility of Farmer Mac's Class C common stock.  The dividend yields were based on the expected dividends as a percentage of the value of Farmer Mac's Class C common stock on the grant date.

Since restricted stock awards will be issued upon vesting regardless of the stock price, expected stock volatility is not considered in determining grant date fair value.  Restricted stock awards also accrue dividends which are paid at vesting.  The weighted-average grant date fair value of the restricted stock awarded in 2011, 2010, and 2009 was $18.77, $12.21 and $5.93 per share, respectively, which was the closing price of the stock on the date granted.

Statutory and Regulatory Capital Requirements

Farmer Mac is subject to three statutory and regulatory capital requirements:

• Statutory  minimum capital requirement – Farmer Mac's statutory minimum capital level is an amount of core capital (stockholders' equity less accumulated other comprehensive income plus non-controlling interest - preferred stock) equal to the sum of 2.75 percent of Farmer Mac's aggregate on-balance sheet assets, as calculated for regulatory purposes, plus 0.75 percent of the aggregate off-balance sheet obligations of Farmer Mac, specifically including:   

◦ the unpaid principal balance of outstanding Farmer Mac Guaranteed Securities;

◦ instruments issued or guaranteed by Farmer Mac that are substantially equivalent to Farmer Mac Guaranteed Securities, including LTSPCs; and

◦ other off-balance sheet obligations of Farmer Mac.

• Statutory critical capital requirement – Farmer Mac's critical capital level is an amount of core capital equal to 50 percent of the total minimum capital requirement at that time.

• Risk-based capital requirement – Farmer Mac's charter directs FCA to establish a risk-based capital stress test for Farmer Mac, using specified stress-test parameters.

Farmer Mac is required to comply with the higher of the minimum capital requirement and the risk-based capital requirement.

As of December 31, 2011, Farmer Mac's minimum and critical capital requirements were $348.7 million and $174.3 million, respectively, and its actual core capital level was $475.2 million, which was $126.5 million above the minimum capital requirement and $300.9 million above the critical capital requirement as of that date.  As of December 31, 2010, Farmer Mac's minimum and critical capital requirements were $301.0 million and $150.5 million, respectively, and its actual core capital level was $460.6 million, which was $159.6 million above the minimum capital requirement and $310.1 million above the critical capital requirement as of that date.

Based on the risk-based capital stress test, Farmer Mac's risk-based capital requirement as of December 31, 2011 was $52.9 million, and Farmer Mac's regulatory capital (core capital plus the allowance for losses) of $492.7 million exceeded that amount by approximately $439.8 million.   As of December 31, 2010, Farmer Mac's risk-based capital requirement was $42.1 million, and Farmer Mac's regulatory capital of $480.7 million exceeded that amount by approximately $438.6 million.