Equity

12 Months Ended

Dec. 31, 2012

Equity [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 2012, Farmer Mac paid a quarterly dividend of $0.10 per share on all classes of the Corporation's common stock. During 2011 and 2010, Farmer Mac paid quarterly dividends of $0.05 per share on the Corporation's common stock.  On February 6, 2013, Farmer Mac's board of directors declared a quarterly dividend of $0.12 per share on the Corporation's common stock payable on March 29, 2013. Farmer Mac's ability to declare and pay a dividend could be restricted if it failed to comply with regulatory capital requirements.

Preferred Stock

As of December 31, 2012 and 2011, Farmer Mac had 57,578 shares of Series C Preferred Stock outstanding. On January 17, 2013, Farmer Mac redeemed and retired all of the outstanding Series C Preferred Stock from the proceeds received from the issuance of a new series of non-cumulative preferred stock on the same date. Prior to its redemption, dividends on Series C Preferred Stock compounded quarterly at an annual rate of 5.0 percent of the then-applicable liquidation preference per share, with the annual rate scheduled to increase to (1) 7.0 percent on January 1 following the fifth anniversary of the applicable issue date and (2) 9.0 percent on January 1 following the tenth anniversary of the applicable issue date. 

Series C Preferred Stock had a par value of $1,000 per share and an initial liquidation preference of $1,000 per share. Series C preferred stock was a component of Stockholder's Equity on the consolidated balance sheets and all outstanding shares were held by National Rural Utilities Cooperative Finance Corporation ("CFC"), a related party. The Series C Preferred Stock ranked senior to Farmer Mac's outstanding Class A voting common stock, Class B voting common stock, and Class C non-voting common stock. There were no sales of Series C Preferred Stock during 2012 and 2011.

Series B Preferred Stock was repurchased and retired on January 25, 2010. Farmer Mac recognized a loss on the retirement of that preferred stock of $5.8 million in 2010.

On January 17, 2013, Farmer Mac issued 2.4 million shares of 5.875% Non-Cumulative Preferred Stock, Series A (the "Series A Preferred Stock"). The Series A Preferred Stock has a par value of $25.00 per share, a liquidation preference of $25.00 per share and a dividend rate of 5.875%. Farmer Mac used the proceeds from the sale of the preferred stock to redeem and retire the outstanding shares of Series C Preferred Stock.

Farmer Mac's ability to declare and pay dividends on outstanding preferred stock could be restricted if it failed to comply with regulatory capital requirements. Farmer Mac's preferred stock is included as a component of core capital for regulatory and statutory capital compliance measurements.

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 II LLC may redeem the preferred stock on March 30, of 2015, 2016, 2017, 2018, and 2019 and on any payment date on or after March 30, 2020, in whole or in part, at a cash redemption price equal to the liquidation preference.

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 2012 have exercise prices ranging from $21.69 to $32.85 per share, SARs granted during 2011 have exercise prices ranging from $18.14 to $18.17 per share, and SARS granted during 2010 have exercise prices ranging from $10.43 to $12.20 per share.  During 2012, 2011, and 2010, 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, 2012, 2011, and 2010:

	For the Year Ended December 31,
	2012				2011				2010
	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	1,327,066		$	18.72	1,924,133		$	21.16	1,799,465		$	22.68
Granted	157,983		22.32		146,000		18.63		302,000		11.88
Exercised	(427,348	)	13.18		(32,001	)	6.99		(26,998	)	11.96
Canceled	(268,953	)	23.29		(711,066	)	25.83		(150,334	)	22.34
Outstanding, end of year	788,748		$	20.89	1,327,066		$	18.72	1,924,133		$	21.16
Exercisable at end of year	574,439		$	21.76	914,743		$	21.12	1,434,544		$	24.59
	For the Year Ended December 31,
	2012				2011				2010
	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	196,076		$	12.15	182,609		$	9.63	200,548		$	5.93
Granted	72,637		21.92		73,060		18.77		115,807		12.21
Canceled	(59,624	)	16.98		(2,003	)	18.77		(11,599	)	8.15
Vested and issued	(117,778	)	10.62		(57,590	)	12.33		(122,147	)	6.14
Outstanding, end of year	91,311		$	18.75	196,076		$	12.15	182,609		$	9.63

The cancellations of stock options, SARs, and non-vested restricted stock during 2012, 2011, and 2010 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. Farmer Mac received $2.9 million from the exercise of stock options during 2012 and $0.2 million during 2010.  There were no exercises of stock options in 2011. During 2012, 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 $3.4 million, $0.5 million, and $0.8 million, respectively.

During 2012, Farmer Mac recorded a net increase to additional paid-in capital of $1.4 million, compared to a net reduction of $0.2 million in 2011, and a net increase of $0.2 million in 2010, related to stock-based compensation awards.

Farmer Mac has a policy that permits directors of Farmer Mac to elect to receive shares of Class C non-voting common stock in lieu of cash retainers. During 2012, Farmer Mac issued 649 shares of Class C non-voting common stock with a fair value of $15,000 to the four directors who made that election. During 2011, 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 made that election.  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 made that election.  Fair values are determined based on the closing price of the Class C non-voting common stock as of the last business day of each quarter.

The following tables summarize information regarding stock options, SARs, and non-vested restricted stock outstanding as of December 31, 2012:

	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	64,999	6.3 years	64,999	6.3 years	64,999	6.3 years
10.00 - 14.99	160,997	7.4 years	102,004	7.4 years	151,431	7.3 years
15.00 - 19.99	95,916	7.5 years	38,583	6.1 years	88,821	7.4 years
20.00 - 24.99	174,821	6.0 years	85,821	2.5 years	166,430	5.8 years
25.00 - 29.99	259,032	4.4 years	259,032	4.4 years	259,031	4.4 years
30.00 - 34.99	32,983	6.2 years	24,000	4.8 years	32,354	6.1 years
	788,748		574,439		763,066
	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
$10.00 - $14.99	26,000	0.2 years	23,400	0.2 years
15.00 - 19.99	13,300	1.2 years	12,370	1.2 years
20.00 - 24.99	52,011	0.7 years	43,973	0.8 years
	91,311		79,743

The weighted average exercise price of the 763,066 options and SARs vested or expected to vest as of December 31, 2012 was $21.01.

As of December 31, 2012 and 2011, the intrinsic value of options, SARs, and non-vested restricted stock outstanding, exercisable, and vested or expected to vest was $11.4 million and $7.4 million, respectively.  During 2012, 2011, and 2010, the total intrinsic value of options and SARs exercised was $7.4 million, $0.5 million, and $0.2 million, respectively.  As of December 31, 2012, there was $2.1 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 2012, 2011, and 2010 were $16.73, $15.35, and $9.24 per share, respectively.  Under the fair value-based method of accounting for stock-based compensation cost, Farmer Mac recognized compensation expense of $2.5 million, $3.0 million, and $2.8 million during 2012, 2011, and 2010, 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,
	2012	2011	2010
Risk-free interest rate	1.1%	2.2%	2.9%
Expected years until exercise	5 years	6 years	7 years
Expected stock volatility	94.6%	102.5%	91.5%
Dividend yield	1.8%	1.1%	1.8%

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.

Because 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 2012, 2011, and 2010 was $21.92, $18.77, and $12.21 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 the Farm Credit Administration ("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, 2012, Farmer Mac's minimum and critical capital requirements were $374.0 million and $187.0 million, respectively, and its actual core capital level was $519.0 million, which was $145.0 million above the minimum capital requirement and $332.0 million above the critical capital requirement as of that date.  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.

Based on the risk-based capital stress test, Farmer Mac's risk-based capital requirement as of December 31, 2012 was $58.1 million, and Farmer Mac's regulatory capital (core capital plus the allowance for losses) of $535.9 million exceeded that amount by approximately $477.8 million.  As of December 31, 2011, Farmer Mac's risk-based capital requirement was $52.9 million, and Farmer Mac's regulatory capital of $492.7 million exceeded that amount by approximately $439.8 million.