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TRANSCRIPT
YANKEE FARM CREDIT, ACA 2012 ANNUAL REPORT
Contents
Chairperson and CEO’s Message .................................................................................................2
Five Year Summary of Selected Financial Data ............................................................................3
Management’s Discussion and Analysis .......................................................................................4
Directors and Senior Officers ..................................................................................................... 10
Report of Independent Auditors..................................................................................................16
Consolidated Financial Statements ............................................................................................. 17
Notes to Consolidated Financial Statements ...............................................................................21
Shareholder Disclosure Information ........................................................................................... 37
Certification Statement ..............................................................................................................39
Borrower Privacy Statement ...................................................................................................... 40
Office Locations ........................................................................................................................ 40
Young, Beginning and Small Farmers ........................................................................................ 41
Relationship with CoBank, ACB ................................................................................................ 42
Information about the Farm Credit System ................................................................................. 43
Employees ................................................................................................................................. 44
Directors ...................................................................................................................................45
Nominating Committee .............................................................................................................. 46
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YANKEE FARM CREDIT, ACA FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(in thousands)
CONSOLIDATED BALANCE SHEET Loans Less allowance for loan losses Net loans Cash Investment in CoBank, ACB Other assets
Total assets
2012
$ 385,100 4,788
380,312 2,522
13,583 6,137
$ 402,554
2011
$ 340,004 4,884
335,120 1,102
13,300 5,535
$ 355,057
2010
$ 336,406 4,617
331,789 1,488
13,187 5,424
$ 351,888
2009
$ 355,742 3,569
352,173 77
12,810 5,509
$ 370,569
$
$
2008
325,761 1,758
324,003 1,770
11,779 5,952
343,504
Note payable to CoBank, ACB Other liabilities
Total liabilities
$ 316,179 6,764
322,943
$ 273,562 5,679
279,241
$ 273,772 5,287
279,059
$ 296,058 4,593
300,651
$ 271,461 4,561
276,022
Stock and participation certificates Unallocated surplus Accum. other comprehensive (loss)
Total members' equity Total liabilities and members' equity
1,030 80,551 (1,970) 79,611
$ 402,554
993 76,798 (1,975) 75,816
$ 355,057
1,005 73,427 (1,603) 72,829
$ 351,888
992 70,104 (1,178) 69,918
$ 370,569 $
939 67,613 (1,070) 67,482
343,504
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Net interest income $ 12,414 $ 11,775 Provision for credit losses 84 437 Non-interest income 3,361 2,607 Non-interest expense 7,017 6,906 Provision for income taxes 3 3
$ 11,406 1,067 3,018 6,373
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$ 10,822 1,812 2,536 6,481
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$ 9,031 781
2,193 5,900
2 Net income Comprehensive Income
$ 8,671 $ 8,676
$ 7,036 $ 6,664
$ 6,982 $ 6,557
$ 5,064 $ 4,955
$ $
4,541 3,846
KEY FINANCIAL RATIOS Return on average assets Return on average members' equity Net interest margin Members' equity to assets Debt to members' equity Net charge-offs (recoveries) to avg. loans Allowance for loan losses to loans
and accrued interest receivable Permanent capital ratio Total surplus ratio Core surplus ratio
2.3% 11.0%
3.6% 19.8%
4.1:1 0.03%
1.2% 19.9% 19.6% 19.4%
2.0% 9.4% 3.6%
21.4% 3.7:1
(0.00%)
1.4% 20.6% 20.3% 20.3%
1.9% 9.6% 3.4%
20.7% 3.8:1
0.01%
1.4% 19.3% 19.0% 19.0%
1.4% 7.3% 3.3%
18.9% 4.3:1
0.00%
1.0% 17.4% 17.1% 16.9%
1.5% 6.6% 3.1%
19.6% 4.1:1
(0.01%)
0.5% 19.2% 18.9% 18.7%
Net income distributed as patronage in the following year: Cash $ 4,918 $ 3,664 $ 3,659 $ 2,573 $ 2,790
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YANKEE FARM CREDIT, ACA
Management’s Discussion and Analysis of Financial Condition and Results of Operations
For the Years Ended December 31, 2012, 2011 and 2010 (Dollars in thousands, except as noted)
FORWARD LOOKING STATEMENTS
This annual report contains forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Words such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or other variations of these terms are intended to identify the forward-looking statements. These statements are based on assumptions and analyses made in light of experience and other 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: weather-related, disease, and other adverse climatic or biological conditions that periodically occur that impact agricultural productivity and income; economic fluctuations in the agricultural, rural utility, international, and farm-related business sectors; changes in United States government support of the agricultural industry; political, legal, regulatory and economic conditions and developments in the United States and abroad; and actions taken by the Federal Reserve System in implementing monetary policy.
RESULTS OF OPERATIONS
Net income in 2012 was $8.671 million, an increase of $1.635 million (23.2%) from 2011.
The most significant factors contributing to increased net income in 2012 were:
Net interest income was $639 thousand more in 2012. This is discussed in more detail below.
The provision for credit losses was $353 thousand lower in 2012. The improvement of credit quality, which was offset by a slight increase in loan volume, contributed to this lower provision for credit losses. More detail on the provision for credit losses is given
below.
Other income, inclusive of patronage refunds from CoBank and refunds from the Farm Credit System Insurance Corp (FCSIC) was $754 thousand higher in 2012. More detail on this is given below.
Other expenses were $111 thousand higher in 2012. This is discussed in more detail below.
The return on average assets (ROA) was 2.3% in 2012 as compared to 2.0% in 2011 and 1.9% in 2010. Return on average members’ equity (ROE) was 11.0% in 2012 as compared to 9.4% in 2011 and 9.6% in 2010.
The Association declared a patronage distribution of $4.918 million based on 2012 earnings, to be distributed 100% in cash in March 2013. The patronage distribution for 2011 (distributed in 2012) was $3.664 million, 100% cash, and the patronage distribution for 2010 (distributed in 2011) was $3.659 million, 100% cash.
The major changes in the components of net income are shown in the following table:
Effect on net income Increase (decrease) 2012 vs. 2011 2011 vs. 2010
Net interest income $ 639 $ 369 Provision for credit losses 353 630 Patronage refunds from CoBank 199 39 Refunds from FCSIC 393 (390) Other income, exclusive of patronage refunds from CoBank and FCSIC refunds 162 (60) Other expense (111) (533) Provision for income taxes (0) (1) Total increase (decrease) in net
income $ 1,635 $ 54
Net interest income: In 2012, net interest income was $12.414 million, an increase of $639 thousand (5.4%) from 2011. The following table shows the principal components of net interest income before the provision for credit losses. Interest earning assets consist of accrual loans, and interest bearing liabilities consist of the note payable to CoBank.
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2012 2011 2010 Interest income on interest earning assets $ 14,682 $ 14,060 $ 14,111 Interest expense on interest bearing liabilities 2,273 2,525 3,124 Subtotal 12,409 11,535 10,987 Interest income on nonaccrual loans (3) 94 48 Interest rate swap income 8 146 371 Net interest income before the provision for credit losses $ 12,414 $ 11,775 $ 11,406
The “subtotal” above can be analyzed in terms of changes in volumes and rates on interest earning assets and interest bearing liabilities. The following table summarizes the applicable volumes and rates. All numbers are averages for the year.
2012 2011 2010 Volumes: Interest earning assets $ 348,858 $ 325,424 $ 339,721 Interest bearing liabilities 285,057 265,755 283,079 Loanable equity $ 63,801 $ 59,669 $ 56,642
Rates: Interest earning assets 4.21% 4.32% 4.15% Interest bearing liabilities 0.80% 0.95% 1.10% Interest rate spread 3.41% 3.37% 3.05%
The following table shows the effects of the above changes in volumes and rates on net interest income:
Effect on net interest income* increase(decrease) 2012 vs. 2011 2011 vs. 2010
Due to changes in volumes $ 827 $ (427) Due to changes in interest rates 47 975 Total increase in net interest income* $ 874 $ 548 *considering interest earning assets & interest bearing liabilities only
Net interest margin (net interest income as a percent of average earning assets) was 3.6% in 2012, as compared to 3.6% in 2011 and 3.4% in 2010.
Provision for credit losses: There was a net provision for credit losses of $84 thousand consisting of a $8 thousand increase to the allowance for loan losses and addition of $76 thousand to the reserve for unfunded commitments. The 2012 net provision for credit losses of $84 thousand compares to a net provision of $437 thousand in 2011 and a net provision of $1.067 million in 2010. The decrease in the net provision in 2012 is due to an improvement in credit quality.
The net provisions made in 2010 consisted entirely of additions to the allowance for loan losses. In 2011, for the first time, the Association established a reserve for unfunded commitments in the amount of $174 thousand. The reserve for unfunded commitments is included in “Other Liabilities” on the Association’s consolidated balance sheet.
Patronage refunds from CoBank: Patronage refunds from CoBank consisted of the following:
2012 2011 2010 Patronage refunds on the Association’s note payable to CoBank $ 1,283 $ 1,194 $ 1,274 Patronage refunds on participation loans sold to CoBank 554 444 325 Total $ 1,837 $ 1,638 $ 1,599
See Note 4 to the Consolidated Financial Statements, “Investment in CoBank, ACB,” for additional information about the patronage relationship between the Association and CoBank.
Refunds from Farm Credit System Insurance Corp: In 2012, we received $393 thousand in refunds from the Farm Credit System Insurance Corp (Fund). The fund is required by statute to maintain a secure base amount equal to 2% of the System’s insured debt. When the fund exceeds that base, FCSIC is required to reduce premiums and may refund excess amounts.
In 2011, we did not receive a refund from FCSIC related to the Fund.
In 2010, we received $390 thousand in refunds from FCSIC related the Fund.
Other income, exclusive of patronage refunds from CoBank and refunds from FCSIC: In 2012, this category increased by $162 thousand (16.7%) as compared to the prior year. The increase is primarily due to an increase in fees received for financial services (credit life insurance and crop insurance).
Other expense: In 2012, this category increased by $111 thousand (1.6%), primarily due to the $226 thousand increase in salaries and employee benefits that were mostly offset by a decrease in other expenses of $111 thousand.
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Provision for income taxes: The provision for (benefit from) income taxes consisted of the following:
2012 2011 2010 Provision for (benefit from) income taxes $ 3 $ 3 $ 2
See Note 8 to the Consolidated Financial Statements, “Income Taxes,” for more detail.
LOAN PORTFOLIO
Year-end 2012 loan volume was $385.1 million, which was $45.1 million (13.3%) higher than at year-end 2011. The increase in loan volume is primarily due to new member loan volume and an increase in purchased participations. Average loan volume in 2012 was $353.8 million, which was $22.9 million (6.9%) higher than in 2011. In 2011, year-end loan volume increased by $3.6 million (1.1%) from year-end 2010, while average loan volume for the year decreased by $14.1 million (4.1%).
The loan portfolio continues to be primarily concentrated in the dairy industry, with 56% of loans invested in dairy businesses at December 31, 2012. The second largest concentration is timber, with 12% of the loan portfolio. Loans to farm related businesses represent 7% of the loan portfolio, while maple represents 5% of the portfolio. Fruit & vegetables represent 4% of the loan portfolio, while part-time farmers and livestock both represent 3% of the portfolio. The remaining 10% of the loan portfolio includes rural homeowners and a variety of other miscellaneous agricultural operations, as well as most of the purchased participation loans, with no single category comprising more than 3% of the loan portfolio.
Loans by Industry 3%4% 3% 12/31/12
Dairy Timber Farm Related Business Maple Fruit & Vegetables Part-Time Farmers Livestock Other
Included in loans are purchased participation loans of $18.4 million (4.8% of the portfolio). These loans are primarily categorized as marketing and processing ($7.6 million), and utilities ($2.0 million) which are included in the industry category other. The remaining balance of participation loans are in farm related business ($6.7
56%
12%
5% 10%
7%
million), timber ($1.5 million), and dairy ($607 thousand) which are included in the corresponding categories above. At December 31, 2011, the two most significant industry concentrations were dairy (58%) and timber (12%). Loans to farm-related business represented 6% of the loan portfolio, while livestock, fruit & vegetables, and maple each represented 4% of the loan portfolio.
See Note 3 to the Consolidated Financial Statements, “Loans and Allowance for Loan Losses,” for additional information about the Association’s loan portfolio, including the volume of loans to each of the above-mentioned industries.
The dairy industry experienced lower prices in 2012 following higher prices in 2011 and 2010. The outlook for 2013 is for increasing prices.
Avg. Price Change From Avg. Price Change From Year w/o premium Prior Year with premium Prior Year 2012 $18.54 (9%) $19.22 (6%) 2011 20.42 21% 20.42 21% 2010 16.85 30% 16.87 20% 2009 12.92 (32%) 14.07 (27%) 2008 19.16 -- 19.16 (1%) 2007 19.25 42% 19.30 36% 2006 13.56 (14%) 14.14 (10%) 2005 15.77 (3%) 15.78 (5%)
(Prices quoted are the Federal Order 1 statistical uniform price for milk delivered to Boston, in $/cwt. Average prices for the year are the December-November prices, reflecting payments received by farmers in January-December. The “premium” referenced above is the Milk Income Loss Contract, which presently applies to only the first 2.985 million pounds of milk produced annually.)
The improved milk prices have been accompanied by an increase in the cost of farm inputs, particularly purchased feed. The composite Feed Index published by the USDA was 265 for 2012, up 18% from 225 in 2011 (revised).
Our loan portfolio is geographically diversified throughout our assigned territory, which consists of all of Vermont, four counties in western New Hampshire, and two counties in northeastern New York. As of December 31, 2012, approximately 72% of our loan volume was with Vermont borrowers, 13% with New Hampshire borrowers, and 10% with New York borrowers.
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Loan 10% Volume by State 13% 5%
12/31/12
Vermont New Hampshire New York Other
72%
There are several ways to examine the quality of the Association's loan portfolio. One measure of loan quality is to consider the level of “high risk assets.” High risk assets include the following:
Nonaccrual loans. These are loans for which it is probable that all principal and interest will not be collected according to the contractual terms. The Association does not record interest income on these loans on an accrual basis. Delinquent loans will generally be classified as nonaccrual when they become 90 days past due.
Accrual loans 90 days or more past due. These are loans on which the Association is recording interest on an accrual basis, even though they are severely past due. Such loans are adequately secured and in the process of collection.
Accrual restructured loans. These are loans on which the Association is recording interest on an accrual basis, but the Association has made a monetary concession to the borrower, such as a below-market interest rate or a reduction in principal or interest owed. Such loans are usually former nonaccrual loans on which the contractual terms have been modified, and which are now performing under the new contractual terms.
Other property owned (OPO). This is property formerly owned by a borrower and typically offered as security for a loan, but now owned by the Association as the result of a default on the loan. Other property owned is usually acquired by the Association through a foreclosure action, a deed in lieu of foreclosure, or other legal action.
All loans that do not fall into one of these categories are considered performing loans.
The following table shows loans plus other property owned, classified according to the above categories. By this measure, loan quality improved slightly in 2012.
December 31, 2012 2011 2010
Performing loans 98.5% 98.4% 97.9% High risk assets Nonaccrual loans 1.3% 1.5% 2.0%
Loans 90+ days past due 0.0% 0.0% 0.0% Restructured loans 0.2% 0.1% 0.1% OPO 0.0% 0.0% 0.0% Total high risk assets 1.5% 1.6% 2.1% Total loans + OPO 100.0% 100.0% 100.0% Percentages based on volume.
Another measure of loan quality is to consider the credit classification of loans according to the Uniform Classification System. By this measure, loan quality improved slightly in 2012. The following table includes all loans (including nonaccrual loans), but not other property owned.
December 31, Credit Classification: 2012 2011 2010 Acceptable 91.2% 90.1% 87.7% OAEM* 4.3% 5.0% 5.2% Substandard 4.4% 4.9% 7.1% Doubtful 0.1% 0.0% 0.0% Loss 0.0% 0.0% 0.0% Total loans 100.0% 100.0% 100.0% Percentages based on volume. *Other Assets Especially Mentioned
Two additional measures of loan quality are the delinquency rate and loan charge-offs. The average delinquency rate for the year decreased during 2012 and was well below our internal goals. There was one charge off of $110 thousand and one net recovery of $6 thousand in 2012.
2012 2011 2010
Accrual loans 30 days or more past due (as % of total accrual loans) At December 31 0.3% 0.5% 0.3% Average for the year 0.4% 0.5% 0.8%
Net loan charge-offs (recoveries) Amount $ 104 $ (4) $ As % of average loans 0.03% (0.00%) 0.01% Percentages based on volume.
Taking all of these measures together, loan quality improved slightly in 2012. Overall loan quality at December 31, 2012 was at a satisfactory level and met all internal goals established by the Association.
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ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at year end was $4.788 million, as compared to $4.884 million in 2011, and $4.617 million in 2010. The $96 thousand reduction in the allowance in 2012 consists of an $8 thousand provision for the allowance for loan losses, offset by a charge-off of $110 thousand and a recovery of $6 thousand.
See Note 3 to the Consolidated Financial Statements, “Loans and Allowance for Loan Losses,” for additional information about the allowance for loan losses, including a summary of activity in the account.
FUNDING SOURCES, LIQUIDITY AND INTEREST RATE RISK
The Association obtains funds by borrowing from CoBank on a revolving line of credit. The funding relationship with CoBank is governed by a General Financing Agreement (GFA). The amount borrowed is expected to remain below 90% of the “borrowing base amount” as defined in the GFA. If this ratio should equal or exceed 92%, CoBank is allowed under the GFA to take certain actions against the Association. At December 31, 2012, this ratio was 82.8%, as compared to 81.5% and 82.9% at December 31, 2011 and 2010, respectively. Because the funding relationship with CoBank provides sufficient liquidity, the Association does not maintain large balances in cash or other liquid investments.
The Association attempts to limit interest rate risk by matching the interest rate characteristics of its debt with the interest rate characteristics of its loans. The Association offers both variable and fixed rate loans. At the end of 2012, the accrual loan portfolio consisted of approximately 89% variable rate loans and 11% fixed rate loans. The interest rate charged to the Association on debt used to fund the fixed rate loans is itself a fixed rate, which limits interest rate risk on that portion of the portfolio. The interest rate charged to the Association on the remaining debt is a variable rate, but the Association has the ability to change the variable rate charged to borrowers as needed.
The Association funds approximately 82% of its loans with debt as described above. The remaining 18% is funded with equity. This has the effect of making the Association sensitive to interest rates as follows: if interest rates rise and all other factors remain equal, the Association’s net interest income will increase; and, conversely, if interest rates fall and all other factors remain equal, the Association’s net interest income will decrease.
At December 31, 2012, the weighted average rate of interest charged to the Association by CoBank was 0.73%.
INTEREST RATE SWAPS
The Association enters into derivative financial instruments known as “receive fixed” interest rate swaps. The purpose of this interest rate swap strategy is to reduce the volatility of net interest income. As noted above, because the Association’s equity is used to fund loans, net interest income will be higher when interest rates are higher, and lower when interest rates are lower, all other factors being equal. On the other hand, income from receive fixed swaps will increase when interest rates decrease, and decrease when interest rates increase, all other factors being equal. These two factors will tend to offset each other. The counterparty to the Association’s swaps is CoBank.
In light of an expected unfavorable pay/receive price relationship, we have suspended further participation in the swap program.
In 2012, the effect of these interest rate swaps on the consolidated statement of income was a decrease in interest expense in the amount of $8 thousand. In 2011, the effect was a decrease in interest expense of $146 thousand, and in 2010, the effect was a decrease in interest expense of $371 thousand.
See Note 15 to the Consolidated Financial Statements, “Derivative Instruments,” for additional information about the Association’s interest rate swaps.
MISSION RELATED INVESTMENTS
The Farm Credit Act states that the mission of the Farm Credit System is “to provide for an adequate and flexible flow of money into rural areas.” To further this mission to serve rural America, the System has initiated mission related programs and other mission related investments approved by the Farm Credit Administration (FCA). The Association has invested in two mission related investment programs.
In 2006, the Association invested in Vermont Capital Partners, LP. Vermont Capital Partners, LP is a joint venture between the Vermont Economic Development Authority (VEDA) and Brook Venture Partners, an investment company in the Boston area.
In 2011, the Association invested in FarmStart, LLP. FarmStart, LLP is an initiative pioneered by Farm Credit East and CoBank to make investments in startup farming
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operations (starter farmers). The goal of FarmStart is to provide working capital to help startup farmers establish a positive business and credit history during the early phases of their business careers. Within five years, recipients should be positioned to graduate to a conventional loan.
At December 31, 2012, the Association’s net investment in these programs was $751 thousand.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income consists of three components: the fair value of swaps less ineffectiveness and the effect of Financial Accounting Standard Board (FASB) guidance on pensions and post retirement health care. The guidance requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and recognize changes in that funded status in the year in which the changes occur through other comprehensive income. The components of accumulated other comprehensive income are detailed below:
December 31, 2012 2011 2010
Swaps Pension Post-Retirement Healthcare
$ 0 $ (1,803)
(167)
8 $ (1,828)
(155)
145 (1,571)
(177) Total Accumulated Other Comprehensive Income $ (1,970) $ (1,975) $ (1,603)
CAPITAL RESOURCES
Members’ equity was 19.8% of assets at December 31, 2012, as compared to 21.4% and 20.7% at the end of 2011 and 2010, respectively.
The primary measure of capital adequacy is the permanent capital ratio as defined by the FCA. At December 31, 2012, the Association's permanent capital ratio was 19.9% as compared to 20.6% at December 31, 2011 and 19.3% at December 31, 2010. The Association continues to exceed all capital requirements of both FCA and ACB. Additionally, the Association sets internal goals for all capital requirements. We did not meet the permanent capital ratio goal as of December 31, 2012 due to loan volume exceeding goal at the time the capital ratio goal was determined.
See Note 7 to the Consolidated Financial Statements, “Members’ Equity,” for additional information about the Association’s capitalization policies, equities, and regulatory capitalization requirements.
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YANKEE FARM CREDIT, ACA DIRECTORS AND SENIOR OFFICERS
DIRECTORS
The Association has a Board of 11 directors. Nine directors (the “elected directors”) are elected by and from the voting members of the Association. The nine elected directors select two additional directors:
The “outside director” may not be a member of the Association.
The “appointed director” is a member of the Association.
Prior to 2012 the Association had two outside directors. The Board amended the Bylaws in 2011 to allow either two outside directors or one outside director and one appointed director. The Farm Credit Administration has encouraged institutions to use appointed directors to achieve diversity on the board.
No. of Region Directors Territory
1 3 NY: Clinton, Essex VT: Chittenden, Franklin, Grand Isle
2 3 NH: Coos, Grafton VT: Caledonia, Essex, Lamoille,
Orange, Orleans, Washington 3 3 NH: Cheshire, Sullivan
VT: Addison, Bennington, Rutland, Windham, Windsor
The nine elected directors are elected by region:
Rocklyn A. Giroux, Chairperson (Region 1) Rocklyn A. Giroux, age 68, has served as director since 2003. His current term expires in 2015. He co-owns Adirondack Farms LLC in Peru, New York, with Jon Rulfs and Jake Swyers. The dairy farm has 1,900 milking cows and raises all of their crops on 3,600 acres of land. From 1972 to 1995, Mr. Giroux operated Giroux Bros. Inc., a John Deere dealership in Plattsburgh and Malone, New York. From 1985 to 1986 he was President of the New York Equipment Dealers Association. Mr. Giroux is a board member for Clinton County’s One Work Force, a board member of Mountain View Equipment LLC. He is also on the board of Trustees at the William H. Miner Agricultural Research Institute in Chazy, New York. In addition, Mr. Giroux is a fire commissioner for Beekmantown Fire Department in Plattsburgh, where he resides with his wife Chris. He and Chris enjoyed raising their five children and now enjoy being grandparents to their ten grandchildren.
Alan J. Bourbeau, Vice Chairperson (Region 1) Alan J. Bourbeau, age 53, has served as a director since 2007. His current term expires in 2013. Mr. Bourbeau owns and operates a third generation farm that is located on the Pond Road in Swanton, Vermont. Mr. Bourbeau and his wife Kimberly have been married for thirty-two years and have three children: Nicole, Justin and Eric; and two granddaughters, Evony & Natalie with another grandchild expected in April 2013. Mr. Bourbeau, along with his two sons, operates Bourbeau & Sons, Inc. which has a 240 cow milking herd and raises all its own replacement livestock. Prior to 2007, Mr. Bourbeau and his family had sold sap to a nearby sugarhouse. In 2007, Mr. Bourbeau and his family built a sugarhouse and expanded the sugar woods, which yields 29,000 taps, to make their own syrup from the maple trees on their farmland. Along with managing Bourbeau & Sons, Inc., Bourbeau Farm LLP, and Greens Corners Maple Products, Mr. Bourbeau has served his community the following ways: nine years with the Swanton Planning Commission, seven years as Chairman; eighteen years as Franklin County Field Days Director, Vice-Chairman for the last four years; six years as a Young Cooperator Member for the St. Albans Cooperative; twelve years as a member and officer of the St. Albans Elks Lodge #1566, Exalted Ruler for the 2004-2005 year and Chairman of the Trustees for the last four years; and seven years as the President of the former Sheldon Jack O’Lopes snowmobile club.
Thomas J. Colgan (Appointed Director) Thomas J. Colgan, age 59, was appointed as a director in 2012. His current term expires in 2015. Mr. Colgan is President and CEO of Wagner Forest Management, Ltd. of Lyme, NH, a position he has held since 1994. He previously worked for Scott Paper Company in Maine. Mr. Colgan holds multiple degrees from Duke University, including an M.S. in forestry. While Yankee’s second largest industry concentration is the timber industry, the Association has not previously had a director from this industry. Mr. Colgan is the Association’s first appointed director, and the first director to represent the timber industry.
Bryan E. Davis (Region 2) Bryan E. Davis, age 58, is finishing his first term on the board, his current term expires 2013. He has owned and operated Grand View Farm in Derby Line with his wife Susan since 1978. They have been a borrower of Yankee since their first day on the farm. The farm consists of 135 milkers and 150 head of replacement cattle. They have a son, two daughters, and a granddaughter. Their son Jeremy has
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come back to the farm after four years of college and has taken a keen interest in details and the fine tuning of the dairy operation. They also operate a 4500 tap sugaring operation. The dairy includes a small wind turbine which has supplied about 20 – 30% of the electricity needs for the past 8 years. Bryan holds an associate’s degree in forestry management and land surveying from Paul Smiths College. He is currently a director of the St. Albans Cooperative Creamery and holds the office of treasurer and is chairman of the quality committee. He also serves as vice chairman of the New England Dairy Promotion Board and is a director of The United Dairy Industry Association. Closer to home, Bryan is chair of the local school board in Derby, a member and past president of the Orleans County Farm Bureau, and a member of The Elks Club, Orleans County Sugarmakers, and The Vermont Sugarmakers.
Dr. Rocki-Lee DeWitt (Outside Director) Dr. Rocki-Lee DeWitt, age 56, has served as a director since 2004. Her current term expires in 2016. She received her Ph.D. from Columbia University in strategic management and an M.S. in Agricultural Economics from the Ohio State University. Dr. DeWitt is a Professor of Management at the University Of Vermont School Of Business Administration. She conducts research on strategies for sustaining businesses in periods of adversity and has served as a business advisor to multiple family businesses. Her professional affiliations include the Academy of Management and the Strategic Management Society. She is a member of the Board of Directors of the Greater Burlington Industrial Council. Dr. DeWitt has been previously employed as Dean of School of Business Administration at the University of Vermont, Associate Dean of Professional Master’s Programs at the Pennsylvania State University and as agricultural parts sales manager with Case-IH. Raised on a dairy farm in Accord, NY, Dr. DeWitt was a 4-H member for 10 years. Dr. DeWitt and her life partner, Josephine Herrera, reside in Charlotte, Vermont.
Paul B. Franklin (Region 3) Paul B. Franklin, age 60, is just completing his first year on the board; his current term expires in 2014. Paul grew up on a small dairy farm in Plainfield, NH. After graduating from the University of New Hampshire, Paul and his wife Nancy started a pick-your-own (PYO) strawberry operation. Now 38 years later (and with the enlisted help of their three children along the way), they own and operate Riverview Farm in Plainfield, NH. Riverview Farm consists of a 45 acre fruit and vegetable operation specializing in PYO apples, blueberries, raspberries and pumpkins. Paul manages the field operations and cider pressing while Nancy oversees the retail barn, PYO and school tours. In addition, they own a 170 acre wood lot managed for timber and firewood production, recreation and wildlife habitat. Both tracts are
protected by conservation easements held by the State of New Hampshire and the Society for the Protection of New Hampshire Forests. For 22 years, Paul was a member and chairman of the New Hampshire Board of Tax and Land Appeals which has concurrent jurisdiction with Superior Court to hear property tax appeals including current use, state tax appeals and determination of just compensation in state and municipal eminent domain actions. He is currently on the board of directors of the New Hampshire Fruit Growers Association and a director on SPACE, the New Hampshire current use advocacy organization. He was formerly a director of the Norwich Farmers Market and on the UNH Cooperative Service Advisory Council for Sullivan County. Paul is presently Plainfield’s moderator and has been a selectman, planning board member and supervisor of the checklist.
Walter M. Gladstone (Region 2) Walter M. Gladstone, age 51, has served as director since 2008. His current term expires in 2014. Walt lives in Bradford, VT with his wife, Margaret. Walt and Margaret own and operate Newmont Farm, LLC and have three sons, Will, John and Matt. Over the years, Newmont Farm has grown from 80 cows in 1988 to currently milking around 1000 cows. The Gladstone’s also grow over 150 acres of pumpkins that are wholesaled locally and in the New England area. Will, the oldest son, graduated from VTC and is currently the herdsman and helps with the day to day operations. Will is married to Brooke and they recently had their first child, Hannah. Matt is studying Diesel Tech at SUNY Cobleskill. John is currently hauling logs, and trucking different material for Newmont Farm. Upon graduating from high school, Matt worked for a crop crew out west. Walt recently served as President of the New England Family Dairy Farms Cooperative.
Celeste Kane-Stebbins (Region 1) Celeste Kane-Stebbins, age 57, has served as director since 2008. Her current term expires in 2014. Celeste is a native of Sheldon, Vermont. She and her husband, Greg, became Farm Credit customers in 1976 when they purchased their first dairy farm with a loan from the Federal Land Bank of Springfield. Since then they’ve expanded their business through the purchase of Celeste’s parents’ farm in 1993 and a neighboring farm in 2003; they also lease two additional farms for crop land. Their son, Sean, joined the business full-time in 2008. Stebbinshire Farms, Inc. employs four full-time and four part-time employees. They milk approximately 275 head and raise all replacements. Greg and Celeste are currently expanding their 4500-tap maple operation and sell logs, and firewood. Today, Celeste’s primary responsibilities include bookkeeping, payroll, and tax preparation.
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In addition to her farm jobs, Celeste works full-time as the Emergency Department Clinical Resource Nurse at Northwestern Medical Center in St. Albans. Celeste earned a B.S. from the University of Vermont and an M.S. from the University of Phoenix. She is the mother of four children.
Celeste currently serves on the Sheldon School Board, the Franklin County Farm Bureau Board of Directors, and the Cold Hollow Career Center Health Advisory Board.
Bradley N. Maxwell (Region 2) Bradley N. Maxwell, age 57, grew up in Coventry, VT, on the dairy farm that his parents started in 1959. He now owns and operates Maxwell’s Neighborhood Farm along with his three brothers, Stewart, Jeff, and Anthony. Brad and his family have been with Yankee Farm Credit for three generations. Over the past fifteen years, the farm has grown from a 120-cow dairy to the current herd of 800 milking cows and 700 head of youngstock. Brad and his wife Jean have four children; their oldest son, Matthew, began working on the farm as a full time employee in 2007. Ever expanding and diversifying, Neighborhood Farm’s methane digester began operation in late 2008, and the compost byproduct will be sold in the spring. The farm’s newest venture is a small sugaring operation and also a greenhouse. Neighborhood Farm also employs two of Brad’s nephews, as well as 5 other full-time employees.
In addition to his work on the farm, Brad has been an integral part of the local and agricultural communities over the past 20 years. He’s been an elementary and high school basketball coach and a member of the Coventry Selectboard, as well as serving on the New England Dairy Promotion Board.
Paul F. Saenger (Region 3) Paul F. Saenger, age 57, has served as director since 2007. His current term expires in 2013. Mr. Saenger left a career as an assistant professor at UVM in 1987 to pursue a lifetime goal of farming. He and his wife Rene own and operate Cream Hill Farm in Shoreham, Vermont. They finish 2,200 head of beef steers and heifers on purchased concentrates and forages grown on 1,600 acres of owned land. Mr. Saenger earned a Bachelor’s and Master’s from the University of Illinois, and a Ph.D. from Purdue University in animal nutrition and management. Since graduating and moving to Addison County in 1982, Farm Credit has been his only lender. After 26 years, Mr. Saenger felt it was time to give back to the organization that facilitated Cream Hill Farm’s success. Mr. Saenger served as Shoreham Town Auditor and is currently Selectboard Chair. He has also served on the Otter Creek Conservation District and the Governor’s Commission on Groundwater and Animal Care Standards. The Saengers also own the stone house at Larrabee’s Point as well as the M/V Carillon, a 60’ cruise vessel offering tours
and charters on Lake Champlain. They have four adult children.
Stephen H. Taylor (Region 3) Stephen H. Taylor, age 73, has served as director since 2009. His current term expires in 2015. Steve lives in the Meriden Village section of Plainfield, NH, where he farms with his three sons, Jim, Bill and Rob. Their farm, begun in 1970, currently includes a 60-cow dairy herd, 7,000-tap maple operation and a cheese making venture. From 1982 until 2007 Mr. Taylor served as New Hampshire’s commissioner of agriculture, prior to that he worked many years as a daily newspaper reporter and editor and as a freelance writer for agricultural, forestry and other publications, in addition to developing the family farm enterprise.
Mr. Taylor has served on many community and state-level boards and committees, and currently he is a director of the Cornish Fair Association, trustee of the Society for Protection of New Hampshire Forests and Eastern States Exposition. He is a 4-H Club leader and grandfather of seven.
BOARD COMMITTEES
The Board of Directors has established four standing committees. Each committee is governed by a formal charter. The directors serving on each committee as of December 31, 2012 are indicated on page 45.
Audit Committee
The purpose of this committee is to assist the Board in fulfilling its fiduciary and oversight responsibilities for the financial reporting process, the systems of internal controls, the audit process, and the Association’s process for monitoring compliance with laws, regulations, policies, standards of conduct, and public responsibilities.
This committee consists of five directors. This committee met four times in 2012 in person. The chairperson of this committee is Dr. DeWitt, the outside director. No member of this committee also serves on the Executive Committee.
Compensation Committee
The purpose of this committee is to review the performance of the President/CEO and recommend to the full Board appropriate compensation for the President/CEO. The Committee also approves the overall compensation plan for senior officers. This committee consists of five directors, and met twice in 2012. The chairperson of this committee is Ms. Kane-Stebbins.
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Executive Committee
The purpose of this committee is to approve or deny credit in specific situations. The committee is further charged with making decisions on non-credit issues as directed by the Board. This committee consists of five directors and met 19 times in 2012, mostly by conference call. The chairperson of this committee is Mr. Giroux. No member of this committee also serves on the Audit Committee.
Membership/Governance Committee
The purpose of this committee is to oversee the Board nomination and election process, as well as Board conduct, compensation, credit quality, performance, and governance practices. Additionally, this committee considers membership issues, including member/applicant appeals of adverse credit decisions. This committee consists of five directors and met two times in 2012. The chairperson of this committee is Mr. Bourbeau.
SENIOR OFFICERS
George S. Putnam (President and CEO) George S. Putnam, age 57, has been employed by the Association (or one of its predecessors) since 1984. He was hired as a Loan Officer and assumed the position of Controller in 1986. In 1995, with the formation of Yankee, he became Chief Financial Officer. He was named Executive Vice President and Chief Operating Officer in 2003. Mr. Putnam assumed his present position in 2006. Prior to working for the Association, Mr. Putnam served as controller of the Richmond Cooperative Association of Richmond, Vermont. Mr. Putnam holds a degree in agricultural engineering from the University of Maine and an MBA from the University of Chicago. In 1993, he graduated from the American Bankers Association’s Stonier Graduate School of Banking. Mr. Putnam grew up on a family dairy farm in Cambridge, Vermont. He is a director of Farm Credit Financial Partners, Inc., which is described in Note 1 to the Consolidated Financial Statements.
John S. Peters (Senior Vice President/CCO) John S. Peters, age 61, has been employed by the Association (or one of its predecessors) since 1973. He was hired as a Loan Officer, working primarily in the Middlebury and Rutland offices. From 1974 until 1986 he served as Branch Manager of the Middlebury Office. He then transferred to the Williston office. After serving in Williston he transferred to St. Albans, again as Branch Manager. In 1994 he obtained his Certified General Appraiser's license and served as an Association Appraiser. In 1995, with the formation of Yankee, he became the Association's Director of Quality Control, in charge of Credit and Collateral Review and
Internal Audit. In 2005 he was named an Association Vice President. In 2006 he assumed the position of Vice President/Operations and was appointed Corporate Secretary. In 2012 he became the Senior Vice President/Chief Credit Officer. Mr. Peters holds a degree in agriculture from the University of Vermont.
Greg M. LeDuc (Chief Financial Officer) Greg M. LeDuc, age 42, has been employed by the Association since May 2011. He was hired as Chief Financial Officer in the Williston, Vermont office. Mr. LeDuc has been appointed Corporate Treasurer. Prior to working at the Association Mr. LeDuc worked at The Vermont Teddy Bear Company for 13 years, most recently as Vice President, Finance. Mr. LeDuc holds a degree in accounting from Trinity College.
Kenneth R. Button (Senior Vice President) Kenneth R. Button, age 59, has been employed by the Association (or one of its predecessors) since 1978. He was hired as a Loan Officer in the Middlebury, Vermont office, and became the Branch Manager in 1986. In August of 2006 he became Senior Vice President and Regional Manager of the Southern Region which includes the Middlebury and White River Jct. offices. Prior to working for the Association, Mr. Button worked for the Farmers Home Administration. Mr. Button holds a degree in agriculture from the University of Vermont.
Michael K. Farmer (Senior Vice President) Michael K. Farmer, age 46, has been employed by the Association (or one of its predecessors) since 1989. He was hired as a Loan Officer in the White River Junction, Vermont office and moved to St. Albans as a Senior Loan Officer in 1998. He became the Branch Manager in 2006 and in 2011 became the Senior Vice President and Regional Manager of the Northern Region which includes Chazy, Newport and St. Albans. Mr. Farmer holds a degree in agricultural economics from the University of Vermont.
Geoffrey C. Yates (Senior Vice President/ Director of Financial Services) Geoffrey C. Yates, age 60, has been employed by the Association (or one of its predecessors) since 1980. He was hired as a Farm Business Consultant and as Manager of the Farm Business department working out of the Chazy, NY office. He became Association Chief Appraiser in 1986 and holds Certified General Appraiser licenses in Vermont, New York, and New Hampshire. During 2011 Mr. Yates assumed management of the Association’s Financial Services which include Taxes and Records, Crop Insurance, and Appraisal departments. Prior to working for Farm Credit, he worked 4 years as a Regional Farm Management Specialist for Cornell Cooperative Extension, based at Miner Institute in Chazy,
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NY. Mr. Yates attended Seale Hayne Agricultural College in the UK and holds a Master of Science degree in agricultural economics from Cornell University.
Pamela A. Simek (Controller) Pamela A. Simek, age 54, has been employed by the Association since 1995 when she was hired as an Administrative Assistant in the Williston, Vermont office. In 1997 she became Assistant Treasurer and Personnel Coordinator. In 2003 Ms. Simek assumed the position of Controller and moved to the Middlebury, Vermont office. Prior to working for the Association, Ms. Simek worked as a legal office administrator in Burlington, Vermont. Ms. Simek holds degrees in both accounting and history from Trinity College.
COMPENSATION OF DIRECTORS AND SENIOR OFFICERS
A. Director Compensation
Directors are compensated at a flat daily rate for attendance at Board meetings and other activities authorized by the Board. Per Board Policy dated June 29, 2010, the rate was $450 per day ($500 per day for the Chairperson at meetings at which he or she presided, and $500 per day for the Chairperson of the Audit Committee at meetings where he or she presided). Directors also receive an annual retainer of $3,500 ($4,500 for the Chairperson) and are paid for participating in telephone conference calls. There were seven Board meetings held during 2012. Other activities attended by Directors included, but were not limited to, Association committee meetings, national directors’ meetings, and national training sessions. Compensation paid to directors in 2012 was:
Days Served Board Other
Director Meetings Activities Compensation Alan J. Bourbeau 7 31 13,950 Bryan E. Davis 7 20.5 10,975 Thomas J. Colgan** 5 8 9,350 Rocki-Lee DeWitt 6.5 9 9,775 Paul B. Franklin 7 16 13,850 Paul E. Gingue* 2 13 5,325 Rocklyn A. Giroux 7 44.5 21,150 Walter M. Gladstone 7 22 11,300 Celeste Kane Stebbins 6 21 10,750 Bradley N. Maxwell** 5 6.5 8,675 Paul F. Saenger 7 13.5 12,950 Charles J. Sniffen* 1 1 900 Stephen H. Taylor 7 14 12,950 Total 74.5 220 $141,900 *Term ended in 2012 **Term began in 2012
B. Senior Officer Compensation
The following tables show the total compensation paid by the Association in each of the last three years to the CEO, George S. Putnam, and to the senior officers as a group (excluding the CEO). Disclosure of the total compensation paid during the last fiscal year to any senior officer included in the aggregate is available to shareholders on request.
CEO 2012 2011 2010 Salary $225,000 $210,000 $200,000 Bonus - - -Deferred/perquisites - - -Other 6,427 6,272 6,316 Total $231,427 $216,272 $206,316
Senior Officers* 2012 2011 2010 Number in group Seven Seven Six Salary $797,396 $720,750 $634,054 Bonus - 20,883 550 Deferred/perquisites - - -Other 30,211 27,830 25,996 Total $827,607 $769,463 $660,600 *Includes senior officers and top salaried employees, but not the CEO.
Senior officers are paid under the same salary administration program as all other employees. Generally, each employee is paid in accordance with the responsibilities of his or her position, and the performance of the employee in that position. Each employee’s salary level is generally reviewed annually. There are no special incentive or bonus programs for senior officers, nor are senior officers covered by employment agreements, except as described below.
The amounts listed in the Other categories above are the value of the personal usage of the assigned company cars, as described below.
Mr. Putnam is employed as President and CEO under terms of an employment agreement through December 31, 2013. If Mr. Putnam is terminated before the end of the contract for other than cause, which is defined, he will be entitled to severance benefits.
C. Travel, Subsistence and Other Related Expenses
The Association’s travel policy provides that directors and employees will be reimbursed for reasonable out-of-pocket expenses while traveling on official Association business. Business use of a personal automobile is reimbursed at the IRS standard mileage rate. Some employees are assigned a company car. A copy of the Association’s travel policy is
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available to shareholders on request. The total amount of reimbursement for travel, subsistence and related expenses for all directors as a group was $51,287, $61,855, and $42,852 in 2012, 2011 and 2010 respectively.
TRANSACTIONS AND LOANS WITH DIRECTORS AND SENIOR OFFICERS
The Association abides by all policies and procedures of CoBank, ACB and the Farm Credit Administration pursuant to transactions and loans with directors and senior officers of the Association.
A. Transactions Other Than Loans
The Association had no transactions other than loans with any directors or senior officers, their immediate family members, or any organizations with which they are affiliated, which are required to be disclosed in this section.
B. Loans
Loans to directors and senior officers, their immediate family members, or any organizations with which directors and senior officers are affiliated, were made in the ordinary course of business and on the same terms, including interest rate, amortization schedule, and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
There were no matters which came to the attention of management or the Board of Directors regarding involvement of current directors or senior officers in specified legal proceedings which are required to be disclosed in this section.
RELATIONSHIP WITH QUALIFIED PUBLIC ACCOUNTANTS
There were no material disagreements with our qualified public accountants, PricewaterhouseCoopers, LLP (PwC) on any matter of accounting principles or financial statement disclosures during this period. In 2012, the Association paid PwC a fee of $25,702 for audit services and a fee of $13,000 for tax services.
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Independent Auditor's Report
To the Board of Directors and Stockholders of Yankee Farm Credit, ACA
We have audited the accompanying consoliddated financial statements of Yankee Farm Credit, ACCA and its subsidiaries (the "Association"), which comprise the consonsolidated balance sheets as of December 31, 2012, 201011 and 2010, and the related consolidated statements of comprehhensive income, changes in members' equity and cashh flows for the years then ended.
Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparattion and fair presentation of the consolidated financiial statements in accordance with accounting principles generarally accepted in the United States of America; this incncludes the design, implementation, and maintenance of internrnal control relevant to the preparation and fair presentntation of consolidated financial statements that are free from mateerial misstatement, whether due to fraud or error.
Auditor's Responsibility Our responsibility is to express an opinion oon the consolidated financial statements based on ouur audits. We conducted our audits in accordance with auditing standndards generally accepted in the United States of Ameerica. Those standards require that we plan and perform the audit tto obtain reasonable assurance about whether the coonsolidated financial statements are free from material misstatemment.
An audit involves performing procedures to obtain audit evidence about the amounts and discloosures in the consolidated financial statements. The procedures selecteed depend on our judgment, including the assessmentnt of the risks of material misstatement of the consolidated financial sstatements, whether due to fraud or error. In makingg those risk assessments, we consider internal control relevant to the AAssociation’s preparation and fair presentation of thhe consolidated financial statements in order to design audit procedureres that are appropriate in the circumstances, but nonot for the purpose of expressing an opinion on the effectiveness oof the Association’s internal control. Accordingly, wee express no such opinion. An audit also includes evaluating the approppriateness of accounting policies used and the reasonanableness of significant accounting estimates made by managementnt, as well as evaluating the overall presentation of thee consolidated financial statements. We believe that the audit evidencnce we have obtained is sufficient and appropriate too provide a basis for our audit opinion.
Opinion In our opinion, the consolidated financial sttatements referred to above present fairly, in all mateerial respects, the financial position of Yankee Farm Credit, ACA and itss subsidiaries at December 31, 2012, 2011 and 2010, and the results of its operations and its cash flows for the years thhen ended in accordance with accounting principles generally accepted in the United States of America.
March 8, 2013
PricewaterhouseCoopers LLP, 125 High SStreet, Boston MA 02110 T: (617) 530 5000, F: (617) 530 5001, wwww.pwc.com/us
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YANKEE FARM CREDIT, ACA CONSOLIDATED BALANCE SHEET
December 31, 2012 2011 2010
(in thousands) ASSETS Loans originated by the Association $ 433,223 $ 381,731 $ 369,300
Plus loans purchased 18,427 10,803 9,751 Less participations sold 66,550 52,530 42,645
Loans held by the Association 385,100 340,004 336,406 Less allowance for loan losses 4,788 4,884 4,617 Net loans 380,312 335,120 331,789
Cash 2,522 1,102 1,488 Accrued interest receivable 1,072 861 852 Patronage refunds due from CoBank, ACB 1,833 1,639 1,597 Investment in CoBank, ACB 13,583 13,300 13,187 Mission related investment 751 696 454 Premises and equipment, less
accumulated depreciation 1,022 1,099 1,033 Other assets 1,459 1,240 1,488
Total assets $ 402,554 $ 355,057 $ 351,888
LIABILITIES Note payable to CoBank, ACB $ 316,179 $ 273,562 $ 273,772 Patronage distribution payable 4,918 3,664 3,659 Reserve for unfunded commitments 251 174 -Other liabilities 1,595 1,841 1,628
Total liabilities 322,943 279,241 279,059
MEMBERS' EQUITY Capital stock and participation certificates 1,030 993 1,005 Unallocated surplus 80,551 76,798 73,427 Accumulated other comprehensive (loss) (1,970) (1,975) (1,603)
Total members' equity 79,611 75,816 72,829 Total liabilities and members' equity $ 402,554 $ 355,057 $ 351,888
The accompanying notes are an integral part of these financial statements.
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YANKEE FARM CREDIT, ACA CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended December 31,
INTEREST INCOME Loans
Total interest income $
2012
14,685 14,685
2011 (in thousands)
$ 14,145 14,145
$
2010
14,157 14,157
INTEREST EXPENSE Note payable to CoBank, ACB
Total interest expense 2,271 2,271
2,370 2,370
2,751 2,751
Net interest income Provision for credit losses Net interest income after provision
for credit losses
12,414 84
12,330
11,775 437
11,338
11,406 1,067
10,339
OTHER INCOME Patronage refunds from CoBank, ACB Refunds from Farm Credit System Insurance Corp Fees for financial services Loan fees and other income
Total other income
1,837 393
1,060 71
3,361
1,638 -
880 89
2,607
1,599 390 928 101
3,018
OTHER EXPENSE Salaries and employee benefits Occupancy and equipment Farm Credit Insurance Fund premium Fees paid to Farm Credit Financial Partners, Inc. Other expenses
Total other expense
4,297 335 131 951
1,303 7,017
4,071 321 143 957
1,414 6,906
3,707 276 125 941
1,324 6,373
Income before income taxes Provision for income taxes
8,674 3
7,039 3
6,984 2
Net income $ 8,671 $ 7,036 $ 6,982
OTHER COMPREHENSIVE (LOSS) INCOME OCI related to swaps OCI related to minimum pension liability OCI related to post retirement healthcare
Comprehensive Income $
(8) 26
(13) 8,676
(137) (258)
23 $ 6,664 $
(207) (72)
(146) 6,557
The accompanying notes are an integral part of these financial statements.
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YANKEE FARM CREDIT, ACA CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY
Accumulated Capital Stock Other Total
and Participation Unallocated Comprehensive Members' Certificates Surplus Income (Loss) Equity
(in thousands)
Balance at December 31, 2009 $ 992 Comprehensive income
Net income -Other comprehensive income
Net unrealized gains on interest rate swaps -
Adjustment for pension accounting Pension -Post Retirement Healthcare -
Total comprehensive income Capital stock/PCs issued 122 Capital stock/PCs retired (109) Patronage distributions in cash -
$ 70,104
6,982
-
--
--
(3,659)
$ (1,178)
-
(207)
(72) (146)
--
$ 69,918
6,982
(207)
(72) (146)
6,557 122
(109) (3,659)
Balance at December 31, 2010 1,005 73,427 (1,603) 72,829
Comprehensive income Net income Other comprehensive income
Net unrealized (losses) on interest rate swaps
Adjustment for pension accounting Pension Post Retirement Healthcare
-
-
--
7,036
-
--
-
(137)
(258) 23
7,036
(137)
(258) 23
Total comprehensive income 6,664 Capital stock/PCs issued Capital stock/PCs retired Patronage distributions in cash Adjustment for rounding
119 (131)
--
--
(3,664) (1)
----
119 (131)
(3,664) (1)
Balance at December 31, 2011 993 76,798 (1,975) 75,816 Comprehensive income
Net income Other comprehensive income
Net unrealized (losses) on interest rate swaps
Adjustment for pension accounting Pension
-
-
-
8,671
-
-
-
(8)
26
8,671
(8)
26 Post Retirement Healthcare
Total comprehensive income - - (13) (13)
8,676 Capital stock/PCs issued Capital stock/PCs retired Patronage distributions in cash
176 (139)
-
--
(4,918)
---
176 (139)
(4,918)
Balance at December 31, 2012 $ 1,030 $ 80,551 $ (1,970) $ 79,611
The accompanying notes are an integral part of these financial statements.
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YANKEE FARM CREDIT, ACA CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 2012 2011 2010
(in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 8,671 $ 7,036 $ 6,982 Adjustments to reconcile net income to net
cash provided by operating activities: Depreciation 214 199 185 Provision for loan losses 84 437 1,067 Noncash increase in investment in CoBank, ACB (156) (113) (127) (Increase) decrease in accrued interest receivable (252) (21) (234) (Decrease) increase in other liabilities (164) 14 (817) (Increase) decrease in other assets (274) 6 271 (Gain) from sales of premises and equipment (18) (33) (13)
Total adjustments (566) 489 332 Net cash provided by operating activities 8,105 7,525 7,314
CASH FLOWS FROM INVESTING ACTIVITIES (Increase) decrease in loans, net (45,235) (3,756) 19,363 Expenditures for premises and equipment (192) (289) (212) Proceeds from sales of premises and equipment 73 57 32 (Increase) decrease in distribution of
Cobank, ACB earnings receivable (194) (42) 10 Increase in investment in CoBank, ACB (127) - (250)
Net cash provided by (used in) investing activities (45,675) (4,030) 18,943
CASH FLOWS FROM FINANCING ACTIVITIES Advances on note payable under financing
agreement with CoBank, ACB 272,948 228,895 209,525 Repayment of note payable to CoBank, ACB (230,331) (229,105) (231,811) Capital stock and participation certificates issued 176 119 122 Capital stock and participation certificates retired (139) (131) (109) Patronage distribution paid (3,664) (3,659) (2,573)
Net cash provided by (used in) financing activities 38,990 (3,881) (24,846)
Net increase (decrease) in cash 1,420 (386) 1,411 Cash at beginning of year 1,102 1,488 77 Cash at end of year $ 2,522 $ 1,102 $ 1,488
Supplemental schedule of non-cash investing and financing activities Patronage distribution declared 4,918 3,664 3,659 Accrued interest receivable transferred to loans 41 12 46
The accompanying notes are an integral part of these financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except as noted)
NOTE 1 - ORGANIZATION AND OPERATIONS
Yankee Farm Credit, ACA (the Association) is one of the associations of the Farm Credit System.
A. The Farm Credit System
The Farm Credit System (System) is a nationwide system of cooperatively owned banks and associations established by Acts of Congress to provide credit and other financial services to farmers and other eligible borrowers. The System is subject to the provisions of the Farm Credit Act of 1971, as amended (the Farm Credit Act).
At December 31, 2012, the System was comprised of four banks and approximately 82 associations. Each association is affiliated with one of the banks. The banks lend funds to the associations, supervise the activities of the associations, provide other services to the associations, and may engage in activities not related to the associations. The banks obtain funds principally by jointly selling Systemwide debt obligations to the public.
The Farm Credit Administration (FCA) is an agency in the executive branch of the Federal government, delegated authority by Congress to regulate all System institutions. 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. (See www.fca.gov)
The Agricultural Credit Act of 1987 established the Farm Credit System Insurance Corporation (Insurance Corporation) to administer the Farm Credit Insurance Fund (Insurance Fund). The primary purpose of the Insurance Fund is to ensure the timely payment of principal and interest on Systemwide debt obligations. The Insurance Fund is funded by premiums paid by System banks (which may then be passed on to associations) until the monies reach the “secure base amount,” which is defined in the Farm Credit Act as 2.0% of the insured obligations. 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 2.0% 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. (See www.fcsic.gov)
B. The Association, CoBank and FPI
The Association is a member-owned cooperative which provides credit and credit-related services to eligible borrowers/members for qualified agricultural purposes within its chartered territory, which consists of: the State of Vermont; Cheshire, Coos, Grafton and Sullivan counties in the State of New Hampshire; and Clinton and Essex counties in the State of New York.
The Association is affiliated with CoBank, ACB, one of the four banks in the System. CoBank, headquartered near Denver, Colorado, is the Association’s source of funds. The Association’s financial condition may be impacted by factors which affect CoBank. CoBank’s Annual Report to Stockholders discusses material aspects of its financial condition, changes in financial condition, and results of operations. In addition, CoBank’s Annual Report discusses the impacts of the Insurance Corporation and other forms of intra-System financial assistance. Information on obtaining a copy of CoBank’s annual and quarterly financial statements is provided on page 43 of this report.
Farm Credit Financial Partners, Inc. (FPI) is an entity that provides important services to the Association. FPI is owned by seven associations (including the Association) and CoBank. FPI, which is headquartered near Springfield, Massachusetts, provides accounting, information technology, and other services to these seven associations, CoBank, and other customers.
C. Operations
The Association makes short-term and intermediate-term loans for agricultural production or operating purposes, and long-term real estate mortgage loans. The Association also offers credit-related financial services, including: credit life insurance and crop insurance (the Association acts as agent, not principal); bookkeeping; farm accounting software; tax return preparation and tax planning; fee appraisals; and leasing.
The Farm Credit Act sets forth the types of authorized lending activity, persons eligible to borrow from, and financial services which can be offered by the Association. Eligible borrowers include farmers, ranchers, producers or harvesters of aquatic products, rural residents and farm-related businesses.
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D. Subsidiaries
The Association (which is an agricultural credit association or ACA) has two wholly owned subsidiaries: Yankee Farm Credit, PCA (a production credit association) and Yankee Farm Credit, FLCA (a federal land credit association). The PCA is presently dormant. The FLCA holds certain assets, primarily long-term real estate loans, and related liabilities. All other assets and liabilities are held by the ACA. The FLCA is exempt from federal and state income tax. The ACA and PCA are taxable. This annual report presents the Association and its subsidiaries on a consolidated basis.
E. Types of System Banks and Associations
For the purpose of reading this report, it may be helpful to know the various types of banks and associations in the System, and their principal authorities:
Banks FCB – Farm Credit Bank – Authorized to provide funds and other services to Farm Credit associations. ACB – Agricultural Credit Bank – Authorized to provide funds and other services to Farm Credit associations and to farmers’ cooperatives.
Associations PCA – Production Credit Association – Authorized to provide short and intermediate term loans to eligible borrowers. FLCA – Federal Land Credit Association – Authorized to provide long-term real estate mortgage loans to eligible borrowers. ACA – Agricultural Credit Association – Authorized to provide both short/intermediate term loans and long-term real estate mortgage loans to eligible borrowers. ACAs may have PCAs and/or FLCAs as wholly-owned subsidiaries.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
A. Recently Issued or Adopted Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (FASB) issued guidance entitled, “Balance Sheet — Disclosures about Offsetting Assets and Liabilities.” The guidance requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities. The requirements apply to recognized financial instruments and derivative instruments that are offset in accordance with the rights of offset set forth in accounting guidance and for those recognized financial instruments and derivative instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset or not. This guidance is to be applied retrospectively for all comparative periods and is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this guidance will not impact the Association’s financial condition or its results of operations, but will result in additional disclosures.
In June and December 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 main provisions of the guidance provides that an entity that reports items of other comprehensive income has the option to present comprehensive income in either one or two consecutive financial statements. This guidance did not change the items that must be reported in other comprehensive income. With either approach, an entity is required to present reclassification adjustments for items reclassified from other comprehensive income to net income in the statement(s). The December 2011 guidance deferred the effective date for the presentation of reclassification adjustments. 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 did not impact financial condition or results of operations, but resulted in changes to the presentation of comprehensive income.
B. Loans and Allowance for Loan Losses
Long-term real estate mortgage loans generally have maturities ranging up to 25 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. Impaired loans are generally placed in nonaccrual status when
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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 is in doubt. When a loan is placed in nonaccrual status, accrued interest deemed uncollectible is either reversed (if accrued in the current year) or charged against the allowance for loan losses (if accrued in prior years). Loans are charged off at the time they are determined to be uncollectible.
When loans are in nonaccrual status, payments are generally applied against the recorded investment in the loan asset. Interest income is generally recognized only to the extent that payments are received once the recorded investment is reduced to zero. Nonaccrual loans may be reinstated to accrual status when principal and interest are current, the borrower has demonstrated payment performance, there are no unrecovered prior charge-offs and collection of future payments is no longer in doubt. If previously unrecognized interest income exists at the time the loan is transferred to accrual status, cash received at the time of or subsequent to the transfer is first recorded as interest income until such time as the recorded balance equals the contractual indebtedness of the borrower.
In cases where a borrower experiences financial difficulties and the Association makes certain monetary concessions to the borrower through modifications to the contractual terms of the loan, the loan is classified as a restructured loan. A restructured loan constitutes a troubled debt restructuring if, for economic or legal reasons related to the borrower’s financial difficulties, the Association grants a concession to the borrower that it would not otherwise consider. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan is classified as a nonaccrual loan.
The Association purchases loan participations from other System entities to generate additional earnings and diversify risk related to existing commodities financed and the geographic area served. Additionally, the Association sells a portion of certain large loans to other System entities to reduce risk and comply with established lending limits. Loans are sold following accounting requirements for sale treatment.
The Association uses a two-dimensional risk rating model that is based on the Combined System Risk Rating Guidance that incorporates a 14-point probability of default (PD) scale and a 6-point loss given default (LGD) scale. Probability of default is an estimate of the probability that a borrower will experience a default within 12 months from the date of the determination of the PD rating. A default is considered to have occurred if the borrower is past due more than 90 days or the lender determines the borrower will be unlikely to pay its obligation in full without recourse by the lender to actions such as collecting on security. 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 combination of its PD and LGD ratings constitute a loan’s risk rating.
Each of the PD categories carries a distinct percentage of default probability. The 14-point PD scale provides for granularity of the probability of default, especially within the acceptable credit classification. There are nine PD categories within the acceptable classification that range from a borrower of the highest quality (a “1”) to a borrower of minimally acceptable quality (a “9”). The range of probability of default between “1” and “9” is very narrow and would reflect almost no default to a minimal default percentage. The probability of default grows more rapidly as a loan moves from a “9” to the other assets especially mentioned credit classification (a “10”) and grows significantly as a loan moves to a substandard (viable) credit classification (an “11”). A substandard (non-viable) credit classification (a “12”) indicates that the probability of default is almost certain.
The credit risk rating methodology is a key component of the Association’s allowance for loan losses evaluation, and is generally incorporated in 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 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 Association’s 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.
The allowance for loan losses includes components for loans individually evaluated for impairment and for loans collectively evaluated for impairment. 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 generally based on recent charge-off experience adjusted for relevant environmental factors. When adjusting the historical charge-off experience, the Association considers changes in credit risk classification,
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collateral values, risk concentrations, weather related conditions and economic conditions.
The Association maintains a separate reserve for unfunded commitments, which is separately noted in the “Liabilities” section of the Association’s consolidated balance sheet.
C. Cash
Cash represents cash on hand and on deposit at banks.
D. Investment in CoBank, ACB
The Association’s investment in CoBank is carried at cost plus face or par value of allocated equities.
E. Mission Related Investment
The Association may hold investments in accordance with mission related investment programs approved by the FCA. These programs allow the Association to make investments that further the System’s mission to serve rural America. The investment is reported using the equity accounting method with realized gains or losses recognized in current operations.
F. Other Property Owned
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. 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.
G. Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation. Land is carried at cost. Depreciation is computed principally using the straight-line method over the estimated useful lives of ten to forty years for buildings and improvements, three to seven years for furniture and equipment, and five years for automobiles. Gains and losses on dispositions are reflected in current operations. Maintenance and repairs are charged to operating expense, and improvements are capitalized.
H. Employee Benefit Plans
Employees are eligible to participate in a deferred compensation plan. A certain percentage of employee contributions is matched by the Association. Costs for this plan are expensed as funded.
The Association also provides a non-contributory defined contribution retirement plan for employees. Costs for this plan are expensed as funded.
Certain former employees of the Association (retirees and vested former employees) participate in a defined benefit retirement plan. The “Projected Unit Credit” actuarial method is used for financial reporting purposes and the “Entry-Age Normal Cost” method is used for funding purposes.
I. Income Taxes
As previously described, the Association operates through two wholly-owned subsidiaries. The FLCA subsidiary is exempt from federal and other income taxes as provided in the Farm Credit Act.
The Association, and the PCA subsidiary, are subject to certain income taxes. The Association is eligible to operate as a cooperative that qualifies 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. Deferred taxes are recorded on the tax effect of all temporary differences based on the assumption that such temporary differences are retained by the institution and will therefore impact future tax payments. 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.
Deferred income taxes have not been provided by the Association on patronage 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 to permanently invest these and other undistributed earnings in CoBank, thereby indefinitely postponing their conversion to cash. (CoBank is the successor to the FCB.) Additionally, deferred income taxes have not been provided on CoBank’s unallocated earnings because CoBank currently has no plans to distribute unallocated earnings and does not contemplate circumstances that, if distributions were made, would result in taxes being paid at the Association level.
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J. Patronage Refund from CoBank
The Association records patronage refunds from CoBank on the accrual basis.
K. Derivative Instruments
The Association was party to derivative financial instruments, consisting of interest rate swaps. The swap program was suspended in June, 2009, with the last swap maturing in June, 2012. These derivatives were accounted for in accordance with FASB guidance. Accordingly, these derivatives were recorded on the consolidated balance sheet in other assets and other liabilities, measured at fair value.
All of the Association’s derivatives were designated as cash flow hedges, used to manage interest rate risk on variable rate loans. The Association measured the effectiveness of the hedge quarterly. If the hedge was effective, changes in fair value were recorded in other comprehensive income. If the hedge was not effective, changes in fair value were recorded in the consolidated statement of income as an adjustment to interest expense. Cash flows resulting from periodic settlements were recorded on the consolidated statement of income as an adjustment to interest expense.
L. 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. The Association does not have any Level 1 financial instruments.
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 interest rate swap contracts.
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 are considered Level 3. 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 values are 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 nonaccrual loans, other property owned and note payable to CoBank.
The fair value disclosures are presented in Note 11 and Note 14.
M. Off-Balance-Sheet Credit Exposures
Commercial letters of credit are conditional commitments issued to guarantee the performance of a borrower 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 borrower and the third party. The credit risk associated with letters of credit is essentially the same as that involved with extending loans to borrowers and is subject to normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s creditworthiness.
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of loans follows:
December 31, 2012 2011 2010
Long-term farm mortgage $ 149,332 $ 136,154 $ 132,066 Country home 1,813 1,567 1,751 Farm related business 23,688 21,349 22,878 Production and intermediate term 258,390 222,661 212,605 Total loans originated by the Association 433,223 381,731 369,300 Plus participations purchased 18,427 10,803 9,751 Less participations sold 66,550 52,530 42,645 Loans held by the Association $ 385,100 $ 340,004 $ 336,406
We may purchase or sell participation interests with other parties in order to diversify risk, manage loan volume and comply with FCA regulations.
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All of the Association’s loan participations are with other Farm Credit institutions. The following table presents information regarding the balances of participations purchased and sold as of December 31, 2012.
Participations Purchased Sold
Long-term farm mortgage $ 215 $ 7,080 Farm related business 17,820 16,242 Production and intermediate term 392 43,228 Total $ 18,427 $ 66,550
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.
December 31, 2012 2011 2010
Commodity Amount % Amount % Amount % Dairy $ 215,844 56% $ 196,050 58% $ 197,643 59% Timber 43,978 12% 39,757 12% 44,992 13% FRB* 27,676 7% 20,797 6% 17,123 5% Maple 20,258 5% 16,084 5% 12,386 4% Fruit & Vegetables 14,202 4% 13,650 4% 14,687 4% Part-time Farmer 12,375 3% 11,346 3% 9,958 3% Livestock 12,174 3% 12,692 4% 12,278 4% Other 38,593 10% 29,628 8% 27,339 8% Total $ 385,100 100% $ 340,004 100% $ 336,406 100% *Farm Related Business
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 equipment and receivables. Long-term real estate loans are secured by first liens on the underlying real 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 loan to value ratios in excess of the regulatory maximum.
Impaired loans include nonaccrual loans plus restructured accrual loans. The following table presents information relating to impaired loans:
December 31, 2012 2011 2010
Nonaccrual loans: Current $ 3,653 $ 1,966 $ 2,313 Past due 1,278 3,223 4,544 Total nonaccrual loans 4,931 5,189 6,857
Restructured accrual loans 628 196 255
Total impaired loans $ 5,559 $ 5,385 $ 7,112
A summary of impaired loans follows:
December 31, 2012 2011 2010
Nonaccrual loans: Long-term farm mortgage $ 3,263 $ 3,502 $ 4,513
Farm related business 760 762 723 Production and intermediate term 908 925 1,621 Total nonaccrual loans 4,931 5,189 6,857
Restructured accrual loans: Long-term farm mortgage 628 196 255
Total impaired loans $ 5,559 $ 5,385 $ 7,112
One credit quality indicator utilized by the Association 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.
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The following table shows loans and related accrued interest as a percentage of total loans and related accrued interest receivable by loan type as of:
December 31, 2012 2011 2010
Long-term farm mortgage Acceptable 33.4% 34.2% 33.3% OAEM 1.0% 1.4% 2.1% Substandard/Doubtful 2.0% 2.4% 2.3% Total 36.4% 38.0% 37.7%
Country Home Acceptable 0.4% 0.4% 0.5% OAEM 0.1% 0.1% 0.1% Substandard/Doubtful - - -Total 0.5% 0.5% 0.6%
Farm related business Acceptable 14.1% 11.9% 11.4% OAEM 0.1% 0.2% 0.2% Substandard/Doubtful 0.5% 0.2% 0.7% Total 14.7% 12.3% 12.3%
Production and Intermediate Term Acceptable 43.3% 43.6% 42.5% OAEM 3.1% 3.4% 2.8% Substandard/Doubtful 2.0% 2.2% 4.1% Total 48.4% 49.2% 49.4%
Total Loans Acceptable 91.2% 90.1% 87.7% OAEM 4.3% 5.1% 5.2% Substandard/Doubtful 4.5% 4.8% 7.1% Total 100.0% 100.0% 100.0%
The following table provides an age analysis of all loans more than 30 days past due as of December 31, 2012:
Past Due 30-89 > 90 Days Days Total
Long-term farm mortgage $ 637 $ 171 $ 808 Farm related business 95 665 760 Production and intermediate term 497 346 843 Loans held by the Association $ 1,229 $ 1,182 $ 2,411
There were no loans that were 90 days or more past due but still classified as accrual at December 31, 2012.
A restructuring of a debt constitutes as troubled debt restructuring if the Association, for economic or legal reasons related to the member’s financial difficulties, grants a concession to the member that it would not otherwise consider. Any loans restructured prior to January 1, 2011 have an extended period of performance under their new contractual terms. As of December 31, 2012 the Association had troubled debt restructurings of $1.086 million.
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The Association had two troubled debt restructurings that occurred during the year ended December 31, 2012. The pre-modification and post-modification investment outstanding for these two troubled debt restructurings was $743 thousand. The modification for both loans involved an interest rate concession. During 2012 no troubled debt restructurings defaulted.
Additional impaired loan information is as follows:
Impaired Loans with a related allowance for loan losses: Long-term farm mortgage
Production and intermediate term Farm related business
Total
Recorded Investment At 12/31/12
$ 3,860849 760
$ 5,469
$
$
Unpaid Principal Balance*
4,452 1,116 1,020 6,588
Related Allowance
$ 31294
143 $ 549
$
$
Average Impaired
Loans
4,054 1,006
927 5,987
$
$
Interest Income
Recognized
-(3) -(3)
Impaired Loans with no related allowance for loan losses: Long-term farm mortgage
Production and intermediate term $ 31
59 $ 105 $
149 --
$ 40 59
$ --
Total $ 90 $ 254 $ - $ 99 $ -
Total Impaired Loans: Long-term farm mortgage $ 3,891 $ 4,557 $ 312 $
Production and intermediate term 908 1,265 94 Farm related business 760 1,020 143
Total $ 5,559 $ 6,842 $ 549 $ *Unpaid principal balance represents the borrower’s contractual balance of the loan.
4,094 1,065
927 6,086
$
$
-(3) -(3)
Impaired Loans with a related allowance for loan losses: Long-term farm mortgage
Production and intermediate term Farm related business
Recorded Investment At 12/31/11
$ 3,653865 762
$
Unpaid Principal Balance*
4,059 1,066
848
Related Allowance
$ 495109 36
$
Average Impaired
Loans
4,012 1,048
820
$
Interest Income
Recognized
80 15 -
Total $ 5,280 $ 5,973 $ 640 $ 5,880 $ 95
Impaired Loans with no related allowance for loan losses: Long-term farm mortgage
Production and intermediate term $ 46
60 $ 111 $
142 --
$ 50 64
$ --
Total $ 106 $ 253 $ - $ 114 $ -
Total Impaired Loans: Long-term farm mortgage
Production and intermediate term Farm related business
$ 3,698925 762
$ 4,170 1,208
848
$ 495109 36
$ 4,062 1,112
820
$ 80 15 -
Total $ 5,385 $ 6,226 $ 640 $ *Unpaid principal balance represents the borrower’s contractual balance of the loan.
5,994 $ 95
There were no material commitments to lend additional funds to members whose loans were classified as impaired at December 31, 2012.
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The following table presents information relating to interest income on nonaccrual loans that would have been recognized under the original terms of the loans:
Year ended December 31, 2012 2011 2010
Interest income that would have been recognized under the original loan terms $ 356 $ 372 $ 427 Less: interest reversed (recognized) 3 (47) (45) Interest not recognized $ 359 $ 325 $ 382
A summary of changes in the allowance for loan losses and period end recorded investment in loans is as follows:
Long-term Production & farm Country Farm related intermediate
mortgage Home business term Total Allowance for Loan Losses: Balance at December 31, 2011 $ 2,818 $ 18 $ 240 $ 1,808 $ 4,884 Charge-offs - - (110) - (110) Recoveries - - 6 - 6 Provision for credit losses (232) 49 102 89 8 Balance at December 31, 2012 $ 2,586 $ 67 $ 238 $ 1,897 $ 4,788
Ending Balance: collectively evaluated for impairment 2,274 67 202 1,697 4,240
Ending Balance: individually evaluated for impairment $ 312 $ - $ 36 $ 200 $ 548
Recorded Investment in Loans Outstanding: Ending Balance for loans collectively evaluated for impairment $ 138,576 $ 1,813 $ 24,506 $ 214,646 $ 379,541
Ending Balance for loans individually evaluated for impairment $ 3,891 $ - $ 760 $ 908 $ 5,559
Ending Balance at December 31, 2012 $ 142,467 $ 1,813 $ 25,266 $ 215,554 $ 385,100
In 2011, we revised our methodology for determining the allowance for credit losses. The new methodology takes into consideration potential losses related to unfunded commitments, and as a result, we have established a separate reserve for unfunded commitments, which is included in Other Liabilities on the Association’s balance sheet.
The provision for the reserve for unfunded commitments is part of the Provision for Credit Losses on the income statement. The components of the Provision for Credit Losses are presented in the table below:
Year ended December 31, 2012 2011 2010
Provision for loan losses $ 8 $ 263 $ 1,067 Provision for unfunded commitments 76 174 -Total provision for credit losses $ 84 $ 437 $ 1,067
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NOTE 4 - INVESTMENT IN COBANK, ACB
The Association’s investment in CoBank, ACB is in the form of Class A stock. The Association is required to invest in CoBank for two purposes.
First, the Association is required to invest in CoBank to capitalize the Association’s loan from CoBank. The capitalization requirement for this purpose is 4% of the average borrowings for the current year. For 2012, the required investment in CoBank for this purpose was $11.462 million and the actual investment was $11.462 million. When the Association’s investment is more than the required amount, CoBank adjusts the interest rate to the Association to compensate for any capital excess of the required amount. As the capitalization requirement is measured at year-end, the interest rate adjustment will be effective in the subsequent year. In 2012, this adjustment reduced the interest rate charged by CoBank by 1 bp.
Second, the Association is required to invest in CoBank to capitalize any participation loans sold to CoBank. In 2012, the capitalization requirement for this purpose was 8% of the previous ten years’ average participations sold. For 2012, the required investment in CoBank for this purpose was $2.514 million and the actual investment was $2.121 million. When the Association’s investment is less than the required amount, CoBank pays a portion of the patronage refunds to the Association in the form of stock. Starting in 2012 (paid in 2013) CoBank will pay the refunds 75% in cash and 25% in stock. Previously, CoBank paid the refunds 65% in cash and 35% in stock.
The noncash patronage refund received by the Association was $157 thousand, $113 thousand and $127 thousand in 2012, 2011, and 2010 respectively.
The Association owned 0.5% of the issued stock of CoBank on December 31, 2012. As of that date, CoBank’s assets totaled $92.5 billion and members’ equity totaled $6.4 billion. CoBank earned net income of $854 million during 2012.
NOTE 5 – PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31, 2012 2011 2010
Land $ 165 $ 165 $ 165 Buildings and improvements 953 953 928 Furniture and equipment 722 777 743 Automobiles 593 586 518
2,433 2,481 2,354 Less accumulated depreciation 1,411 1,382 1,321 Total net premises and equipment $ 1,022 $ 1,099 $ 1,033
NOTE 6 - NOTE PAYABLE TO COBANK, ACB
The Association’s indebtedness to CoBank represents borrowings by the Association to fund its loan portfolio. This indebtedness is collateralized by a pledge of substantially all of the Association’s assets, and is governed by a General Financing Agreement. The interest rate is periodically adjusted by CoBank. The average interest rate was 0.73% at December 31, 2012. The average interest rate at December 31, 2011 was 0.89%. The average interest rate at December 31, 2010 was 1.01%.
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, 2012 the Association’s note payable was within the specified limitations.
NOTE 7 - MEMBERS’ EQUITY
The Association’s capitalization policies are specified in the Bylaws (Article VIII) and the Capitalization Plan. The Capitalization Plan is subject to change by the Board of Directors at any time, and is normally updated annually. Copies of the Association’s Bylaws and Capitalization Plan are available to members upon request.
A more detailed description of the Association’s capitalization policies, equities, and regulatory capitalization requirements and restrictions is provided below.
A. Capital Stock and Participation Certificates In accordance with the Farm Credit Act, each borrower is required to invest in the Association as a condition of borrowing. The Association’s Bylaws and Capitalization Plan specify that each borrower shall invest, at the time the loan is made, in Class B stock for agricultural loans or Class B participation certificates for country home and farm-related
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business loans. The required amount of stock or participation certificates is 2.0% of the loan, with a cap of $1 thousand per customer, which is the legal minimum requirement.
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.
Each owner or joint owners of Class B stock is 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, 2012, the Association had 186,126 shares of Class B stock outstanding at a par value of $5 per share, and 19,882 shares of Class B participation certificates outstanding at a par value of $5 per share.
B. Patronage Distributions and Allocated Surplus
Subject to the Farm Credit Act, and the Association’s Bylaws and Capitalization Plan, the Association’s Board of Directors may authorize the distribution of Association earnings in the form of a patronage distribution. Patronage distributions are made in the following year and may be made in cash or allocated surplus or any combination, as long as the cash portion is at least 20%. Beginning in 2002, patronage distributions have been 100% in cash. Earnings not distributed are retained as unallocated surplus.
The increase in patronage distribution payable in 2012 to $4.918 million, up from $3.664 million the previous year, was due in part a 25 bp increase in the rate used to calculate the patronage pool. The patronage rate increased from 100 bp in 2011 to 125 bp in 2012.
The Association had no allocated surplus as of December 31, 2012.
C. Dividends
Although permitted under Article VIII, Section 890 of the Association’s Bylaws, the Association typically does not pay dividends on stock or participation certificates.
D. Risks Associated With Members’ Equity
Ownership of stock, participation certificates and allocated surplus is 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. 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.
E. Regulatory Capitalization Requirements
FCA’s capital adequacy regulations require the Association to maintain specified minimum amounts of core surplus, total surplus and permanent capital. Failure to meet these capital requirements can initiate certain mandatory and possibly additional discretionary actions by FCA that, if undertaken, could have a direct material effect on the Association’s financial statements. The Association is prohibited from retiring stock or making certain other distributions to shareholders unless these capital standards are met.
The Association’s regulatory capital ratios were:
Value at Regulatory December 31, 2012 Minimum
Core surplus 19.4% 3.5% Total surplus 19.6% 7.0% Permanent capital 19.9% 7.0%
Additionally, the Association’s internal permanent capital goal for 2012 was 20.5%, which was not met, as shown by the table above. The reason this goal was not met is due to the increase in loan volume, which is a major component of the denominator in the permanent capital calculation. It was not due to a deterioration of capital.
The Association is not aware of any regulatory restrictions to retire stock or distribute earnings during the fiscal year subsequent to the fiscal year just ended.
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 had not been called upon to initiate any transfers and is not aware of any proposed action under this regulation.
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NOTE 8 - INCOME TAXES
The provision for income taxes follows:
Year Ended December 31, 2012 2011 2010
Current: Federal $ - $ - $ - State 3 3 2 Deferred: Federal - - - State - - -Total provision for income taxes $ 3 $ 3 $ 2
The FLCA subsidiary, which contains primarily long-term real estate mortgage loans, is exempt from income tax.
The following table quantifies the differences between the provision for income taxes and the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income of the Association.
Year Ended December 31, 2012 2011 2010
Federal tax at statutory rate $ 2,949 $ 2,393 $ 2,375 State tax, net of federal income tax effect 2 2 2 Effect of tax exempt FLCA (1,717) (907) (1,265) Patronage distributions (1,672) (1,246) (1,244) Change in valuation allowance 488 (331) 305 Other (47) 92 (171) Total provision for income taxes $ 3 $ 3 $ 2
Deferred Tax Assets and Liabilities; Valuation Allowance 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 2012, none of the Association’s net deferred tax asset will be realizable in future periods. Accordingly, a valuation allowance is provided against 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.
Deferred tax assets and liabilities in accordance with accounting guidance are comprised of:
December 31, 2012 2011 2010
Allowance for loan losses $ 572 $ 536 $ 970 Deferred compensation and
other postretirement benefits 1,201 1,205 1,108 Net operating loss 3,096 2,367 2,396 Other 241 170 134 Deferred tax asset 5,110 4,278 4,608
Bank stock patronage after December 31, 1992 81 81 81 Retirement benefits 804 740 663 CoBank, ACB patronage 629 558 516 Depreciation 12 18 14 Deferred tax liability 1,526 1,397 1,274
Subtotal 3,584 2,881 3,334 Less valuation allowance 3,584 2,881 3,334
Net deferred tax asset $ - $ - $ -
The Association recognized interest and penalties related to unrecognized tax benefits as an adjustment to income tax expense. 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. No uncertain tax positions were taken by the Association during 2012, 2011 or 2010. The tax years that remain open for federal and major state income tax jurisdictions are 2009 and forward.
NOTE 9 - EMPLOYEE RETIREMENT PLANS
Employee Savings Plan The Association participates in the CoBank, ACB Employee Savings Plan (“Employee Savings Plan”). The Employee Savings Plan serves six employers in the Farm Credit System, including the Association and CoBank. All active employees of the Association participate in the Employee Savings Plan. The Employee Savings Plan has two components:
Schedule A – Employer Matching Contributions Under this part of the plan, the Association matches 100% of employee contributions up to a maximum employee contribution of 6% of salary. Employer contributions charged to expense were $173 thousand, $160 thousand and $153 thousand in 2012, 2011 and 2010, respectively.
Schedule B – Employer Contributions Under this part of the plan, the Association contributes a percentage of each employee’s salary, based on years of service. Employer contributions charged to expense were
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$196 thousand, $193 thousand and $186 thousand in 2012, 2011 and 2010, respectively.
Defined Benefit Plan Prior to 1998, the Association offered the CoBank, ACB Retirement Plan, a non-contributory multiple employer defined benefit retirement plan (Defined Benefit Plan). No current employees of the Association participate in this plan. The Association continues to participate in this plan only to the extent that it has retirees and vested former employees in the plan. The Defined Benefit Plan serves the same six Farm Credit System employers as the Employee Savings Plan. Benefits are based on years of service and compensation during the highest four consecutive years of employment.
December 31, 2012 2011 2010
Change in Benefit Obligation Benefit obligation at
beginning of year $ 2,571 $ 2,537 $ 2,583 Service cost - - -Interest Cost 116 127 138 Plan amendments - - -Actuarial (gain)/loss, net 220 244 152 Benefits Paid (312) (337) (336) Benefit obligation at
end of year $ 2,595 $ 2,571 $ 2,537
December 31, 2012 2011 2010
Change in Plan Assets Fair value of plan assets at
beginning of year $ 2,573 $ 2,606 $ 2,493 Actual return on plan assets 319 104 223 Employer contributions 200 200 226 Benefits Paid (312) (337) (336) Fair value of plan assets at
end of year $ 2,780 $ 2,573 $ 2,606
Funded status $ 185 $ 2 $ 69 Fourth quarter employer contributions and other - - -Net amount recognized
at end of year $ 185 $ 2 $ 69
The following tables show the impact of this plan on the financial statements:
December 31, 2012 2011 2010
Balance sheet: Intangible asset (included in other assets) Pension liability (included in other liabilities) Accumulated other comprehensive income
185
-
(1,803)
2
-
(1,829)
69
-
(1,571)
Year Ended December 31, 2012 2011 2010
Statement of income: Expense (Benefit) recognized in salaries and employee benefits $ 43 $ (9) $ 5
The fair values of the Association’s pension plan assets at December 31, 2012 by asset category are as follows:
Level 1 Level 2 Total Cash $ 9 $ - $ 9 Domestic Equity: Large-cap growth funds 578 471 1,049 Small-cap growth funds - 138 138 International Equity: International fund 287 - 287 Fixed Income: Total return fund 1,015 - 1,015 Emerging Markets: Equity & fixed income fund - 149 149 Real Assets: gold fund 133 - 133 Fair value of plan assets at
end of year $ 2,022 $ 758 $ 2,780
The fair values of the Association’s pension plan assets at December 31, 2011 by asset category are as follows:
Level 1 Level 2 Total Cash $ 8 $ - $ 8 Domestic Equity: Large-cap growth funds 594 447 1,041 Small-cap growth funds - 139 139 International Equity: International fund 200 - 200 Fixed Income: Total return fund 923 - 923 Emerging Markets: Equity & fixed income fund - 115 115 Real Assets: gold fund 147 - 147 Fair value of plan assets at
end of year $ 1,872 $ 701 $ 2,573
Other The following table sets forth information about the Association’s post-retirement health care benefit plan funding status and assumptions used to determine benefits obligations.
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December 31,
Benefit obligations Net liability recognized
2012 $ 233
233
2011 $ 199
199 $
2010 207 207
Net periodic expense $ 22 $ 14 $ 6
For measurement purposes, an 8.0% annual rate of increase in the cost of covered health care benefits was assumed for 2012. The rate is assumed to decrease gradually to 5.0% for 2018 and remain level thereafter.
Assumptions We measure 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 weighted-average rate assumptions used in the measurement of the Association’s benefit obligations are as follows:
December 31, 2012 2011 2010
Discount rate 4.05% 4.80% 5.35% Rate of compensation increase (qualified plans only) 4.75% 4.75% 5.00%
The weighted average rate assumptions used in the measurement of our net periodic benefit cost are as follows:
December 31, 2012 2011 2010
Discount rate 4.80% 5.35% 5.70% Expected rate of return on plan
assets (qualified plans only) 7.25% 8.00% 8.00% Rate of compensation increase (qualified plans only) 4.75% 5.00% 5.00%
NOTE 10 – RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Association enters into loan transactions with officers and directors 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 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.
Total loans outstanding to such persons at December 31, 2012 amounted to $20.895 million. During 2012, $16.805 million of new loans were made and repayments totaled $10.407
million. Additionally, other increases to the related party loan balance totaling $1.357 million represent changes in the composition of Association officers and/or board members during 2012. In the opinion of management, none of these loans outstanding at December 31, 2012 involved more than a normal risk of collectability.
At December 31, 2012, the Association owned a 6.3% interest in FPI. FPI and the nature of the Association’s relationship with it are more fully described in Note 1 to the Consolidated Financial Statements, “Organization and Operations.” Fees paid to FPI are separately disclosed in the consolidated statement of income.
NOTE 11 – FAIR VALUE MEASUREMENTS
Accounting guidance from FASB defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. See Note 2L for additional information.
Assets measured at fair value on a recurring basis at December 31, 2012 and December 31, 2011 for each of the fair value hierarchy values are summarized as follows:
December 31, 2012 Fair Value Measurement Using
Level 1 Level 2 Level 3 Assets: Interest Rate Swaps $ - $ - $ - Total assets $ - $ - $ -
December 31, 2011 Fair Value Measurement Using
Level 1 Level 2 Level 3 Assets: Interest Rate Swaps $ - $ 14 $ - Total assets $ - $ 14 $ -
Assets measured at fair value on a non-recurring basis at December 31, 2012 and December 31, 2011 for each of the fair value hierarchy values are summarized as follows:
December 31, 2012 Fair Value Measurement Using
Level 1 Level 2 Level 3 Assets: Impaired Loans $ - $ - $ 5,559 Total liabilities $ - $ - $ 5,559
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December 31, 2011 Fair Value Measurement Using
Level 1 Level 2 Level 3 Assets: Impaired Loans $ - $ - $ 5,385 Total liabilities $ - $ - $ 5,385
There were no liabilities measured at fair value on a recurring or non-recurring basis at December 31, 2012 or December 31, 2011.
As more fully discussed in Note 2L, FASB 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 by the Association for asset and liabilities:
Derivatives Exchange-traded derivatives valued using quoted prices would be classified with Level 1 of the valuation hierarchy. However, few classes of derivative contracts are listed on an exchange; thus, the majority of the 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. Level 2 includes derivatives such as 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’s interest rate swaps meet the definition of Level 2 financial instruments.
Impaired Loans For certain loans evaluated for impairment under FASB impairment guidance, the fair value was based upon the underlying collateral. The fair value measurement process uses 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 related 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, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established.
NOTE 12 - COMMITMENTS AND CONTINGENCES
The Association has various commitments outstanding and contingent liabilities as discussed elsewhere in these Notes to Consolidated Financial Statements.
There are no actions pending against the Association in which claims of money damages are asserted.
NOTE 13 - COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
In the normal course of business, the Association makes commitments to extend credit and issues or participates in standby letters of credit. At December 31, 2012, $66.186 million of commitments to extend credit were outstanding. Of this amount $1.331 million were standby letters of credit.
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 credit-related 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 to extend credit and standby letters of credit is substantially the same as that involved in extending loans to borrowers and the same credit policies are applied by management.
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following tables present the carrying amounts and fair values of the Association’s financial instruments at December 31, 2012, 2011 and 2010.
Quoted market prices are generally not available for certain Association 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 Association’s financial instruments are as follows:
December 31, 2012 Carrying Fair Amount Value
Financial assets: Loans, net $ 380,312 $ 380,514 Cash 2,522 2,522 Investment in CoBank, ACB 13,583 13,583 Interest rate swaps - -
Financial liabilities: Note payable to CoBank, ACB $ 316,179 $ 316,942
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December 31, 2011 Carrying Fair Amount Value
Financial assets: Loans, net $ 335,120 $ 338,757 Cash 1,102 1,102 Investment in CoBank, ACB 13,300 13,300 Interest rate swaps 14 14
Financial liabilities: Note payable to CoBank, ACB $ 273,562 $ 272,891
December 31, 2010 Carrying Fair Amount Value
Financial assets: Loans, net $ 331,789 $ 334,167 Cash 1,488 1,488 Investment in CoBank, ACB 13,187 13,187 Interest rate swaps 180 180
Financial liabilities: Note payable to CoBank, ACB $ 273,772 $ 274,931
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:
A. Loans
Fair value is estimated by discounting the expected future cash flows using the Association’s and/or the Bank’s current interest rates at which similar loans would be made to borrowers with similar credit risk. As the discount rates are based on the Association’s current loan rates as well as management estimates, management has no basis to determine whether the estimated fair values presented would be indicative of assumptions and adjustments that a purchaser of the Association’s loans would seek in an actual sale, which could be less. Loans are classified as a Level 3 in the fair value measurement hierarchy.
B. Cash
The carrying value is a reasonable estimate of the fair value. Cash is classified as a Level 1 in the fair value measurement hierarchy.
C. Investment in CoBank, ACB
Estimating the fair value of the Association’s investment in CoBank is not practicable because the stock is not traded. As described in Note 4, the investment is a requirement of borrowing from CoBank and is carried at cost plus allocated equities on the consolidated balance sheet. The investment in CoBank, ACB is classified as a Level 3 in the fair value measurement hierarchy.
D. Interest Rate Swaps
Interest rate swaps are carried at their estimated fair value, calculated as the present value of estimated future cash flows. Depending on the position of the swap, the fair value may either be an asset or a liability. Interest rate swaps are classified as a Level 2 in the fair value measurement hierarchy.
E. Note Payable to CoBank, ACB
The note payable is segregated into pricing pools according to the types and terms of the loans (or other assets) which it funds. 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 note is equal to the principal payments on the Association’s loan receivables plus accrued interest on the note payable. This assumption implies that earnings on the Association’s interest margin are used to fund operating expenses and capital expenditures. The note payable to CoBank, ACB is classified as a Level 3 in the fair value measurement hierarchy.
NOTE 15 – DERIVATIVE INSTRUMENTS
The Association enters into derivative financial instruments known as “receive fixed” interest rate swaps. In a receive fixed swap, the Association pays to a counterparty a variable rate of interest and receives from the counterparty a fixed rate of interest. The variable “pay rate” is a three month rate, which resets quarterly. The fixed “receive rate” is determined at the time the swap is initiated and remains fixed for the term of the swap. The swaps entered into by the Association have terms ranging up to three years. Each quarter a net cash settlement between the Association and the counterparty is calculated by applying both rates of interest (the pay rate and the receive rate) to a specified amount called the notional value. The counterparty to the Association’s swaps is CoBank.
The Association’s swap program was suspended in June, 2009, with the last swap maturing in June 2012. As of December 31, 2012, the Association held no derivatives.
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The following tables show the impact of these derivatives on the financial statements:
December 31, 2012 2011 2010
Balance sheet: Accrued interest receivable $ - $ 3 $ 15 Accrued interest payable (included in other liabilities) - - -Positive fair values (included in other assets) - 14 180 Negative fair values (included in other liabilities) - - -Accumulated other comprehensive income - 8 145
Year Ended December 31, 2012 2011 2010
Statement of income: (Decreased) increased interest expense $ (8) $ (146) $ (371)
Other comprehensive income: Net unrealized (losses) gains on interest rate swaps $ - $ (137) $ (207)
NOTE 16 – SUBSEQUENT EVENTS
The Association has evaluated events through March 8, 2013, which is the date the financial statements were issued or available to be issued.
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SHAREHOLDER DISCLOSURE INFORMATION
The following information is required to be disclosed to shareholders:
Description of Business
Please refer to Note 1 to the Consolidated Financial Statements, “Organization and Operations,” for information concerning the organization and operations of the Association.
Description of Property
At year-end the Association owned the following offices:
Location Description Middlebury, Vermont Office condominium (3000 sq. ft.) Newport, Vermont Office building (1400 sq. ft.) on 0.5 A land St. Albans, Vermont Office building (4300 sq. ft.) on 3.2 A land White River Jct., Vermont Office building (4300 sq. ft.) on leased land
Legal Proceedings and Enforcement Actions
Please refer to Note 12 to the Consolidated Financial Statements, “Commitments and Contingencies,” for information concerning any legal proceedings against the Association. There are no enforcement actions in effect against the Association by its regulator, the Farm Credit Administration.
Description of Capital Structure
Please refer to Note 7 to the Consolidated Financial Statements, “Members’ Equity,” for information concerning the capital structure of the Association.
Description of Liabilities
Please refer to Note 6 to the Consolidated Financial Statements, “Note Payable to CoBank, ACB,” for a description of debt outstanding. The description of contingent liabilities is outlined in Note 12 to the Consolidated Financial Statements, “Commitments and Contingencies.”
Association Quarterly Reports
The Association’s quarterly reports are available without charge from any of our offices, listed on page 40. Quarterly reports as of March 31, June 30 and September 30 are available 40 days after quarter-end.
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YANKEE FARM CREDIT, ACA BORROWER PRIVACY STATEMENT
Your privacy is important to us. We do not sell or trade our borrowers’ personal information to marketing companies or information brokers. Since 1972, Farm Credit Administration regulations have governed the disclosure of borrower information. In accordance with those regulations, we may disclose your information to others only in the following circumstances:
Examiners, auditors and reviewers may review loan files. We may provide information in certain types of legal or law enforcement proceedings. We may share your information with other Farm Credit institutions that you do business with. We may be a credit reference for you with other lenders and provide information to a credit bureau or other
consumer reporting agency. If one of our employees applies to become a licensed real estate appraiser, we may give copies of real estate
appraisal reports to the State agency that licenses appraisers when required. We will first remove as much personal information from the appraisal report as possible.
We may share your information in other circumstances if you consent in writing.
As a member/owner of this Association, your privacy and the security of your personal information are vital to our continued ability to serve your ongoing credit needs.
YANKEE FARM CREDIT, ACA OFFICE LOCATIONS
Yankee Farm Credit, ACA Yankee Farm Credit, ACA Yankee Farm Credit, ACA 9784 Route 9 1436 Exchange Street 41 Highland Avenue P.O. Box 507 P.O. Box 350 P.O. Box 537 Chazy, NY 12921 Middlebury, VT 05753 Newport, VT 05855 (800) 545-8374 (800) 545-1169 (800) 370-2738 (518) 846-7330 (802) 388-2692 (802) 334-8050
Yankee Farm Credit, ACA Yankee Farm Credit, ACA Yankee Farm Credit, ACA 130 Upper Welden Street 52 Farmvu Drive 289 Hurricane Lane, Suite 102 P.O. Box 240 P.O. Box 1009 P.O. Box 467 St. Albans, VT 05478 White River Jct., VT 05001 Williston, VT 05495 (800) 545-1097 (800) 370-3276 (800) 639-3053 (802) 524-2938 (802) 295-3670 (802) 879-4700
World wide web address: www.YankeeACA.com
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YANKEE FARM CREDIT, ACA YOUNG, BEGINNING AND SMALL FARMERS
Mission Statement: Yankee Farm Credit believes in supporting Young, Beginning and Small (YBS) farmers. They represent the future of farming. The entry of YBS farmers into the industry is critical to the long-term success of agriculture. The Association’s Board Policy on Young, Beginning, and Small Farmers provides a mandate to Association management to assure this success.
Young, Beginning and Small farmers are defined as:
Young farmer: A farmer, rancher, or producer or harvester of aquatic products who is age 35 or younger as of the loan transaction date.
Beginning farmer: A farmer, rancher, or producer or harvester of aquatic products who has 10 years or less farming, ranching, or aquatic experience as of the loan transaction date.
Small farmer: A farmer, rancher, or producer or harvester of aquatic products who normally generates less than $250,000 in annual gross sales of agricultural or aquatic products.
The 2007 Census of Agriculture (the most recent available) indicates 9,344 farms are located within the Association’s geographic territory (as described on page 7 of the MD&A). The following table provides a comparison of data from the 2007 Census of Agriculture with Association loan numbers and loan volume as of December 31, 2012 for those farms meeting the above Young, Beginning and Small farmer definitions:
2007 Census Data Association Data* as of 12/31/2012 # of
Farms % of Total
Farms # of
Loans % of Total
Loan #s Loan Volume**
Goal Loan Volume**
Actual Young 511 5.5% 319 18.2% $62,000,000 $69,520,168 Beginning 2,509 26.9% 479 27.4% $94,400,000 $102,404,210 Small 8,600 92.0% 615 35.0% $53,200,000 $52,630,383
* Association Data adjusted to exclude Country Home and Farm Related Business loans. **Volume refers to outstanding gross principal balance, prior to any participations sold.
Quantitative Goals: The Association established loan volume goals for credit to YBS farmers as listed in the table above.
Qualitative Goals: The Association strives to serve as a reliable and consistent provider of sound and constructive credit to YBS farmers. The Association makes every effort to meet the credit needs of YBS farmer applicants. Referrals to and coordination with governmental and private sources such as Farm Service Agency, Vermont Agricultural Credit Corporation, leases and private party financing often plays an important role in serving these customers.
The Association is involved in, and supports, a number of activities and programs designed to benefit YBS farmers. The Association is a partner in, and has invested in, FarmStart, LLP. Contributions are made regularly to agriculturally-related organizations such Extension Service, FFA, and 4-H that provide education and experience to our future farmers. The Association awards up to three scholarships each year to family members of customers enrolled in higher education programs, preferentially agricultural programs. Association employees routinely serve in a variety of capacities, e.g., as classroom instructors and mentors, in furtherance of the Association’s efforts to assist YBS farmers.
Methodology: The Association employs various measures to ensure that credit and related services offered to YBS farmers are provided in a safe and sound manner in accordance with the Association’s risk-bearing capacity. The Association’s quality control plan calls for periodic review of certain loans made to YBS farmers.
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YANKEE FARM CREDIT, ACA RELATIONSHIP WITH COBANK, ACB
CoBank, ACB is the funding bank for the Association. A description of the organizational relationship between CoBank and the Association can be found in Note 1 to the Consolidated Financial Statements, “Organization and Operations.”
The Association borrows funds from CoBank. The Association is not permitted to borrow funds from other sources without the permission of CoBank. Information about the borrowing relationship between the Association and CoBank can be found in Note 6 to the Consolidated Financial Statements, “Note Payable to CoBank, ACB,” and in Management’s Discussion & Analysis (MD&A, the section titled “Funding Sources, Liquidity and Interest Rate Risk”).
In addition to borrowing, the Association also engages in the following transactions with CoBank:
The Association buys participation loans from CoBank. Participation loans are discussed in Note 3 to the Consolidated Financial Statements, “Loans and Allowance for Loan Losses,” and in the MD&A—the section titled “Loan Portfolio.” (The Association may also buy participation loans from other Farm Credit institutions, in addition to CoBank.)
The Association sells participation loans to CoBank. Participation loans are discussed in Note 3 to the Consolidated Financial Statements, “Loans and Allowance for Loan Losses,” and in the MD&A—the section titled “Loan Portfolio.” (The Association may also sell participation loans to other Farm Credit institutions, in addition to CoBank.)
The Association enters into interest rate swaps with CoBank. Interest rate swaps are discussed in Note 15 to the Consolidated Financial Statements, “Derivative Instruments,” and in the MD&A—the section titled “Interest Rate Swaps.” The counterparty for all interest rate swaps is CoBank.
CoBank is a cooperative, and the Association invests in CoBank. Information about the Association’s investment in CoBank can be found in Note 4 to the Consolidated Financial Statements, “Investment in CoBank, ACB.”
CoBank may pay patronage refunds to the Association, based on the business that the Association does with CoBank. Patronage refunds from CoBank are discussed in Note 4 to the Consolidated Financial Statements, “Investment in CoBank, ACB,” and in the MD&A—the section titled “Patronage refunds from CoBank.”
There are no capital preservation, loss sharing, or financial assistance agreements between the Association and CoBank. CoBank does not have access to the Association’s capital. CoBank and the Association are each responsible for their own interest rate risk.
Shareholders’ investments in the Association may be materially affected by the financial condition and results of operations of CoBank. CoBank’s annual and quarterly reports are available without charge from any of our offices (see page 40) for contact information) or directly from CoBank (see page 43 for contact information).
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YANKEE FARM CREDIT, ACA RELATIONSHIP WITH COBANK, ACB
(continued)
Contact information for CoBank, ACB:
Springfield Banking Center Corporate Headquarters
mailing address:
CoBank, ACB 240B South Road Enfield, CT 06082
mailing address:
CoBank, ACB P.O. Box 5110 Denver, CO 80217
physical address:
CoBank, ACB 240B South Road Enfield, CT 06082
physical address:
CoBank, ACB 5500 S. Quebec Street Greenwood Village, CO 80111
telephone: (860) 814-4043 telephone: (303) 740-4000
World wide web address: www.cobank.com
INFORMATION ABOUT THE FARM CREDIT SYSTEM
A brief description of the Farm Credit System is contained in Note 1 to the Consolidated Financial Statements, “Organization and Operations.” Additional information about the Farm Credit System can be obtained from any of our offices, listed below, or from the Federal Farm Credit Banks Funding Corporation:
Federal Farm Credit Banks Funding Corporation 10 Exchange Place, Suite 1401 Jersey City, NJ 07302-3913
telephone: (201) 200-8000 World wide web address: www.farmcreditfunding.com
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YANKEE FARM CREDIT, ACA EMPLOYEES
Chazy, New York (800) 545-8374 or (518) 846-7330
Geoffrey C. Yates, SVP/Director-Financial Svcs. Robert A. Guay, Appraiser
Sharon A. Perry, Financial Services Assistant
Middlebury, Vermont (800) 545-1169 or (802) 388-2692
Kenneth R. Button, Sr. Vice President Susan K. Kelley, Sr. Loan Officer
Kyle A. Lussier, Loan Officer Kristi L. Wood, Loan Officer
Abigail E. Roleau, Credit Analyst Donna L. Barnum, Office Assistant
Cheryl A. Heath, Records & Tax Specialist Pamela A. Simek, Controller
Newport, Vermont (800) 370-2738 or (802) 334-8050
Loren E. Petzoldt, Asst. Vice President Kelly E. Richardson, Loan Officer
Peggy S. Reed, Credit Analyst/Office Assistant Suzie J. Wheeler, Tax Specialist/Office Assistant Randall L. Smith, Credit Analyst/Tax Specialist
White River Junction, Vermont (800) 370-3276 or (802) 295-3670
Kenneth F. Nelson, Asst. Vice President Jeffrey A. Temple, Sr. Loan Officer
Christopher A. Bessette, Sr. Loan Officer/Part. Spec. Jean Conklin, Sr. Loan Officer/Farm Tax Specialist
April S. Smith, Loan Officer Clara E. Hall, Loan Officer
Morgan Greenwood Rilling, Credit Operations Coordinator Ryan A. Scelza, Credit Analyst
Desiree M. Gauthier, Office Assistant WendySue Smith, Office Assistant
Elizabeth L. Bayne, Appraiser/Sr. Records & Tax Specialist Michael J. Moloney, Sr. Records & Tax Specialist
Nicholas F. Bullock, Tax Specialist Kendra A. Burroughs, Financial Services Assistant
Williston, Vermont (800) 639-3053 or (802) 879-4700
George S. Putnam, President & CEO Greg M. LeDuc, Chief Financial Officer John S. Peters, SVP/Chief Credit Officer Ruchel D. St. Hilaire, Executive Assistant Lisa S. Wener, Sr. Accounting Assistant Vanda L. Ripley, Accounting Assistant
St. Albans, Vermont (800) 545-1097 or (802) 524-2938
Michael K. Farmer, Sr. Vice President David E. Lane, Sr. Loan Officer Chuck J. Custeau, Loan Officer
Thomas A. St. Pierre, Loan Officer Suzanne L. Petig, Loan Officer
Ellen H. Paradee, Credit Analyst Carly J. Bushey, Credit Analyst
Shantel M. Thomas, Crop Insurance Agent Sharron L. Hancock, Office Assistant
Lisa M. Gravel, Records & Tax Specialist Alicia M. Marcy, Financial Services Assistant
Nathan W. Goddard, Appraiser Trainee
See page 40 for physical and mailing addresses for the offices.
44
YANKEE FARM CREDIT, ACA DIRECTORS
Rocklyn A. Giroux, Chairperson Walter M. Gladstone 8096 Route 9 161 Mallary Rd. Plattsburgh, NY 12901 Bradford, VT 05033 (518) 561-2537 (802) 222-9232 Region 1 – Committee 3 Region 2 – Committees 2,3 Term Expires 2015 Term Expires 2014
Alan J. Bourbeau, Vice Chairperson Celeste Kane-Stebbins 30 Pond Rd 9437 VT Route 105 Sheldon, VT 05483 Enosburg Falls, VT 05450 (802) 524-2768 (802) 933-4975 Region 1 – Committees 3, 4 Region 1 – Committees 2, 3 Term Expires 2013 Term Expires 2014
Thomas J. Colgan Bradley N. Maxwell 264 Orford Road 732 Maxwell Road Lyme, NH 03768 Newport, NH 05855 (603) 795-2002 (802) 522-5582 Appointed Director – Committees 1,4 Region 2 – Committee 4 Term expires 2015 Term Expires 2015
Bryan E. Davis Paul F. Saenger 514 Holland Road P.O. Box 205 Derby Line, VT 05830 Shoreham, VT 05770 (802) 873-3941 (802) 897-2101 Region 2 – Committees 3, 4 Region 3 – Committees 1, 2 Term Expires 2013 Term Expires 2013
Rocki-Lee DeWitt Stephen H. Taylor 6181 Greenbush Rd. 166 Main Street Charlotte, VT 05445 Meriden, NH 03770 (802) 656-0043 (603) 469-3375 Outside Director – Committees 1, 2 Region 3 – Committees 1, 2 Term Expires 2016 Term expires 2015
Paul B. Franklin 141 River Road Committees as of 12/31/2012 Plainfield, NH 03781 1 – Audit Committee (603) 298-8519 2 – Compensation Committee Region 3 – Committees 1, 4 3 – Executive Committee Term Expires 2014 4 – Membership/Governance Committee
45
Members
Region #1 Arnold Mercy 2637 South Main St. Montgomery Center, VT 05471 802-326-4200
Wynn Paradee 2286 Sheldon Rd Sheldon, VT 05483 802-524-4202
Mark A. Wrisley 199 Clark Road Essex, NY 12936 518-963-4039
Region #2 Paul Gingue 1800 Higgins Hill Rd. Waterford, VT 05819 802-748-8843
Richard Martin 1066 Route 102 Guildhall, VT 05905 802-328-4120
Patrick Waterbury 397 Vaughan Farms Road East Thetford, VT 05043 802-785-4753
Region #3 David Ainsworth 86 VT Route 14 South Royalton, VT 05068 802-763-8017
Bruce Bascom 64 Sugarhouse Rd. Alstead, NH 03602-9801 603-835-6361
Kim Harvey 49 Humphrey Rd. Florence, VT 05744 802-483-6130
YANKEE FARM CREDIT, ACA NOMINATING COMMITTEE
Alternates
Region #1 Andrew Brouillette 3989 VT Route 105 Sheldon, VT 05483 802-933-8845
Guy Palardy 207 Middle Road Alburg, VT 05440-9663 802-796-3637
Region #2 Rendell Tullar 268 NH Route 10 Orford, NH 03777 603-353-4860
Denis Ward 3037 Littleton Rd. Monroe, NH 03771 603-638-2282
Region #3 Paul Doton 202 Lakota Rd. Woodstock, VT 05091 802-457-3292
David Goodhouse 1212 Baileys Mill Rd. Reading, VT 05062 802-484-5540
46
NOTES
47
NOTES
48
Yankee Farm Credit, ACA P.O. Box 467 Williston, VT 05495
PRSRT STD U.S. Postage
PAID Permit No. 478 Burlington, VT