2008 Annual Report
YANKEE FARM CREDIT, ACA 2008 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...... 33
Certification Statement...... 34
Borrower Privacy Statement...... 35
Office Locations ...... 35
Young, Beginning and Small Farmers ...... 36
Relationship with CoBank, ACB ...... 37
Information about the Farm Credit System ...... 38
Employees ...... 39
Directors ...... 40
1 Message from the Chairperson and CEO
We are in challenging times. Last year stock markets crashed and credit markets seized up. Major financial institutions around the world failed or were rescued by their governments. The economy was declared in recession. In spite of these challenges, the Farm Credit System needed no government assistance and it continued to meet the needs of its borrowers.
Highlights of your Association's financial results in 2008: • Net income was $4.5 million, down $1.9 million (29%) from 2007. The two most significant reasons for the decrease in net income were: an increase in the provision for loan losses, and lower net interest income due to falling interest rates. (Interest rates are presently at their lowest levels in over 50 years.) • Loans held by the Association increased by $24 million (8%) to $326 million. • Loan quality remained strong. Acceptable loan volume improved slightly from 96.8% to 97.8%, while high risk assets deteriorated slightly from 0.2% to 0.5% of total loan volume. • Permanent capital decreased slightly from 19.4% to 19.2%, still strong.
While loan quality remained high in 2008, it is almost certain to deteriorate in 2009. Conditions in the dairy industry, our primary industry concentration, weakened in the last half of 2008 and especially at the end of the year and into early 2009. Conditions in the timber industry, our second most important industry concentration, remain weak due to the overall recession, with no recovery in sight. Because of these circumstances, we increased our allowance for loan losses by nearly $800,000 (83%) in 2008 even though we have not identified any specific losses.
Many Association borrowers are facing financial stress in 2009. Your Association has excellent resources to work with you during these challenging times. Our credit staff is experienced and our balance sheet is strong. One way that we are pleased to help is by returning a portion of the Association's net income to members in the form of a patronage refund. The 2008 patronage refund is nearly $2.8 million and represents 1.00% (100 basis points) of member average loan volume. The 2008 patronage refund is 61 % of net income.
Thank you once again for your continuing patronage and support. We look forward to visiting with you at our upcoming regional annual meetings.
?~'i_.~ Paul E. Doton George S. Putnam Chairperson President and CEO
2 YANKEE FARM CREDIT, ACA FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (in thousands)
2008 2007 2006 2005 2004 CONSOLIDATED BALANCE SHEET Loans $ 325,761 $ 302,019 $ 296,207 $ 275,354 $ 282,364 Less allowance for loan losses 1,758 960 801 646 1,118 Net loans 324,003 301,059 295,406 274,708 281,246 Cash 1,770 2,075 1,420 1,352 1,341 Investment in CoBank, ACB 11,779 11,504 11,224 11,018 10,796 Other property owned - - - - - Other assets 5,952 6,159 6,239 5,443 5,348 Total assets $ 343,504 $ 320,797 $ 314,289 $ 292,521 $ 298,731
Note payable to CoBank, ACB $ 271,461 $ 248,997 $ 245,629 $ 225,246 $ 232,913 Other liabilities 4,561 5,417 5,161 5,738 5,183 Total liabilities 276,022 254,414 250,790 230,984 238,096
Stock and participation certificates 939 906 935 951 976 Allocated surplus - - - 2,220 4,399 Unallocated surplus 67,613 65,852 62,792 59,027 55,584 Accum. other comprehensive (loss) (1,070) (375) (228) (661) (324) Total members' equity 67,482 66,383 63,499 61,537 60,635 Total liabilities and members' equity $ 343,504 $ 320,797 $ 314,289 $ 292,521 $ 298,731
CONSOLIDATED STATEMENT OF INCOME Net interest income $ 9,031 $ 9,663 $ 8,593 $ 8,278 $ 8,658 Provision (reversal of provision) for loan losses 781 131 155 (511) (6,106) Non-interest income 2,193 2,560 3,014 2,212 2,090 Non-interest expense 5,900 5,698 5,323 4,706 4,614 Provision for (benefit from) income taxes 2 2 (666) 227 17 Net income $ 4,541 $ 6,392 $ 6,795 $ 6,068 $ 12,223
KEY FINANCIAL RATIOS Return on average assets 1.5% 2.1% 2.3% 2.1% 4.4% Return on average members' equity 6.6% 9.6% 10.7% 9.7% 23.7% Net interest margin 3.1% 3.3% 3.1% 3.1% 3.2% Members' equity to assets 19.6% 20.7% 20.2% 21.0% 20.3% Debt to members' equity 4.1:1 3.8:1 4.0:1 3.8:1 3.9:1 Net charge-offs (recoveries) to avg. loans (0.01%) (0.01%) 0.00% (0.01%) 0.21% Allowance for loan losses to loans and accrued interest receivable 0.5% 0.3% 0.3% 0.2% 0.4% Permanent capital ratio 19.2% 19.4% 18.4% 19.8% 17.4% Total surplus ratio 18.9% 19.1% 18.1% 19.5% 17.1% Core surplus ratio 18.7% 18.7% 17.6% 18.1% 14.7%
Net income distributed as patronage in the following year: Cash $ 2,790 $ 3,332 $ 3,031 $ 2,624 $ 2,600
3 YANKEE FARM CREDIT, ACA
Management’s Discussion and Analysis of Financial Condition and Results of Operations
For the Years Ended December 31, 2008, 2007 and 2006 (Dollars in thousands, except as noted)
FORWARD LOOKING STATEMENTS • Patronage refunds from CoBank were $1.411 million in 2008, as compared to $1.663 million in 2007, a This annual report contains forward-looking statements. decrease of $252 thousand. This is primarily due to a These statements are not guarantees of future performance lower patronage refund related to participation loans and involve certain risks, uncertainties and assumptions that sold to CoBank. More detail on this item is given are difficult to predict. Words such as “anticipates,” below. “believes,” “could,” “estimates,” “may,” “should,” “will,” or other variations of these terms are intended to identify The return on average assets (ROA) was 1.5% in 2008 as the forward-looking statements. These statements are compared to 2.1% in 2007 and 2.3% in 2006. Return on based on assumptions and analyses made in light of average members’ equity (ROE) was 6.6% in 2008 as experience and other historical trends, current conditions, compared to 9.6% in 2007 and 10.7% in 2006. and expected future developments. However, actual results and developments may differ materially from our The Association declared a patronage distribution of $2.790 expectations and predictions due to a number of risks and million based on 2008 earnings, to be distributed 100% in uncertainties, many of which are beyond our control. cash in March 2009. The patronage distribution for 2007 These risks and uncertainties include, but are not limited to: (distributed in 2008) was $3.332 million, 100% cash, and weather-related, disease, and other adverse climatic or the patronage distribution for 2006 (distributed in 2007) biological conditions that periodically occur that impact was $3.031 million, 100% cash. agricultural productivity and income; economic fluctuations in the agricultural, rural utility, international, and farm- The major changes in the components of net income are related business sectors; changes in United States shown in the following table: government support of the agricultural industry; political, legal, regulatory and economic conditions and Effect on net income developments in the United States and abroad; and actions Increase (decrease) 2008 vs. 2007 2007 vs. 2006 taken by the Federal Reserve System in implementing Net interest income $ (632) $ 1,070 monetary policy. Provision for loan losses (650) 24 Patronage refunds from CoBank (252) 99 Other income, exclusive of RESULTS OF OPERATIONS patronage refunds from CoBank (115) (553) Other expense (202) (375) Net income in 2008 was $4.541 million, a decrease of Provision for income taxes - (668) $1.851 million (29%) from 2007. Total (decrease) in net income $ (1,851) $ ( 403)
The most significant factors causing less net income in Net interest income: In 2008, net interest income before 2008 were: the provision for loan losses was $9.031 million, a decrease of $632 thousand (6.5%) from 2007. The following table • Provision for loan losses was $650 thousand higher in shows the principal components of net interest income 2008 due to a change in the factors used to calculate before the provision for loan losses. Interest earning assets the allowance for loan losses. This is discussed in consist of accrual loans, and interest bearing liabilities more detail below. consist of the note payable to CoBank.
• Net interest income was $632 thousand less in 2008 due to the overall drop in interest rates during the year.
4 2008 2007 2006 Patronage refunds from CoBank: Patronage refunds from Interest income on CoBank consisted of the following: interest earning assets $ 15,852 $ 22,244 $ 21,017 Interest expense on 2008 2007 2006 interest bearing liabilities 7,044 12,494 11,879 Patronage refunds on Subtotal 8,808 9,750 9,138 the Association’s note Interest income on payable to CoBank $ 1,071 $ 1,103 $ 1,011 nonaccrual loans 20 155 80 Patronage refunds on Interest rate swap participation loans sold income (expense) 203 (242) (625) to CoBank 340 560 553 Net interest income before the Total $ 1,411 $ 1,663 $ 1,564 provision for loan losses $ 9,031 $ 9,663 $ 8,593
See Note 4 to the Consolidated Financial Statements, The “subtotal” above can be analyzed in terms of changes “Investment in CoBank, ACB,” for additional information in volumes and rates on interest earning assets and interest about the patronage relationship between the Association bearing liabilities. The following table summarizes the and CoBank. applicable volumes and rates. All numbers are averages for the year. Other income, exclusive of patronage refunds from CoBank: In 2008, this category decreased by $115 2008 2007 2006 thousand (13%) as compared to the prior year. The Volumes: decrease is primarily due to the receipt of Credit Life Interest earning assets $ 293,650 $ 290,909 $ 279,719 Interest bearing liabilities 239,212 238,564 228,985 Insurance dividends totaling $102 thousand in 2007, as Loanable equity $ 54,438 $ 52,345 $ 50,734 compared to only $1 thousand in 2008.
Rates: Other expense: In 2008, this category increased by $202 Interest earning assets 5.40% 7.65% 7.51% thousand (4%), primarily due to two items: Interest bearing liabilities 2.94% 5.24% 5.19% Interest rate spread 2.46% 2.41% 2.32% • Salaries and employee benefits increased by $178 thousand (6%) as a result of an increase in employees The following table shows the effects of the above changes in 2008. in volumes and rates on net interest income: • Fees paid to Farm Credit Financial Partners increased Effect on net interest income* $81 thousand (9%). This increase reflects the increase increase (decrease) 2008 vs. 2007 2007 vs. 2006 in cost to provide services to the Association. Due to changes in volumes $ 153 $ 349
Due to changes in interest rates (1,095) 263 Total (decrease) increase in net Provision for (benefit from) income taxes: The provision interest income* $ ( 942) $ 612 for (benefit from) income taxes consisted of the following: *considering interest earning assets & interest bearing liabilities only 2008 2007 2006 Provision for (benefit from) income taxes $ 2 $ 2 $ (666) Net interest margin (net interest income as a percent of average earning assets) was 3.1% in 2008, as compared to The (benefit from) income taxes in 2006 resulted primarily 3.3% in 2007 and 3.1% in 2006. from a recalculation of the valuation allowance. Prior to
2006, the valuation allowance was equal to the gross Provision for loan losses: There was a net provision for deferred tax assets. Starting in 2006, the valuation loan losses of $781 thousand in 2008, as compared to a net allowance is equal to the net deferred tax assets, causing the provision of $131 thousand in 2007 and a net provision of benefit in 2006. See Note 8 to the Consolidated Financial $155 thousand in 2006. The increase in 2008 was due to Statements, “Income Taxes,” for more detail. changes in the factors used to calculate the allowance for loan losses as discussed below under “Allowance for Loan Losses.”
5 LOAN PORTFOLIO The dairy industry experienced slightly lower prices in 2008 following high prices in 2007 and low prices in 2006. Year-end 2008 loan volume was $325.8 million, which was The outlook for 2009 is for decreasing prices. $23.7 million (7.9%) higher than at year-end 2007. Average loan volume in 2008 was $294.2 million, which Avg. Price Change From Avg. Price Change From was $2.9 million (1.0%) higher than in 2007. In 2007, Year w/o premium Prior Year with premium Prior Year year-end loan volume increased by $5.8 million (2.0%) 2008 $19.16 -- $19.16 (1%) from year-end 2006, while average loan volume for the 2007 19.25 42% $19.30 36% 2006 13.56 (14%) 14.14 (10%) year increased by $10.9 million (3.9%). 2005 15.77 (3%) 15.78 (5%) 2004 16.32 27% 16.54 18% The loan portfolio continues to be primarily concentrated in 2003 12.81 -- 14.02 1% the dairy industry, with 58% of loans invested in dairy 2002 12.76 (19%) 13.91 (12%) businesses at December 31, 2008. The second largest 2001 15.67 21% 15.83 14% concentration is timber, with 14% of the loan portfolio. Loans to farm related businesses and livestock each (Prices quoted are the Federal Order 1 statistical uniform represent 4% of the loan portfolio, while fruit growers and price for milk delivered to Boston, in $/cwt. Average part-time farmers each represent 3% of the loan portfolio. prices for the year are the December-November prices, The remaining 14% of the loan portfolio includes rural reflecting payments received by farmers in January- homeowners and a variety of other miscellaneous December. The “premium” referenced above was either agricultural operations, as well as most of the purchased the Northeast Dairy Compact premium from July 1997 participation loans, with no single category comprising through September 2001 or the Milk Income Loss Contract more than 3% of the loan portfolio. (MILC or MILCX) premium from December 2001 through September 2007. The MILC premium applies to only the first 2.4 million pounds of milk produced annually. The Loans by Industry premium referenced above does not include payments for 3%3% 12/31/08 4% 14% production that were paid through the Vermont Target 4% Price program.) Dairy Timber 14% The higher milk prices have been accompanied by an Farm Related Business increase in the cost of farm inputs, particularly purchased Livestock Part-time Farmers feed. The composite Feed Index published by the USDA Fruit was 188 for 2008, up 21% from 156 in 2007. 58% Other Our loan portfolio is geographically diversified throughout our assigned territory, which consists of all of Vermont, Included in loans are purchased participation loans of $14.7 four counties in western New Hampshire, and two counties million (4.5% of the portfolio). These loans are primarily in northeastern New York. As of December 31, 2008, categorized as marketing and processing ($6.8 million), approximately 67% of our loans were in Vermont, 16% in which is included in the 15% “other” category in the chart New Hampshire, and 12% in New York. above, and timber ($4.5 million). The remaining $3.4 million of purchased participation loans is either crop, nursery, dairy, or farm related business volume, and is Loans by State included in the dairy and “other” categories listed above. 12% 12/31/08 16% 5% At December 31, 2007, the two most significant industry Verm ont concentrations were dairy (58%) and timber (14%). Loans Ne w Hamp shire to farm-related business, fruit growers, part-time farmers Ne w Y ork and livestock each represented 4% of the loan portfolio. Other
See Note 3 to the Consolidated Financial Statements, “Loans and Allowance for Loan Losses,” for additional 67% information about the Association’s loan portfolio,
including the volume of loans to each of the above- mentioned industries.
6 There are several ways to examine the quality of the Another measure of loan quality is to consider the Association's loan portfolio. One measure of loan quality is classification of loans according to the Uniform to consider the level of “high risk assets.” High risk assets Classification System. By this measure, loan quality include the following: improved slightly in 2008. The following table includes all loans (including nonaccrual loans), but not other property • Nonaccrual loans. These are loans for which it is owned. probable that all principal and interest will not be collected according to the contractual terms. The December 31, Association does not record interest income on these Credit Classification: 2008 2007 2006 loans on an accrual basis. Delinquent loans will Acceptable 94.4% 93.0% 93.1% generally be classified as nonaccrual when they OAEM* 3.4% 3.8% 3.3% become 90 days past due. Substandard 2.2% 3.2% 3.6% Doubtful 0.0% 0.0% 0.0%
Loss 0.0% 0.0% 0.0% • Accrual loans 90 days or more past due. These are Total loans 100.0% 100.0% 100.0% loans on which the Association is recording interest on Percentages based on volume. an accrual basis, even though they are severely past *Other Assets Especially Mentioned due. Such loans are adequately secured and in the process of collection. Two additional measures of loan quality are the delinquency rate and loan charge-offs. The delinquency • Accrual restructured loans. These are loans on which rate increased during 2008, but remained at a low level and the Association is recording interest on an accrual well within our internal goals. Additionally, there were basis, but the Association has made a monetary recoveries of loan charge-offs in 2008 of $17 thousand. concession to the borrower, such as a below-market interest rate or a reduction in principal or interest 2008 2007 2006 owed. Such loans are usually former nonaccrual loans on which the contractual terms have been modified, Accrual loans 30 days or more past due (as % of total accrual loans) and which are now performing under the new At December 31 0.5% 0.1% 0.1% contractual terms. Average for the year 0.4% 0.3% 0.2%
Net loan (recoveries) charge-offs Other property owned (OPO). This is property • Amount $ (17) $ (28) $ - formerly owned by a borrower and typically offered as As % of average loans (0.01)% (0.01)% 0.00% security for a loan, but now owned by the Association Percentages based on volume. as the result of a default on the loan. Other property owned is usually acquired by the Association through a Taking all of these measures together, loan quality foreclosure action, a deed in lieu of foreclosure, or remained fairly stable in 2008. Overall loan quality at other legal action. December 31, 2008 was at a satisfactory level and met all internal goals established by the Association. All loans that do not fall into one of these categories are considered performing loans. ALLOWANCE FOR LOAN LOSSES
The following table shows loans plus other property During 2008 a Farm Credit System workgroup provided, owned, classified according to the above categories. By and recommended the use of, updated probability of default this measure, loan quality deteriorated slightly in 2008. factors in the calculation of the allowance for loan losses. The probability of default factors had not been updated December 31, since they were first implemented in 2004. 2008 2007 2006 Performing loans 99.5% 99.8% 99.7% Weakened conditions in the dairy industry which occurred High risk assets in the last half of 2008, along with the effect that the overall Nonaccrual loans 0.4% 0.1% 0.2% recession is having on the already weakened timber Loans 90+ days past due 0.0% 0.0% 0.0% industry were the reasons the Association adopted the new Restructured loans 0.1% 0.1% 0.1% OPO 0.0% 0.0% 0.0% factors in the fourth quarter of 2008. Total high risk assets 0.5% 0.2% 0.3% Total loans + OPO 100.0% 100.0% 100.0% The allowance for loan losses at year end was $1.758 Percentages based on volume. million as compared to $960 thousand in 2007, and $801 thousand in 2006. The increase in the allowance is
7 primarily due to the change in the probability of default variable rate of interest and receives from the counterparty factors described above. a fixed rate of interest. The variable “pay rate” is a three month rate which resets quarterly. The fixed “receive rate” See Note 3 to the Consolidated Financial Statements, is determined at the time the swap is initiated and remains “Loans and Allowance for Loan Losses,” for additional fixed for the term of the swap. The swaps entered into by information about the allowance for loan losses, including a the Association have terms ranging up to three years. Each summary of activity in the account. quarter a net cash settlement between the Association and the counterparty is calculated by applying both rates of FUNDING SOURCES, LIQUIDITY AND INTEREST interest (the pay rate and the receive rate) to a specified RATE RISK amount called the notional value. The counterparty to the Association’s swaps is CoBank. The Association obtains funds by borrowing from CoBank on a revolving line of credit. The funding relationship with The purpose of this interest rate swap strategy is to reduce CoBank is governed by a General Financing Agreement the volatility of net interest income. As noted above, (GFA). The amount borrowed is expected to remain below because the Association’s equity is used to fund loans, net 90% of the “borrowing base amount” as defined in the interest income will be higher when interest rates are GFA. If this ratio should equal or exceed 92%, CoBank is higher, and lower when interest rates are lower, all other allowed under the GFA to take certain actions against the factors being equal. On the other hand, income from Association. At December 31, 2008, this ratio was 83.5%, receive fixed swaps will increase when interest rates as compared to 82.7% and 83.1% at December 31, 2007 decrease, and decrease when interest rates increase, all and 2006, respectively. Because the funding relationship other factors being equal. These two factors will tend to with CoBank provides sufficient liquidity, the Association offset each other. does not maintain large balances in cash or other liquid investments. In accordance with this strategy, it is the Association’s intent to have the total notional value of its interest rate The Association attempts to limit interest rate risk by swaps not exceed accrual loans less the note payable to matching the interest rate characteristics of its debt with the CoBank. The Association intends to enter into swaps with interest rate characteristics of its loans. The Association terms not exceeding three years. offers both variable and fixed rate loans. At the end of 2008, the accrual loan portfolio consisted of approximately This strategy has the additional benefit that on average, 82% variable rate loans and 18% fixed rate loans. The over long periods of time, it should increase net interest interest rate charged to the Association on debt used to fund income. This is because the pay rate is a three month rate the fixed rate loans is itself a fixed rate, which limits while the receive rate is a longer term rate, up to three interest rate risk on that portion of the portfolio. The years. Historically, long term interest rates have on average interest rate charged to the Association on the remaining been higher than short term interest rates. Nevertheless, it debt is a variable rate, but the Association has the ability to is possible to experience several consecutive years of change the variable rate charged to borrowers as needed. negative impact on net interest income from this strategy.
The Association funds approximately 81% of its loans with In 2008, the effect of these interest rate swaps on the debt as described above. The remaining 19% is funded consolidated statement of income was a decrease in interest with equity. This has the effect of making the Association expense in the amount of $203 thousand. In 2007, the sensitive to interest rates as follows: if interest rates rise and effect was an increase in interest expense of $242 thousand, all other factors remain equal, the Association’s net interest and in 2006, the effect was an increase in interest expense income will increase; and, conversely, if interest rates fall of $625 thousand. and all other factors remain equal, the Association’s net interest income will decrease. See Note 14 to the Consolidated Financial Statements, “Derivative Instruments,” for additional information about At December 31, 2008, the weighted average rate of the Association’s interest rate swaps. interest charged to the Association by CoBank was 1.69%. MISSION RELATED INVESTMENTS INTEREST RATE SWAPS The Farm Credit Act states that the mission of the Farm The Association enters into derivative financial instruments Credit System is “to provide for an adequate and flexible known as “receive fixed” interest rate swaps. In a receive flow of money into rural areas.” Congress also recognized fixed swap, the Association pays to a counterparty a the “growing need for credit in rural areas” and declared
8 that the System be designed to accomplish the objective of See Note 7 to the Consolidated Financial Statements, improving the income and well being of America’s farmers “Members’ Equity,” for additional information about the and ranchers. To further the System’s mission to serve Association’s capitalization policies, equities, and rural America, the System has initiated mission related regulatory capitalization requirements. programs and other mission related investments approved by the FCA.
The Association has initiated a mission related investment program approved by the FCA, whereby the Association may make investments that further our commitment to serve the needs of the rural community. At December 31, 2007, the Association’s net investment in this program was $401 thousand.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income consists of three components: the fair value of swaps less ineffectiveness and the effect of Statement of Financial Accounting Standards No. 158 on pensions and post retirement health care. The largest component is the effect of FAS No. 158, which was implemented December 31, 2007. The Standard 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, 2008 2007 2006 Swaps $ 629 $ 152 $ (228) Pension (1,657) (491) - Post-Retirement Healthcare (42) (36) - Total Accumulated Other Comprehensive Income $ (1,070) $ ( 375) $ (228)
CAPITAL RESOURCES
Members’ equity was 19.6% of assets at December 31, 2008, as compared to 20.7% and 20.2% at the end of 2007 and 2006, respectively.
The primary measure of capital adequacy is the permanent capital ratio as defined by the FCA. At December 31, 2008, the Association's permanent capital ratio was 19.2% as compared to 19.4% at December 31, 2007 and 18.4% at December 31, 2006. The Association continues to exceed all capital requirements of both FCA and ACB. Additionally, the Association sets internal goals for all capital requirements and met those goals as of December 31, 2008.
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YANKEE FARM CREDIT, ACA DIRECTORS AND SENIOR OFFICERS
DIRECTORS another dairy operation in Fairfax, VT. The new operation, Gingue Brothers Dairy LLC is milking 400 Holsteins. Also in The Association has a Board of 11 directors. Nine directors January 2009 Mr. Gingue and his wife Rosemary purchased (the “elected directors”) are elected by and from the voting Begin Realty Associates where Rosemary has been a Sales members of the Association. Two directors (the “outside Associate and Broker for the past 15 years. Mrs. Gingue took directors”) are elected by the other directors. None of the over operations of the business as of January 1st. Mr. Gingue directors may be an employee of the Association. The outside holds a degree in Dairy Herd Management from Vermont directors may not be members of the Association. Technical College and serves as Director for Select Sire Power, Inc. New York/New England district. He is also a The nine elected directors are elected by region: member of the Caledonia County Farm Bureau, The Holstein No. of Association of America, Northeast Kingdom Chamber of Region Directors Territory Commerce and the Brother Knights of Columbus. He is a past 1 3 NY: Clinton, Essex member of the Lyndonville Savings Bank Advisory Board and VT: Chittenden, Franklin, Grand Isle the Caledonia/Essex Farm Service Agency County 2 3 NH: Coos, Grafton Committee. VT: Caledonia, Essex, Lamoille, Orange, Orleans, Washington Alan J. Bourbeau (Region 1) 3 3 NH: Cheshire, Sullivan Alan J. Bourbeau, age 49, has served as a director since 2007. VT: Addison, Bennington, Rutland, His current term expires in 2010. Mr. Bourbeau owns and Windham, Windsor operates a third generation farm that is located on the Pond
Road in Swanton, Vermont. Mr. Bourbeau and his wife Paul E. Doton, Chairperson (Region 3) Kimberly have been married for twenty-eight years and have Paul E. Doton, age 59, has served as a director since 1998. three children: Nicole, Justin and Eric; and one grandchild, His current term expires in 2011. He and his wife, Sherry, Evony. Mr. Bourbeau, along with his two sons, operates and son Bryan, own and operate Doton Farm, LLC in Bourbeau & Sons, Inc. which has a 220 cow milking herd and Barnard, Vermont. The Doton Farm consists of 200 acres raises all its own replacement livestock. For the past four owned and 200 acres rented. The Dotons have 110 head of years, Mr. Bourbeau and his family have sold sap to a nearby Holstein cattle, and a diversified operation offering sugarhouse. In 2007, Mr. Bourbeau and his family built a vegetables, snow plowing and maple syrup. Mr. Doton is a sugarhouse and expanded the sugar woods, which yields member of the Vermont Maple Producers Association, 10,000 taps, to make their own syrup from the maple trees on Windsor County Maple Producers Association and Vermont their farmland. Along with managing Bourbeau & Sons, Inc., Farm Bureau. He is currently a director of Agri-Mark, the Bourbeau Farm LLP, and Greens Corners Maple Products, New England Dairy Promotion Board and the New England Mr. Bourbeau has served his community the following ways: Dairy and Food Council, the United Dairy Industry nine years with the Swanton Planning Commission, seven Association National promotion Board, as well as a member years as Chairman; eighteen years as Franklin County Field of the Windsor/Orange County FSA Committee and the VT Days Director, Vice-Chairman for the past four years; six Milk Commission. In his hometown, he is currently the town years as a Young Cooperator Member for the St. Albans moderator, and a Justice of the Peace. He is a former Barnard Cooperative; nine years as a member and officer of the St. Elementary School director, member of the Barnard zoning Albans Elks Lodge #1566, Exalted Ruler for the 2004-2005 board of adjustment, Woodstock Union High School director, year; and seven years as the President of the formerly known Vermont DHIA director, Vermont Dairy Promotion Council Sheldon Jack O’Lopes snowmobile club. member, Agri-Mark representative and Agri-Mark
Resolutions Committee member. Rupert C. Chamberlin (Region 2)
Rupert C. Chamberlin, age 74, has served as a director since Paul E. Gingue, Vice Chairperson (Region 2) 1993. His current term expires in 2010. He and his wife, Paul E. Gingue, age 54, has served as a director since 2000. Muriel, own and operate Wonder View Farm in Barton, His current term expires in 2009. Mr. Gingue and his wife Vermont, consisting of 175 acres of land. The cattle were Rosemary have four sons. Together with the two younger sold in 2001, but they still maintain ownership of a few sons, Jeff and James, Mr. Gingue owns and operates a 230 registered Jerseys, which are boarded out. The tillable land cow registered Holstein farm in Waterford, Vermont. In 2008 and barn are currently rented to a young farmer. The wood Mr. Gingue and his two older sons, Dan and Shawn, started land consisting of a small maple orchard and timber is still
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being operated by Rupert. He is a graduate of the Vermont Rocklyn A. Giroux (Region 1) School of Agriculture (VTC), class of 1953. Among other Rocklyn A. Giroux, age 64, has served as director since 2003. activities, Mr. Chamberlin is presently serving as a selectman His current term expires in 2009. He co-owns Adirondack for the town of Barton and is President of the Orleans County Farms LLC in Peru, New York, with Jon Rulfs and Jake Fair. He is a past president of the Vermont Farm Bureau, Swyers. The dairy farm has 1,400 milking cows and raises all served as a director of Farm Family Insurance, and served for of their crops on 2,400 acres of land. From 1972 to 1995, Mr. many years on the local Barton school board. He has been Giroux operated Giroux Bros. Inc., a John Deere dealership in active in Jersey Breed activities. He has served as president of Plattsburgh and Malone, New York. From 1985 to 1986 he the VT Jersey Breed Association and the New England Jersey was President of the New York Equipment Dealers Breed Association. He and Muriel were awarded the Association. Mr. Giroux is a board member for Clinton Outstanding Young Dairyman Award by the American Jersey County’s One Work Force. He is also on the board of Breed Association. He has also served on the Orleans County Trustees at the William H. Miner Agricultural Research Soil Conservation District Committee, and served as Institute in Chazy, New York. In addition, Mr. Giroux is a Chairman during his tenure. fire commissioner for Beekmantown Fire Department in Plattsburgh, where he resides with his wife Chris. He and Dr. Rocki-Lee DeWitt (Outside Director) Chris enjoyed raising their five children and now enjoy being Dr. Rocki-Lee DeWitt, age 52, has served as a director since grandparents to their nine grandchildren. 2004. Her current term expires in 2010. She received her Ph.D. from Columbia University in strategic management and Walter M. Gladstone (Region 2) an M.S. in Agricultural Economics from the Ohio State Walter M. Gladstone, age 47, lives in Bradford, VT with his University. Dr. DeWitt is Dean of the School of Business at wife, Margaret. Walt and Margaret own and operate the University of Vermont and a Professor of Management. Newmont Farm, LLC and have three sons, Will, John and She conducts research on strategies for businesses in maturing Matt. Over the years, Newmont Farm has grown from 80 and declining industries and has served as a business advisor cows in 1988 to currently milking over 900 cows. The to multiple technology-based startups. Her professional Gladstone’s also grow over 150 acres of pumpkins that are affiliations include the Academy of Management and the wholesaled locally and in the New England area. Will, the Strategic Management Society. She sits on the Board of oldest son, graduated from VTC and is currently the herdsman Governors of Beta Gamma Sigma and is a member of the and helps with the day to day operations. John works with the Board of Directors of the Greater Burlington Industrial mechanics on the dairy and will be attending Paul Smith’s Council and the Lake Champlain Region Chamber of College in the fall. Matt works for the local custom harvester, Commerce. Dr. DeWitt has been previously employed as cropping locally and for Newmont Farm. Walt is presently is Associate Dean of Professional Master’s Programs at the serving as President of the New England Family Dairy Farms Pennsylvania State University and as agricultural parts sales Cooperative. manager with Case-IH. Raised on a dairy farm in Accord, NY, Dr. DeWitt was a 4-H member for 10 years. Dr. DeWitt Celeste Kane-Stebbins (Region 1) and her life partner, Josephine Herrera, reside in Charlotte, Celeste Kane-Stebbins, age 53, is a native of Sheldon, Vermont. Vermont. Celeste and her husband, Gregory Stebbins, own and operate Stebbinshire Farms, a 450-head dairy enterprise. Alfred A. Dunklee (Region 3) Celeste and Greg began farming in 1976 when they purchased Alfred A. Dunklee, age 78, has been a member of Farm Credit a farm in West Enosburg with a loan from Farm Credit. They since 1950. He has served as director since 1985, and was expanded the business in 1993 with the purchase of Celeste’s chairman from 1995 through April, 2006. His current term parents’ farm in Sheldon, where they now reside. Currently, expires in 2009. Mr. Dunklee, his wife Martha and son Jeff, 275 cows are milked at the Sheldon and West Enosburg own and operate Vern-Mont Farms, LLC, a 500 cow locations. In 2003, they purchased a neighboring farm where registered Holstein farm with 400 herd replacements. Vern- they now raise all replacement livestock; two other nearby Mont Farms also consists of 700 acres of land with 250 rented farms are leased for crop land. In addition to the dairy acres along the Connecticut River in Vernon, Vermont. Jeff operation, Celeste and Greg harvest and sell maple syrup, serves as herd manager for the operation and Mrs. Dunklee as lumber, and firewood. The farm employs four full-time farm accountant. Among other activities, Mr. Dunklee is a workers, including two of their sons, and two part-time member of the National Holstein Association and Vermont employees. In the earlier years, Celeste milked cows, cared Farm Bureau. Mr. Dunklee graduated from the Vermont State for young stock, helped with crop work, and kept the books. College of Agriculture. He has served as a trustee of the As the business has expanded and increased in complexity, Vermont DHIA, as county committeeman for ASCS, and as a Celeste’s responsibilities as the farm’s fiscal manager have lister for the town of Vernon. also grown; she now spends her time primarily doing bookkeeping, payroll, and tax preparation.
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In addition to the farm work, Celeste is an RN and works full- grandchildren. Dr. Sniffen is a member of the American time as manager of the Education Department at Northwestern Society of Animal Science, the American Dairy Science Medical Center in St. Albans; she also continues to work part- Association, and the Northeast Ag and Feed Alliance. time as an Emergency Department nurse. Celeste earned a BS from the University of Vermont and a MS from the University BOARD COMMITTEES of Phoenix, and is a member of Sigma Theta Tau International, the Honor Society of Nursing. She is the The Board of Directors has established five standing mother of four children: Emily, Michael, and twins, Matthew committees. Each committee is governed by a formal charter. and Sean. The directors serving on each committee as of December 31, 2008 are indicated on page 40. Celeste is an involved community member and has served on the Sheldon School Board for over 8 years, the Franklin Audit Committee County Farm Bureau Board of Directors for 7 years, and the Cold Hollow Career Center Health Advisory Board for 3 The purpose of this committee is to assist the Board in years. She is co-founder of The Healing Circle Breast Cancer fulfilling its fiduciary and oversight responsibilities for the Support Group, serves as an Emergency Nurses CARE financial reporting process, the systems of internal controls, (ENCARE) Nurse, and as a lector and choir member at her the audit process, and the Association’s process for church. She is a former Community Health Center board monitoring compliance with laws, regulations, policies, member. standards of conduct, and public responsibilities.
Paul F. Saenger (Region 3) This committee consists of five directors, including both Paul F. Saenger, age 53, has served as director since 2007. outside directors. This committee met six times in 2008, three His current term expires in 2010. Mr. Saenger left a career as times in person and three by conference call. The chairperson an assistant professor at UVM in 1987 to pursue a lifetime of this committee is Dr. DeWitt, one of the outside directors. goal of farming. He and his wife Rene own and operate No member of this committee also serves on the Executive Cream Hill Farm in Shoreham, Vermont. They finish 2,200 Committee. head of beef steers and heifers on purchased concentrates and forages grown on 1,600 acres of owned land. Mr. Saenger Compensation Committee earned a Bachelor’s and Master’s from the University of Illinois, and a Ph.D. from Purdue University in animal The purpose of this committee is to review the performance of nutrition and management. Since graduating and moving the President/CEO and recommend to the full Board back to Addison County in 1982, Farm Credit has been his appropriate compensation for the President/CEO. The only lender. After 26 years, Mr. Saenger felt it was time to Committee also approves the overall compensation plan for give back to the organization that facilitated Cream Hill senior officers. This committee consists of five directors, and Farm’s success. Mr. Saenger served as Shoreham Town met twice in 2008. The chairperson of this committee is Mr. Auditor and is currently Selectboard Chair. He has also Gingue. served on the Otter Creek Conservation District and the Governor’s Commission on Groundwater. Mr. and Mrs. Executive Committee Saenger recently purchased the stone house at Larrabee’s Point as well as the M/V Carillon, a 60’ cruise vessel offering The purpose of this committee is to approve or deny credit in tours and charters on Lake Champlain. They have four specific situations. The committee is further charged with children in college. making decisions on non-credit issues as directed by the Board. This committee consists of five directors, and met 24 Dr. Charles J. Sniffen (Outside Director) times in 2008, mostly by conference call. The chairperson of Dr. Charles J. Sniffen, age 71, has served as a director since this committee is Mr. Doton. No member of this committee 1992. His current term expires in 2009. He received his also serves on the Audit Committee. Ph.D. from the University of Kentucky in ruminant nutrition. Dr. Sniffen is president of Fencrest, a consulting firm for the Membership/Governance Committee dairy industry. Prior to his present employment, Dr. Sniffen was President of Miner Agricultural Research Institute, The purpose of this committee is to oversee the Board Professor, and Meadows Endowed Chair in Dairy nomination and election process, as well as Board conduct, Management, at Michigan State University, Professor at compensation, credit quality, performance, and governance Cornell University and Professor at the University of Maine. practices. Additionally, this committee considers membership He and his wife, Judy, reside in Holderness, New Hampshire. issues, including member/applicant appeals of adverse credit They have two daughters, Sarah and Kathy and four decisions. This committee consists of five directors, and met
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two times in 2008. The chairperson of this committee is Mr. Button holds a degree in agriculture from the University of Giroux. Vermont.
Strategic Planning Committee Kenneth H. Buzzell (Senior Vice President) Kenneth H. Buzzell, age 57, has been employed by the The purpose of this committee is to analyze and recommend to Association (or one of its predecessors) since 1981. He was the full Board strategies for optimizing the long-term benefits hired as a loan officer in the White River Junction, Vermont to members/stockholders. This committee consists of four office. In 1984 he became the manager of the St. Johnsbury, directors, and met one time in 2008. The chairperson of this Vermont office, and Vice President of that office in 1990. committee is Dr. DeWitt. When the St. Johnsbury, Vermont office closed in 1992 he became the Vice President/manager of the Newport, Vermont SENIOR OFFICERS office. In August of 2005 he became a Senior Vice President and Regional Manager of the Northern Region which includes George S. Putnam (President and CEO) Newport, St. Albans and Chazy, New York. Prior to working George S. Putnam, age 53, has been employed by the for the Association, Mr. Buzzell worked for the Farmers Association (or one of its predecessors) since 1984. He was Home Administration. Mr. Buzzell holds a degree in hired as a loan officer, and assumed the position of controller agriculture from the University of Vermont. in 1986. In 1995, with the formation of Yankee, he became Chief Financial Officer. He was named Executive Vice John S. Peters (Vice President/Operations) President and Chief Operating Officer in 2003. Mr. Putnam John S. Peters, age 57, has been employed by the Association assumed his present position in 2006. Prior to working for the (or one of its predecessors) since 1973. He was hired as a Association, Mr. Putnam served as controller of the Richmond loan officer, working primarily in the Middlebury and Rutland Cooperative Association of Richmond, Vermont. Mr. Putnam offices. From 1974 until 1986 he served as Branch Manager holds a degree in agricultural engineering from the University of the Middlebury Office. He then transferred to the Williston of Maine and an MBA from the University of Chicago. In office. After serving in Williston he transferred to St. Albans, 1993, he graduated from the American Bankers Association’s again as Branch Manager. In 1994 he obtained his Certified Stonier Graduate School of Banking. General Appraiser's license and served as an Association appraiser. In 1995, with the formation of Yankee, he became William C. Heath, Jr. (Senior Vice President/CCO) the Association's Director of Quality Control, in charge of William C Heath, age 53, has been employed by the Credit and Collateral Review and Internal Audit. In 2005 he Association (or one of its predecessors) since 1985. Previous was named an Association Vice President. In 2006 he to that he served one year with the Watertown NY, Federal assumed the position of Vice President/Operations and was Land Bank and PCA. Mr. Heath started in the Newport, appointed Corporate Secretary. Mr. Peters holds a degree in Vermont office in 1985 as a loan officer and obtained his agriculture from the University of Vermont. Certified General Appraisers license in 1993. In 1995, with the formation of Yankee, he became Branch Manager and Pamela A. Simek (Controller) Vice President in the White River Junction office. During Pamela A. Simek, age 50, has been employed by the 2006 Mr. Heath assumed his present position as Senior Vice Association since 1995 when she was hired as an President/Chief Credit Officer covering all of Yankee's administrative assistant in the Williston, Vermont office. In territory. Prior to working for Farm Credit, Mr. Heath 1997 she became Assistant Treasurer and Personnel operated an 80 cow registered Holstein dairy in Coventry, VT Coordinator. In 2003 Ms. Simek assumed the position of in partnership with his brother-in-law for 6 years. Mr. Heath Controller and moved to the Middlebury, Vermont office. holds a degree in business administration from the University She was appointed Corporate Treasurer in 2006. Prior to of Vermont. working for the Association, Ms. Simek worked as a legal office administrator in Burlington, Vermont. Ms. Simek holds Kenneth R. Button (Senior Vice President) degrees in both accounting and history from Trinity College. Kenneth R. Button, age 55, 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 office 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.
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2008 2007 2006 2006 COMPENSATION OF DIRECTORS AND SENIOR CEO George S. George S. George S. Dean W. OFFICERS Putnam Putnam Putnam Moreau Salary $200,000 $185,000 $164,000 $ 199,604 A. Director Compensation Bonus - 1,200 - - Deferred/perquisites - - - - Directors are compensated at a flat daily rate for attendance at Other 5,644 5,437 4,850 1,694 Board meetings and other activities authorized by the Board. Total $205,644 $191,637 $168,850 $ 201,298 Through June 25, 2008, the rate was $350 per day ($400 per day for the Chairperson at meetings at which he or she 2008 2007 2006 presided, and $400 per day for the Chairperson of the Audit Number in group Six* Six* Six* Committee at meetings where he or she presided). Effective Salary $591,942 $569,851 $531,938 June 26, 2008, the rate was $450 per day ($500 per day for the Bonus 982 7,200 650 Chairperson at meetings at which he or she presided, and $500 Deferred/perquisites - - - per day for the Chairperson of the Audit Committee at Other 24,999 22,602 22,195 meetings where he or she presided). Directors also receive an Total $618,083 $599,653 $554,783 annual retainer of $3,000 ($4,000 for the Chairperson) and are paid for participating in telephone conference calls. There *Does not include CEO information from the table above. were seven Board meetings held during 2008. Other activities Senior officers are paid under the same salary administration attended by Directors included, but were not limited to, program as all other employees. Generally, each employee is Association committee meetings, national directors’ meetings, paid in accordance with the responsibilities of his or her and national training sessions. Compensation paid to directors position, and the performance of the employee in that in 2008 was: position. Each employee’s salary level is generally reviewed
annually. There are no special incentive or bonus programs Days Served for senior officers, nor are senior officers covered by Board Other employment agreements, except as described below. Director Meetings Activities Compensation
Alan J. Bourbeau 7 8.5 10,825 * The amounts listed in the Other categories above is the value Claude J. Bourbeau 2 4 3,250 of the personal usage of the assigned company cars, as Rupert C. Chamberlin 7 12 11,450 described below. Rocki-Lee DeWitt 7 9.5 10,325 Paul E. Doton 7 25.5 19,725 Mr. Putnam is employed as President and CEO under terms of Alfred A. Dunklee 7 8 11,100 an employment agreement through December 31, 2009. If Paul E. Gingue 6 21.5 17,050 Mr. Putnam is terminated before the end of the contract for Rocklyn A. Giroux 7 16 12,900 other than cause, which is defined, he will be entitled to Walter M. Gladstone** 5 3.5 7,450 ** severance benefits. Celeste Kane Stebbins 5 5 7,300 Paul F. Saenger 7 14.5 12,250 C. Travel, Subsistence and Other Related Expenses Charles J. Sniffen 7 10 10,925 * Robert C. Young 2 1 1,825 The Association’s travel policy provides that directors and Total 76 139 $136,375 employees will be reimbursed for reasonable out-of-pocket *Term expired in 2008 **Elected in 2008 expenses while traveling on official Association business. Business use of a personal automobile is reimbursed at the B. Senior Officer Compensation IRS standard mileage rate. Some employees are assigned a company car. A copy of the Association’s travel policy is The following tables show the total compensation paid by the available to shareholders on request. The total amount of Association in each of the last three years to the CEO and to reimbursement for travel, subsistence and related expenses for the top salaried employees and senior officers, excluding the all directors as a group was $51,752, $50,165 and $52,202 in CEO, as a group. Disclosure of the total compensation paid 2008, 2007 and 2006 respectively. during the last fiscal year to any senior officer or any other officer included in the aggregate is available to shareholders on request.
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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 2008, the Association paid PwC a fee of $21,200 for audit services and a fee of $11,000 for tax services.
15 PricewaterhouseCoopers LLP Suite 1800 2001 Ross Ave. Dallas TX 75201 -2997 Telephone (214) 999 1400 Facsimile (21 4) 754 7991 www.pwc.com
Report of Independent Auditors
To Board of Directors and Stockholders of Yankee Farm Credit, ACA:
We have audited the accompanying consolidated balance sheets of Yankee Farm Credit, ACA (the "Association") and its subsidiaries as of December 31, 2008, 2007 and 2006, and the related consolidated statements of income, changes in members' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company' s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Yankee Farm Credit, ACA and its subsidiaries at December 31, 2008, 2007 and 2006, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
LLP
February 27, 2009
16 YANKEE FARM CREDIT, ACA CONSOLIDATED BALANCE SHEET
December 31, 2008 2007 2006 (in thousands) ASSETS Loans originated by the Association $ 354,583 $ 335,257 $ 356,801 Plus loans purchased 14,671 13,378 11,646 Less participations sold 43,493 46,616 72,240 Loans held by the Association 325,761 302,019 296,207 Less allowance for loan losses 1,758 960 801 Net loans 324,003 301,059 295,406
Cash 1,770 2,075 1,420 Accrued interest receivable 1,007 1,117 1,288 Patronage refunds due from CoBank, ACB 1,411 1,624 1,493 Investment in CoBank, ACB 11,779 11,504 11,224 Mission related investment 401 360 200 Premises and equipment, less accumulated depreciation 1,070 1,108 1,102 Other assets 2,063 1,950 2,156 Total assets $ 343,504 $ 320,797 $ 314,289
LIABILITIES Note payable to CoBank, ACB $ 271,461 $ 248,997 $ 245,629 Patronage distribution payable 2,790 3,332 3,031 Other liabilities 1,771 2,085 2,130 Total liabilities 276,022 254,414 250,790
MEMBERS' EQUITY Capital stock and participation certificates 939 906 935 Unallocated surplus 67,613 65,852 62,792 Accumulated other comprehensive (loss) (1,070) (375) (228) Total members' equity 67,482 66,383 63,499 Total liabilities and members' equity $ 343,504 $ 320,797 $ 314,289
The accompanying notes are an integral part of these financial statements.
17 YANKEE FARM CREDIT, ACA CONSOLIDATED STATEMENT OF INCOME
Year ended December 31, 2008 2007 2006 (in thousands) INTEREST INCOME Loans $ 15,872 $ 22,399 $ 21,105 Total interest income 15,872 22,399 21,105
INTEREST EXPENSE Note payable to CoBank, ACB 6,841 12,736 12,512 Total interest expense 6,841 12,736 12,512
Net interest income 9,031 9,663 8,593 Provision for loan losses 781 131 155 Net interest income after provision for loan losses 8,250 9,532 8,438
OTHER INCOME Patronage refunds from CoBank, ACB 1,411 1,663 1,564 Fees for financial services 674 708 498 Loan fees and other income 108 189 952 Total other income 2,193 2,560 3,014
OTHER EXPENSE Salaries and employee benefits 3,073 2,895 2,800 Occupancy and equipment 291 289 299 Farm Credit Insurance Fund premium 353 416 401 Fees paid to Farm Credit Financial Partners, Inc. 965 884 750 Other expenses 1,218 1,214 1,073 Total other expense 5,900 5,698 5,323
Income before income taxes 4,543 6,394 6,129 Provision for (benefit from) income taxes 2 2 (666) Net income $ 4,541 $ 6,392 $ 6,795
The accompanying notes are an integral part of these financial statements.
18 YANKEE FARM CREDIT, ACA CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY Accumulated Capital Stock Other Total and Participation Surplus Comprehensive Members' Certificates Allocated Unallocated Income (Loss) Equity (in thousands) Balance at December 31, 2005 $ 951 $ 2,220 $ 59,027 $ (661) $ 61,537 Net income - - 6,795 - 6,795 Other comprehensive income Net unrealized gains on interest rate swaps - - - 433 433 Total comprehensive income 7,228 Capital stock/PCs issued 238 - - - 238 Capital stock/PCs retired (254) - - - (254) Allocated surplus redeemed - (2,220) - - (2,220) Patronage distributions in cash - - (3,031) (3,031) Adjustment for rounding - - 1 - 1 Balance at December 31, 2006 935 - 62,792 (228) 63,499 Comprehensive income Net income - - 6,392 - 6,392 Other comprehensive income Net unrealized gains on interest rate swaps - - - 380 380 Total comprehensive income 6,772 Adjustment to initially apply FAS No. 158: Pension - - - (491) (491) Post Retirement Healthcare - - - (36) (36) Capital stock/PCs issued 146 - - - 146 Capital stock/PCs retired (175) - - - (175) Patronage distributions in cash - - (3,332) - (3,332) Balance at December 31, 2007 906 - 65,852 (375) 66,383 Adjustment to beginning balance due to FAS No. 158 measurement date change - - 10 - 10 Balance at January 1, 2008 906 - 65,862 (375) 66,393 Comprehensive income Net income - - 4,541 - 4,541 Other comprehensive income Net unrealized gains on interest rate swaps - - - 477 477 FAS No. 158 adjustment: Pension - - - (1,166) (1,166) Post Retirement Healthcare - - - (6) (6) Total comprehensive income 3,846 Capital stock/PCs issued 160 - - - 160 Capital stock/PCs retired (127) - - - (127) Patronage distributions in cash - - (2,790) - (2,790) Balance at December 31, 2008 $ 939 $ - $ 67,613 $ (1,070) $ 67,482
The accompanying notes are an integral part of these financial statements.
19 YANKEE FARM CREDIT, ACA CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 2008 2007 2006 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,541 $ 6,392 $ 6,795 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 199 192 173 Provision for loan losses 781 131 155 Decrease (increase) in accrued interest receivable 101 125 (224) (Decrease) increase in other liabilities (999) (192) (591) (Increase) decrease in other assets (154) 46 (547) (Gain) from sales of premises and equipment (12) (21) (711) Total adjustments (84) 281 (1,745) Net cash provided by operating activities 4,457 6,673 5,050
CASH FLOWS FROM INVESTING ACTIVITIES Increase in loans, net (23,716) (5,738) (20,809) Expenditures for premises and equipment (188) (241) (187) Proceeds from sales of premises and equipment 39 64 857 Increase in investment in CoBank, ACB (275) (280) (206) Decrease (increase) in distribution of of CoBank, ACB earnings receivable 213 (131) (160) Net cash used in investing activities (23,927) (6,326) (20,505)
CASH FLOWS FROM FINANCING ACTIVITIES Advances on note payable under financing agreement with CoBank, ACB 498,354 298,692 309,516 Repayment of note payable to CoBank, ACB (475,890) (295,324) (289,133) Capital stock and participation certificates issued 160 146 238 Capital stock and participation certificates retired (127) (175) (254) Patronage distribution paid (3,332) (3,031) (4,844) Net cash provided by financing activities 19,165 308 15,523
Net (decrease) increase in cash (305) 655 68 Cash at beginning of year 2,075 1,420 1,352 Cash at end of year $ 1,770 $ 2,075 $ 1,420
Supplemental schedule of non-cash investing and financing activities Distribution of CoBank, ACB earnings $ 1,411 $ 1,663 $ 1,564 Patronage distribution declared 2,790 3,332 3,031 Accrued interest receivable transferred to loans 9 46 34
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 The Association’s financial condition may be impacted by Yankee Farm Credit, ACA (the Association) is one of the factors which affect CoBank. CoBank’s Annual Report to associations of the Farm Credit System. Stockholders discusses material aspects of its financial condition, changes in financial condition, and results of A. The Farm Credit System operations. In addition, CoBank’s Annual Report discusses the impacts of the Insurance Corporation and other forms of The Farm Credit System (System) is a nationwide system of intra-System financial assistance. Information on obtaining a cooperatively owned banks and associations established by copy of CoBank’s annual and quarterly financial statements is Acts of Congress to provide credit and other financial services provided on page 38 of this report. to farmers and other eligible borrowers. The System is subject to the provisions of the Farm Credit Act of 1971, as Farm Credit Financial Partners, Inc. (FPI) is an entity that amended (the Farm Credit Act). provides important services to the Association. FPI is owned by eight associations (including the Association) and CoBank. Within the System are five banks and approximately 90 FPI, which is headquartered near Springfield, Massachusetts, associations. Each association is affiliated with one of the provides accounting services, information technology, and banks. The banks lend funds to the associations, supervise the other services to these eight associations, CoBank and other activities of the associations, provide other services to the customers. associations, and may engage in activities not related to the associations. The banks obtain funds principally by jointly C. Operations selling Systemwide debt obligations to the public. The Association makes short-term and intermediate-term The Farm Credit Administration (FCA) is an agency in the loans for agricultural production or operating purposes, and executive branch of the Federal government, delegated long-term real estate mortgage loans. The Association also authority by Congress to regulate all System institutions. The offers credit-related financial services, including: credit life FCA examines the activities of the Association and certain insurance and crop insurance (the Association acts as agent, actions by the Association are subject to the prior approval of not principal); bookkeeping; farm accounting software; tax the FCA. (See www.fca.gov) return preparation and tax planning; fee appraisals; and leasing. The Agricultural Credit Act of 1987 established the Farm Credit System Insurance Corporation (Insurance Corporation) The Farm Credit Act sets forth the types of authorized lending to administer the Farm Credit Insurance Fund (Insurance activity, persons eligible to borrow from, and financial Fund). The primary purpose of the Insurance Fund is to services which can be offered by the Association. Eligible ensure the timely payment of principal and interest on borrowers include farmers, ranchers, producers or harvesters Systemwide debt obligations. The Insurance Fund is funded of aquatic products, rural residents and farm-related by assessments on System banks. (See www.fcsic.gov) businesses.
B. The Association, CoBank and FPI D. Subsidiaries
The Association is a member-owned cooperative which The Association (which is an agricultural credit association or provides credit and credit-related services to eligible ACA) has two wholly owned subsidiaries. Yankee Farm borrowers/members for qualified agricultural purposes within Credit, PCA (a production credit association) and Yankee its chartered territory, which consists of: the State of Vermont; Farm Credit, FLCA (a federal land credit association). The Cheshire, Coos, Grafton and Sullivan counties in the State of PCA is presently dormant. The FLCA holds certain assets, New Hampshire; and Clinton and Essex counties in the State primarily long-term real estate loans, and related liabilities. of New York. All other assets and liabilities are held by the ACA. The FLCA is exempt from federal and state income tax. The ACA The Association is affiliated with CoBank, ACB, one of the and PCA are taxable. This annual report presents the five banks in the System. CoBank, headquartered near Association and its subsidiaries on a consolidated basis. Denver, Colorado, is the Association’s source of funds.
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E. Types of System Banks and Associations status, accrued interest deemed uncollectible is either reversed (if accrued in the current year) or charged against the For the purpose of reading this report, it may be helpful to allowance for loan losses (if accrued in prior years). know the various types of banks and associations in the System, and their principal authorities: When loans are in nonaccrual status, payments are generally applied against the recorded investment in the loan asset. Banks Interest income is generally recognized only to the extent that FCB – Farm Credit Bank – Authorized to provide funds and payments are received once the recorded investment is other services to Farm Credit associations. reduced to zero. Nonaccrual loans may be reinstated to ACB – Agricultural Credit Bank – Authorized to provide accrual status when principal and interest are current, any funds and other services to Farm Credit associations and to prior charge-offs have been recovered, the ability of the farmers’ cooperatives. borrower to fulfill the contractual repayment terms is fully expected, and the loan is not classified as “doubtful” or “loss.” Associations PCA – Production Credit Association – Authorized to provide When a nonaccrual loan is reinstated to accrual status, interest short and intermediate term loans to eligible borrowers. that would have accrued if the loan had been in accrual status FLCA – Federal Land Credit Association – Authorized to is recognized in income only as principal payments are provide long-term real estate mortgage loans to eligible received following reinstatement. borrowers. ACA – Agricultural Credit Association – Authorized to In cases where a borrower experiences financial difficulties provide both short/intermediate term loans and long-term real and the Association makes certain monetary concessions to estate mortgage loans to eligible borrowers. ACAs may have the borrower through modifications to the contractual terms of PCAs and/or FLCAs as wholly-owned subsidiaries. the loan, the loan is classified as a restructured loan. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan is classified as a nonaccrual loan. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The allowance for loan losses is maintained at a level considered adequate by management to provide for probable The accounting and reporting policies of the Association and estimable losses inherent in the loan portfolio. The conform with accounting principles generally accepted in the allowance is based on a periodic evaluation of the loan United States of America (GAAP) and prevailing practices portfolio by management in which numerous factors are within the banking industry. The preparation of financial considered, including economic conditions, loan portfolio statements in conformity with GAAP requires management to characteristics and composition, and prior loan loss make estimates and assumptions that affect the amounts experience. It is based on estimates, appraisals and reported in the financial statements and accompanying notes. evaluations of loans which, by their nature, contain elements Significant estimates are discussed in these footnotes, as of uncertainty and imprecision. The possibility exists that applicable. Actual results may differ from these estimates. changes in the economy and its impact on borrower repayment capacity will cause these estimates, appraisals and evaluations Certain amounts in prior years’ financial statements have been to change. reclassified to conform to current financial statement presentation. The allowance for loan losses is a valuation account used to reasonably estimate loan losses as of the financial statement A. Loans and Allowance for Loan Losses date. Determining the appropriate allowance balance involves significant judgment about when a loss has been incurred and Long-term real estate mortgage loans generally have the amount of that loss. The determination of the allowance maturities ranging up to 33 years. Substantially all short-term for loan losses is based on management’s current judgments and intermediate-term loans for agricultural production or about the credit quality of its loan portfolio. A specific operating purposes have maturities of 10 years or less. allowance may be established for impaired loans under SFAS No. 114. Impairment of these loans is measured based on the Loans are carried at their principal amount outstanding. present value of expected future cash flows discounted at the Loans are generally placed in nonaccrual status when loan’s effective interest rate, or as practically expedient, at the principal or interest is delinquent for 90 days or more (unless loan’s observable market price or fair value of the collateral if adequately secured and in the process of collection) or the loan is collateral dependent. circumstances indicate that collection of principal and/or interest is in doubt. When a loan is placed in nonaccrual
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The level of allowance for loan losses is generally based on G. Employee Benefit Plans recent charge-off experience adjusted for relevant environmental factors. When adjusting the historical charge- Employees are eligible to participate in a deferred off experience, the Association considers changes in credit compensation plan. A certain percentage of employee risk classifications, collateral values, risk concentrations, contributions is matched by the Association. Costs for this weather related conditions and economic conditions. plan are expensed as funded.
The allowance for loan losses is increased through loan The Association also provides a non-contributory defined recoveries and provisions for loan losses and is decreased contribution retirement plan for employees. Costs for this through loan charge-offs and reversals of provisions for loan plan are expensed as funded. losses. Certain former employees of the Association (retirees and B. Cash vested former employees) participate in a defined benefit retirement plan. The “Projected Unit Credit” actuarial method Cash represents cash on hand and on deposit at banks. is used for financial reporting purposes and the “Entry-Age Normal Cost” method is used for funding purposes. C. Investment in CoBank, ACB H. Income Taxes The Association’s investment in CoBank is carried at cost plus face or par value of allocated equities. As previously described, the Association operates through two wholly-owned subsidiaries. The FLCA subsidiary is exempt D. Mission Related Investment from federal and other income taxes as provided in the Farm Credit Act. The Association may hold investments in accordance with mission related investment programs approved by the FCA. The Association, and the PCA subsidiary, are subject to These programs allow the Association to make investments certain income taxes. The Association is eligible to operate as that further the System’s mission to serve rural America. The a cooperative that qualifies for tax treatment under Subchapter investment is reported at fair value with realized gains or T of the Internal Revenue Code. Accordingly, under specified losses recognized in current operations. conditions, the Association can exclude from taxable income amounts distributed as qualified patronage refunds in the form E. Other Property Owned of cash, stock or allocated surplus. Provisions for income taxes are made only on those earnings that will not be Other property owned, consisting of real and personal distributed as qualified patronage refunds. The Association property acquired through a collection action, is recorded at distributes patronage on the basis of book income. Deferred fair value less estimated selling costs. Revised estimates to taxes are recorded on the tax effect of all temporary the fair value less cost to sell are reported as adjustments to differences based on the assumption that such temporary the carrying amount of the asset, provided that such adjusted differences are retained by the institution and will therefore value is not in excess of the carrying amount at acquisition. impact future tax payments. A valuation allowance is Income and expenses from operations and carrying value provided against deferred tax assets to the extent that it is adjustments are included in (gains) losses on other property more likely than not (over 50 percent probability), based on owned. management’s estimate, that they will not be realized.
F. Premises and Equipment Deferred income taxes have not been provided by the Association on patronage distributions from the Farm Credit Premises and equipment are carried at cost less accumulated Bank of Springfield (FCB) prior to January 1, 1993, the depreciation. Land is carried at cost. Depreciation is adoption date of Statement of Accounting Standards No. 109, computed principally using the straight-line method over the “Accounting for Income Taxes.” Management’s intent is to estimated useful lives of ten to forty years for buildings and permanently invest these and other undistributed earnings in improvements, three to seven years for furniture and CoBank, thereby indefinitely postponing their conversion to equipment, and five years for automobiles. Gains and losses cash. (CoBank is the successor to the FCB.) Additionally, on dispositions are reflected in current operations. deferred income taxes have not been provided on CoBank’s Maintenance and repairs are charged to operating expense, unallocated earnings because CoBank currently has no plans and improvements are capitalized. 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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I. Patronage Refund from CoBank traded less frequently than exchange-traded instruments, the prices are not current or principal market information is not The Association records patronage refunds from CoBank on released publicly; (c) inputs other than quoted prices that are the accrual basis. observable such as interest rates and yield curves, prepayment speeds, credit risks and default rates and (d) inputs derived J. Derivative Instruments principally from or corroborated by observable market data by correlation or other means. This category generally includes The Association is party to derivative financial instruments, certain U.S. Government and agency mortgage-backed debt consisting of interest rate swaps. These derivatives are securities, corporate debt securities, and derivative contracts. accounted for in accordance with Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Level 3 — Unobservable inputs that are supported by little or Instruments and Hedging Activities,” as amended. no market activity and that are significant to the fair value of Accordingly, these derivatives are recorded on the the assets or liabilities are considered Level 3. These consolidated balance sheet in other assets and other liabilities, unobservable inputs reflect the reporting entity’s own measured at fair value. assumptions about assumptions that market participants would use in pricing the asset or liability. Level 3 assets and All of the Association’s derivatives are designated as cash liabilities include financial instruments whose value is flow hedges, used to manage interest rate risk on variable rate determined using pricing models, discounted cash flow loans. The Association measures the effectiveness of the methodologies, or similar techniques, as well as instruments hedge quarterly. If the hedge is effective, changes in fair for which the determination of fair value requires significant value are recorded in other comprehensive income. If the management judgment or estimation. This category generally hedge is not effective, changes in fair value are recorded in the includes certain private equity investments, retained residual consolidated statement of income as an adjustment to interest interests in securitizations, asset-backed securities, impaired expense. Cash flows resulting from periodic settlements are loans, other property owned and highly structured or long- recorded on the consolidated statement of income as an term derivative contracts. adjustment to interest expense. The fair value disclosures have been expanded in accordance K. Fair Value Measurement with SFAS No. 157, as disclosed in Note 11.
Effective January 1, 2008, the System adopted Statement of L. Recently Issued Accounting Pronouncements Financial Accounting Standard No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes In March 2008, the Financial Accounting Standards Board a framework for measuring fair value and expands disclosures (FASB) issued Statement of Financial Accounting about fair value measurements. It describes three levels of Standards No. 161, “Disclosures about Derivative Instruments inputs that may be used to measure fair value: and Hedging Activities,” which amends and expands the disclosure requirements for derivative instruments and for Level 1 — Quoted prices in active markets for identical assets hedging activities previously required by Statement of or liabilities that the reporting entity has the ability to access at Financial Accounting Standards No. 133, “Accounting for the measurement date. Level 1 asset and liabilities include Derivative Instruments and Hedging Activities.” SFAS No. debt and equity securities and derivative contracts that are 161 states that an entity with derivative instruments shall traded in an active exchange market, as well as certain disclose information to enable users of the financial U.S. Treasury, other U.S. Government and agency mortgage- statements to understand: (a) how and why an entity uses backed debt securities that are highly liquid and are actively derivative instruments, (b) how derivative instruments and traded in over-the-counter markets. Assets held in trust funds related hedged items are accounted for under this Statement relate to deferred compensation and our supplemental and related interpretations, and (c) how derivative instruments retirement plan. The trust funds include investments that are and related hedged items affect an entity’s financial position, actively traded and have quoted net asset values that are financial performance, and cash flows. This Statement is observable in the marketplace. effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with Level 2 — Observable inputs other than quoted prices early application encouraged. This Statement encourages, but included within Level 1 that are observable for the asset or does not require, comparative disclosures for earlier periods at liability either directly or indirectly. Level 2 inputs include the initial adoption. The Association is currently evaluating the following: (a) quoted prices for similar assets or liabilities in impact of adoption on its financial statement disclosures. active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active so that they are
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NOTE 3 - LOANS AND ALLOWANCE FOR LOAN Association in the collateral, may result in loan to value ratios LOSSES in excess of the regulatory maximum.
A summary of loans follows: Impaired loans include nonaccrual loans plus restructured accrual loans. The following table presents information December 31, relating to impaired loans: 2008 2007 2006 Long-term farm mortgage $ 124,148 $ 133,174 $ 132,088 December 31, Country home 2,126 1,862 1,964 2008 2007 2006 Farm related business 17,771 15,934 12,969 Nonaccrual loans: Production and Current $ 170 $ 96 $ 1 intermediate term 210,538 184,287 209,780 Past due 1,152 262 469 Total loans originated Total nonaccrual loans 1,322 358 470 by the Association 354,583 335,257 356,801 Plus participations purchased 14,671 13,378 11,646 Restructured accrual loans 271 225 397 Less participations sold 43,493 46,616 72,240 Total impaired loans $ 1,593 $ 583 $ 867 Loans held by the Association $ 325,761 $ 302,019 $ 296,207
The Association’s concentration of credit risk in various There were no material commitments to lend additional funds agricultural commodities is shown in the following table. to debtors whose loans were classified as impaired at While the amounts represent the Association’s maximum December 31, 2008. potential credit risk as it relates to recorded loan principal, a substantial portion of the Association’s lending activities is There were no loans that were 90 days or more past due but collateralized and the Association’s exposure to credit loss still classified as accrual at December 31, 2008, 2007 and associated with lending activities is reduced accordingly. An 2006. estimate of the Association’s credit risk exposure is considered in the determination of the allowance for loan The following table presents information relating to interest losses. income on nonaccrual loans:
Year ended December 31, December 31, 2008 2007 2006 2008 2007 2006 Interest income that would Commodity Amount % Amount % Amount % have been recognized under Dairy $ 187,798 58% $ 174,120 58% $ 176,591 60% the original loan terms $ 82 $ 57 $ 77 Timber 46,753 14% 42,659 14% 43,355 15% Less: interest recognized (16) (150) (68) FRB* 14,236 4% 13,056 4% 8,642 3% Interest not recognized Livestock 12,496 4% 10,747 4% 10,369 4% (recognized) $ 66 $ ( 93) $ 9 Part-time farmer 10,410 3% 11,380 4% 9,678 3% Fruit 8,656 3% 10,957 4% 10,227 3% If a nonaccrual loan is reinstated to accrual status, previously Other 45,412 14% 39,100 12% 35,345 12% unrecognized interest is recognized when and to the extent Total $ 325,761 100% $ 302,019 100% $ 294,207 100% that principal payments are received. The following table sets *Farm Related Business forth this type of interest income:
The amount of collateral obtained, if deemed necessary upon Year ended December 31, extension of credit, is based on management’s credit 2008 2007 2006 evaluation of the borrower. Collateral held varies, but Previously unrecognized typically includes farmland and income-producing property, interest income, recognized such as crops and livestock, as well as equipment and subsequent to reinstatement $ 5 $ 6 $ 12 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
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The following table presents information relating to interest First, the Association is required to invest in CoBank to income on all impaired loans: capitalize the Association’s loan from CoBank. In 2008, the capitalization requirement for this purpose was 4% of the Year ended December 31, average borrowings for the previous year. For 2008, the 2008 2007 2006 required investment in CoBank for this purpose was $9.539 Interest income recognized on million and the actual investment was $10.175 million. When impaired loans: the Association’s investment is more than the required Nonaccrual $ 16 $ 150 $ 68 amount, CoBank adjusts the interest rate to the Association to Restructured accrual 17 20 28 compensate for any capital in excess of the required amount. Total $ 33 $ 170 $ 96 In 2008, this adjustment reduced the interest rate charged by CoBank by 1 basis point. The following table presents information on average balances of impaired loans: Second, the Association is required to invest in CoBank to capitalize any participation loans sold to CoBank. In 2008, Year ended December 31, the capitalization requirement for this purpose was 10% of the 2008 2007 2006 previous five years’ average participations sold. For 2008, the Average balance of impaired required investment in CoBank for this purpose was $2.466 loans: Nonaccrual $ 552 $ 423 $ 652 million and the actual investment was $1.605 million. When Restructured accrual 270 317 438 the Association’s investment is less than the required amount, Total $ 822 $ 740 $ 1,090 CoBank pays patronage refunds to the Association 50% in cash and 50% in stock. A summary of changes in the allowance for loan losses follows: The Association owned 1.0% of the issued stock of CoBank on December 31, 2008. As of that date, CoBank’s assets Year ended December 31, totaled $61.2 billion and members’ equity totaled $3.6 billion. 2008 2007 2006 CoBank earned net income of $533 million during 2008. Balance at beginning of year $ 960 $ 801 $ 646 Provision for loan losses 781 131 155 Loans charged-off -- - NOTE 5 – PREMISES AND EQUIPMENT Recoveries 17 28 - Balance at end of year $ 1,758 $ 960 $ 801 Premises and equipment consisted of the following:
The following table presents information concerning the December 31, portion of the allowance for loan losses related to impaired 2008 2007 2006 loans. Land $ 165 $ 165 $ 165 Buildings and improvements 924 916 916 Year ended December 31, Furniture and equipment 651 611 597 Automobiles 473 425 451 2008 2007 2006 2,213 2,117 2,129 Allowance on impaired loans: Nonaccrual $ 140 $ 6 $ 12 Less accumulated depreciation 1,143 1,009 1,027 Restructured accrual 13 5 9 Total net premises and Total $ 153 $ 11 $ 21 equipment $ 1,070 $ 1,108 $ 1,102
NOTE 4 - INVESTMENT IN COBANK, ACB NOTE 6 - NOTE PAYABLE TO COBANK, ACB The Association’s investment in CoBank, ACB is in the form of Class E stock. Most of the investment has been The Association’s indebtedness to CoBank represents accumulated through patronage refunds distributed to the borrowings by the Association to fund its loan portfolio. This Association in the form of stock. indebtedness is collateralized by a pledge of substantially all of the Association’s assets, and is governed by a General The Association is required to invest in CoBank for two Financing Agreement. The interest rate is periodically purposes. adjusted by CoBank. The average interest rate was 1.69% at December 31, 2008. The average interest rate at December
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31, 2007 was 4.66%. The average interest rate at December At December 31, 2008, the Association had 168,685 shares of 31, 2006 was 5.49%. Class B stock outstanding at a par value of $5 per share, and 19,142 shares of Class B participation certificates outstanding CoBank, consistent with FCA regulations, has established at a par value of $5 per share. limitations on the Association’s ability to borrow funds based on specified factors or formulas relating primarily to credit B. Patronage Distributions and Allocated Surplus quality and financial condition. At December 31, 2008 the Association’s note payable is within the specified limitations. 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 NOTE 7 - MEMBERS’ EQUITY form of a patronage distribution. Patronage distributions are made in the following year and may be made in cash or The Association’s capitalization policies are specified in the allocated surplus or any combination, as long as the cash Bylaws (Article VIII) and the Capitalization Plan. The portion is at least 20%. Beginning in 2002, patronage Capitalization Plan is subject to change by the Board of distributions have been 100% in cash. Earnings not Directors at any time, and is normally updated annually. distributed are retained as unallocated surplus. Copies of the Association’s Bylaws and Capitalization Plan are available to members upon request. The Association had no allocated surplus as of December 31, 2008. A more detailed description of the Association’s capitalization policies, equities, and regulatory capitalization requirements C. Risks Associated With Members’ Equity and restrictions is provided below. Ownership of stock, participation certificates and allocated A. Capital Stock and Participation Certificates surplus is subject to certain risks that could result in a partial or complete loss. These risks include excessive levels of loan In accordance with the Farm Credit Act, each borrower is losses experienced by the Association, losses resulting from required to invest in the Association as a condition of contractual and statutory obligations, impairment of ACB borrowing. The Association’s Bylaws and Capitalization Plan stock owned by the Association, losses resulting from adverse specify that each borrower shall invest, at the time the loan is judicial decisions or other losses that may arise in the course made, in Class B stock for agricultural loans or Class B of business. In the event of such impairment, borrowers participation certificates for country home and farm-related would remain liable for the full amount of their loans. business loans. The required amount of stock or participation certificates is 2.0% of the loan, with a cap of $1 thousand per Any losses which result in impairment of capital stock and customer, which is the legal minimum requirement. participation certificates would be allocated to such purchased capital on a pro rata basis. In the case of liquidation or The borrower acquires ownership of the capital stock or dissolution of the Association, capital stock, participation participation certificates at the time the loan is made, but certificates and allocated surplus would be utilized as usually does not make a cash investment. The aggregate par necessary to satisfy any remaining obligations in excess of the value is added to the principal amount of the related loan amounts realized on the sale or liquidation of assets. obligation. The Association retains a first lien on the stock or participation certificates owned by borrowers. Retirement of D. Regulatory Capitalization Requirements such equities will generally be at the lower of par or book value, and repayment of a loan does not automatically result in FCA’s capital adequacy regulations require the Association to retirement of the corresponding stock or participation maintain specified minimum amounts of core surplus, total certificates. All stock and participation certificates are retired surplus and permanent capital. Failure to meet these capital at the discretion of the Association’s Board of Directors after requirements can initiate certain mandatory and possibly considering the Capitalization Plan as well as regulatory and additional discretionary actions by FCA that, if undertaken, other requirements. could have a direct material effect on the Association’s financial statements. The Association is prohibited from Each owner or joint owners of Class B stock is entitled to a retiring stock or making certain other distributions to single vote, while Class B participation certificates provide no shareholders unless these capital standards are met. voting rights to their owners. Voting stock may not be transferred to another person unless such person is eligible to hold voting stock.
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The Association’s regulatory capital ratios were: Year Ended December 31, 2008 2007 2006 Value at Regulatory December 31, 2008 Minimum Federal tax at statutory rate $ 1,544 $ 2,174 $ 2,084 Core surplus 18.7% 3.5% State tax, net of federal Total surplus 18.9% 7.0% income tax effect 2 2 2 Permanent capital 19.2% 7.0% Effect of tax exempt FLCA (1,158) (1,586) (1,294) Patronage distributions (948) (1,133) (1,031) Additionally, the Association’s internal permanent capital goal Change in valuation allowance 613 629 (402) for 2008 was 18.4%, which was met, as shown by the table Other (51) (84) (25) above. Total provision for (benefit from) income taxes $ 2 $ 2 $ ( 666) The Association knows of no reason why it might be under any regulatory restrictions to retire stock or distribute earnings Deferred Tax Assets and Liabilities; Valuation Allowance during the fiscal year subsequent to the fiscal year just ended. Based on the Association’s strategic financial plan, primarily An FCA regulation empowers it to direct a transfer of funds or expected future patronage programs and the tax benefits of the equities by one or more System institutions to another System FLCA subsidiary, management believes that as of the end of institution under specified circumstances. The Association 2008, none of the Association’s net deferred tax asset will be had not been called upon to initiate any transfers and is not realizable in future periods. Accordingly, a valuation aware of any proposed action under this regulation. 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 NOTE 8 - INCOME TAXES they will not be realized.
The provision for (benefit from) income taxes follows: Prior to 2006, the Association provided a valuation allowance against gross deferred tax assets. In 2006 the Association Year Ended December 31, analyzed the realizability of the deferred tax assets based on 2008 2007 2006 the reversal of deferred tax liabilities and determined it was Current: appropriate to provide a valuation allowance against net Federal $ - $ - $ - deferred tax assets. In applying the valuation allowance to the State 2 2 2 Deferred: net deferred asset, rather than the gross asset, a tax benefit of Federal - - (507) $668 thousand was recognized in 2006 due to the release of State - - (161) the related valuation allowance. Total provision for (benefit from) income taxes $ 2 $ 2 $ (666) The Association adopted the provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and The FLCA subsidiary, which contains primarily long-term Other Postretirement Plans,” on December 31, 2007. The real estate mortgage loans, is exempt from income tax. adoption of this Standard increased deferred tax assets, and the related net deferred tax assets valuation allowance, by The following table quantifies the differences between the $474 thousand in 2008, and by $213 thousand in 2007. provision for (benefit from) 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.
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Deferred tax assets and liabilities in accordance with SFAS $146 thousand, $153 thousand and $157 thousand in 2008, No. 109 are comprised of: 2007 and 2006, respectively.
December 31, Defined Benefit Plan 2008 2007 2006 Prior to 1998, the Association offered the CoBank, ACB Allowance for loan losses $ 231 $ 167 $ 120 Retirement Plan, a non-contributory multiple employer Deferred compensation and defined benefit retirement plan (Defined Benefit Plan). No other postretirement benefits 1,127 628 384 current employees of the Association participate in this plan. Net operating loss 2,242 1,692 1084 The Association continues to participate in this plan only to Other 65 22 25 the extent that it has retirees and vested former employees in Deferred tax asset 3,665 2,509 1,613 the plan. The Defined Benefit Plan serves the same seven Bank stock patronage after Farm Credit System employers as the Employee Savings Plan. December 31, 1992 81 81 81 Retirement benefits 460 338 321 The following tables set forth information about the CoBank, ACB patronage 389 430 388 Association’s share of the Defined Benefit Plan. Benefits are Depreciation 24 36 41 based on years of service and compensation during the highest Deferred tax liability 954 885 831 four consecutive years of employment.
Subtotal 2,711 1,624 782 December 31, Less valuation allowance 2,711 1,624 782 2008 2007 2006 Fair value of plan assets $ 2,074 $ 2,865 $ 2,893 Net deferred tax asset $ - $ - $ - Projected benefit obligations 2,593 2,520 2,677 Funded status $ ( 519) $ 345 $ 216 The Association adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes,” on January 1, Weighted average assumptions 2007. The Association recognized no uncertain tax positions Discount rate 6.35% 6.35% 6.00% upon adoption of this Interpretation. No uncertain tax Expected return on plan assets 8.00% 8.00% 8.00% positions were taken by the Association during 2008 or 2007. The tax years that remain open for federal and major state Year Ended December 31, income tax jurisdictions are 2005 and forward. 2008 2007 2006 Employer contribution $ 250 $ - $ - Participant contributions -- - Benefits paid 398 343 343 NOTE 9 - EMPLOYEE RETIREMENT PLANS The following tables show the impact of this plan on the Employee Savings Plan financial statements: The Association participates in the CoBank, ACB Employee Savings Plan (“Employee Savings Plan”). The Employee December 31, Savings Plan serves seven employers in the Farm Credit 2008 2007 2006 System, including the Association and CoBank. All active Balance sheet: employees of the Association participate in the Employee Intangible asset Savings Plan. The Employee Savings Plan has two (included in other assets) - 345 794 components: Pension liability (included in other liabilities) 519 - - Schedule A – Employer Matching Contributions Accumulated other Under this part of the plan, the Association matches 100% of comprehensive income (1,657) (491) - employee contributions up to a maximum employee contribution of 6% of salary. Employer contributions charged Year Ended December 31, to expense were $122 thousand, $126 thousand and $123 2008 2007 2006 Statement of income: thousand in 2008, 2007 and 2006, respectively. (Benefit) recognized in salaries and employee benefits $ (42) $ (43) $ (54) Schedule B – Employer Contributions Under this part of the plan, the Association contributes a Other percentage of each employee’s salary, based on years of The following table sets forth information about the service. Employer contributions charged to expense were Association’s post retirement health care benefit plan funding
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status and assumptions used to determine benefits obligations. December 31, 2008 for each of the fair value hierarchy values are summarized as follows: December 31, 2008 2007 2006 Fair Value Measurement Using Benefit obligations $ 61 $ 58 $ 82 Level 1 Level 2 Level 3 Net liability recognized 61 58 21 Assets: Interest Rate Swaps $ - $ 666 $ - Net periodic (income) expense $ (4) $ 2 $ 12 Total assets $ - $ 666 $ -
Discount rate 6.35% 6.35% 5.25% Assets measured at fair value on a non-recurring basis at December 31, 2008 for each of the fair value hierarchy values For measurement purposes, a 9% annual rate of increase in the are summarized as follows: cost of covered health care benefits was assumed for 2008.
The rate is assumed to decrease gradually to 5.00% for 2015 Fair Value Measurement Using and remain level thereafter. Level 1 Level 2 Level 3 Assets: Nonaccrual Loans $ - $ - $ 1,322 NOTE 10 - RELATED PARTY TRANSACTIONS Total liabilities $ - $ - $ 1,322
In the ordinary course of business, the Association enters into There were no liabilities measured at fair value on a recurring loan transactions with officers and directors of the or non-recurring basis at December 31, 2008. Association, their immediate families, and other organizations with which such persons may be associated. Such loans are As more fully discussed in Note 2K, SFAS No. 157 subject to special approval requirements contained in FCA establishes a fair value hierarchy, which requires an entity to regulations and are made on the same terms, including interest maximize the use of observable inputs and minimize the use rates and collateral, as those prevailing at the time for of unobservable inputs when measuring fair value. The comparable transactions with unrelated borrowers. following represent a brief summary of the valuation techniques used by the Association for asset and liabilities: Total loans outstanding to such persons at December 31, 2008 amounted to $9.852 million. During 2008, $9.079 million of Derivatives new loans were made and repayments totaled $6.905 million. Exchange-traded derivatives valued using quoted prices Additionally, other increases to the related party loan balance would be classified with Level 1 of the valuation hierarchy. totaling $351 thousand represent changes in the composition However, few classes of derivative contracts are listed on an of Association officers and/or board members during 2008. In exchange; thus, the majority of the derivative positions are the opinion of management, none of these loans outstanding at valued using internally developed models that use as their December 31, 2008 involved more than a normal risk of basis readily observable market parameters and are classified collectibility. within Level 2 of the valuation hierarchy. Level 2 includes derivatives such as basic interest rate swaps. Derivatives that At December 31, 2008, the Association owned a 5.9% interest are valued based upon models with significant unobservable in FPI. FPI and the nature of the Association’s relationship market parameters and that are normally traded less actively with it are more fully described in Note 1 to the Consolidated or have trade activity that is one way are classified within Financial Statements, “Organization and Operations.” Fees Level 3 of the valuation hierarchy. The Association’s interest paid to FPI are separately disclosed in the consolidated rate swaps meet the definition of Level 2 financial statement of income. instruments.
NOTE 11 – FAIR VALUE MEASUREMENTS NOTE 12 - COMMITMENTS AND CONTINGENCES
Statement of Financial Accounting Standards No. 157, “Fair The Association has various commitments outstanding and Value Measurements” defines fair value as the exchange price contingent liabilities as discussed elsewhere in these Notes to that would be received for an asset or paid to transfer a Consolidated Financial Statements. liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or There are no actions pending against the Association in which liability. See Note 2K for additional information. claims of money damages are asserted.
Assets measured at fair value on a recurring basis at
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NOTE 13 - COMMITMENTS TO EXTEND CREDIT December 31, 2007 AND STANDBY LETTERS OF CREDIT Carrying Fair Amount Value In the normal course of business, the Association makes Financial assets: commitments to extend credit and issues or participates in Loans, net $ 301,059 $ 304,777 standby letters of credit. At December 31, 2008, $52.447 Cash 2,075 2,075 Investment in CoBank, ACB 11,504 n/a million of commitments to extend credit were outstanding. Of Interest rate swaps 184 184 this amount $225 thousand were standby letters of credit. Financial liabilities: Since many of these commitments are expected to expire Note payable to CoBank, ACB $ 248,997 $ 249,924 without being drawn upon, the total commitments do not Interest rate swaps 12 12 necessarily represent future cash requirements. However, these credit-related financial instruments have off-balance- December 31, 2006 sheet credit risk, because their amounts are not reflected on Carrying Fair the balance sheet until funded or drawn upon. The credit risk Amount Value associated with issuing commitments to extend credit and Financial assets: standby letters of credit is substantially the same as that Loans, net $ 295,406 $ 295,422 Cash 1,420 1,420 involved in extending loans to borrowers and the same credit Investment in CoBank, ACB 11,224 n/a policies are applied by management. Interest rate swaps 5 5
Financial liabilities: NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF Note payable to CoBank, ACB $ 245,629 $ 245,265 FINANCIAL INSTRUMENTS Interest rate swaps 229 229
The following tables present the carrying amounts and fair A description of the methods and assumptions used to values of the Association’s financial instruments at estimate the fair value of each class of the Association’s December 31, 2008, 2007 and 2006. financial instruments for which it is practicable to estimate that value follows: Quoted market prices are generally not available for certain Association financial instruments, as described below. A. Loans Accordingly, fair values are based on judgments regarding future expected loss experience, current economic conditions, Because no active market exists for the Association’s loans, risk characteristics of various financial instruments, and other fair value is estimated by discounting the expected future cash factors. These estimates involve uncertainties and matters of flows using the Association’s current interest rates at which judgment, and therefore cannot be determined with precision. similar loans would be made to borrowers with similar credit Changes in assumptions could significantly affect the risk. As the discount rates are based on the Association’s loan estimates. rates as well as management estimates, management has no basis to determine whether the fair values presented would be The estimated fair values of the Association’s financial indicative of the value negotiated in an actual sale. instruments are as follows: B. Cash December 31, 2008 Carrying Fair The carrying value is a reasonable estimate of the fair value. Amount Value Financial assets: C. Investment in CoBank, ACB Loans, net $ 324,003 $ 325,384 Cash 1,770 1,770 Estimating the fair value of the Association’s investment in Investment in CoBank, ACB 11,779 n/a CoBank is not practicable because the stock is not traded. As Interest rate swaps 666 666 described in Note 4, the investment is a requirement of Financial liabilities: borrowing from CoBank and is carried at cost plus allocated Note payable to CoBank, ACB $ 271,461 $ 269,312 equities on the consolidated balance sheet. Interest rate swaps - -
31
D. Interest Rate Swaps The following tables show the impact of these derivatives on the financial statements: Interest rate swaps are carried at their estimated fair value, calculated as the present value of estimated future cash flows. December 31, Depending on the position of the swap, the fair value may 2008 2007 2006 either be an asset or a liability. Balance sheet: Accrued interest receivable $ 19 $ - $ - E. Note Payable to CoBank, ACB Accrued interest payable (included in other liabilities) - (4) (22) Positive fair values The note payable is segregated into pricing pools according to (included in other assets) 666 183 5 the types and terms of the loans (or other assets) which it Negative fair values funds. Fair value of the note payable is estimated by (included in other liabilities) - (12) (229) discounting the anticipated cash flows of each pricing pool Accumulated other using the current rate that would be charged for additional comprehensive income 629 152 (228) borrowings. For purposes of this estimate it is assumed the cash flow on the note is equal to the principal payments on the Year Ended December 31, Association’s loan receivables plus accrued interest on the 2008 2007 2006 note payable. This assumption implies that earnings on the Statement of income: Association’s interest margin are used to fund operating (Decreased) increased interest expenses and capital expenditures. expense $ (203) $ 242 $ 625
Other comprehensive income: Net unrealized gains (losses) NOTE 15 – DERIVATIVE INSTRUMENTS on interest rate swaps $ 629 $ 152 $ (228)
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.
At December 31, 2008, the derivatives held by the Association consisted of the following:
Maturing In 2009 2009 2010 Total Notional value $ 4,000 $ 5,000 $ 8,000 $ 17,000 Fair value $ 81 $ 257 $ 328 $ 666 Avg. receive rate 5.00% 4.77% 3.27% 4.12% Avg. pay rate 2.10% 2.10% 2.10% 2.10%
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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 35. Quarterly reports as of March 31, June 30 and September 30 are available 40 days after quarter-end.
33 YANKEE FARM CREDIT, ACA
CERTIFICATION STATEMENT FOR 2008 ANNUAL REPORT
The Board of Directors and management are responsible for the consolidated financial statements and other information in this Annual Report. This responsibility includes the preparation of the consolidated statements in accordance with accounting principles generally accepted in the United States of America, appropriate with the circumstances and consistently applied. This responsibility also includes the fairness of the estimates and judgments required, and the reliability of the underlying data.
The steps taken to meet this responsibility include maintaining a system of internal controls, providing for the training of personnel, promulgating written policies and procedures and, in general, seeking to create an atmosphere conducive to proper reporting and ethical behavior.
The Audit Committee of the Board of Directors is assigned the task of assisting the Board in fulfilling its oversight responsibilities. The Audit Committee is comprised ofRocki-Lee DeWitt, Rocklyn Giroux, Walter Gladstone, Paul Saenger and Charles Sniffen. None of the committee members is an officer or employee of the Association. The Audit Committee meets periodically with the internal auditor and the independent auditors, both with and without management present. These consolidated financial statements were prepared under the oversight of the Audit Committee.
On the basis of the above-mentioned and other controls, policies, and independent reviews, the Board and management believe that the responsibility described in the first paragraph has been fulfilled in all material respects.
The Audit Committee has reviewed and discussed these audited financial statements with both management and the independent auditors. The Audit Committee has discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 114, "The Auditor's Communication with Those Charged with Governance." The Audit Committee has received the written disclosures and the letter from the independent auditors required by Independence Standards Board Standard No. 1, "Independence Discussions with Audit Committees." The Audit Committee has discussed, and confirmed, with those same auditors their independent status.
The signatories have reviewed this report and certify that it has been prepared in accordance with all applicable statutory or regulatory requirements and that the information contained herein is true, accurate, and complete to the best of his or her knowledge and belief, and that the consolidated financial statements in the opinion of the Board of Directors and management fairly present the consolidated financial condition of the institution except as otherwise noted.
Paul E. Doton Chairperson, Board of Directors ( Prnsidont j CEO ~.a.a~ Rocki-Lee DeWitt Pamela A. Simek Chairperson, Audit Committee Controller
March 6, 2009
34
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
35
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 YBS Farmer Board Policy provides a mandate to 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 6 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, 2008 for those farms meeting the above Young, Beginning and Small farmer definitions:
2007 Census Data Yankee Data as of 12/31/2008 # of % of Total # of % of Total Loan Volume Actual Loan Farms Farms Loans Loan #s Goal* Volume* Young 511 5.5% 299 19.0% $57,000,000 $67,971,242 Beginning 2,509 26.9% 425 27.0% $59,500,000 $81,049,819 Small 8,600 92.0% 578 36.7% $46,500,000 $48,515,153 *Volume refers to outstanding principal balance, net of participations sold Yankee Loan #s and Volume adjusted to exclude Participations Sold, Country Home and Farm Related Business loans
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. 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. 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 two or more 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.
36
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 35 for contact information) or directly from CoBank (see page 38 for contact information).
37
YANKEE FARM CREDIT, ACA RELATIONSHIP WITH COBANK, ACB (continued)
Contact information for CoBank, ACB:
Springfield Banking Center Corporate Headquarters mailing CoBank, ACB mailing CoBank, ACB address: 67 Hunt Street, Suite 3 address: P.O. Box 5110 Agawam, MA 01001 Denver, CO 80217 physical CoBank, ACB physical CoBank, ACB address: 67 Hunt Street, Suite 3 address: 5500 S. Quebec Street Agawam, MA 01001 Greenwood Village, CO 80111 telephone: (413) 821-0200 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.farmcredit-ffcb.com
38 YANKEE FARM CREDIT, ACA EMPLOYEES
Chazy, New York White River Junction, Vermont (800) 545-8374 (800) 370-3276 (518) 846-7330 (802) 295-3670
Geoffrey C. Yates, VP/Director-Appraisal William C. Heath, Sr. Vice President & CCO Services Marie A. Guay, Sr. Loan Officer Jeffrey A. Temple, Vice President Robert A. Guay, Appraiser Trainee Kenneth F. Nelson, Sr. Loan Officer Jean Conklin, Loan Officer/Farm Tax Specialist Middlebury, Vermont Morgan Greenwood Rilling, Loan Officer (800) 545-1169 Elizabeth L. Bayne, Appraiser/Sr. Records & Tax Specialist (802) 388-2692 Michael J. Moloney, Sr. Records & Tax Specialist April S. Smith, Office Assistant/Credit Analyst Kenneth R. Button, Sr. Vice President Desiree M. Gauthier, Office Assistant Susan K. Kelley, Sr. Loan Officer Kendra A. Burroughs, Financial Services Assistant Heather L. Curler, Credit Analyst Douglas W. Harlow, Farm Tax Specialist Cheryl A. Heath, Records & Tax Specialist Audrey C. Tetu, Credit Analyst Donna L. Barnum, Office Assistant Tina J. Reynolds, Financial Services Representative Pamela A. Simek, Controller Williston, Vermont (800) 639-3053 Newport, Vermont (802) 879-4700 (800) 370-2738 (802) 334-8050 George S. Putnam, President & CEO John S. Peters, VP/Operations Kenneth H. Buzzell, Sr. Vice President Ruchel D. St. Hilaire, Executive Assistant Kelly E. Langmaid, Loan Officer Lisa M. Young, Records & Tax Specialist Peggy S. Reed, Credit Analyst/Office Assistant Lisa S. Wener, Sr. Accounting Assistant Suzie J. Wheeler, Tax Specialist/Office Assistant Dena F. Verdin, Accounting Assistant
St. Albans, Vermont (800) 545-1097 (802) 524-2938
Michael K. Farmer, Vice President Loren E. Petzoldt, Sr. Loan Officer Chuck J. Custeau, Loan Officer Thomas A. St. Pierre, Loan Officer Shantel M. Thomas, Crop Insurance Agent Suzanne L. Petig, Credit Analyst Sharron L. Hancock, Office Assistant Alicia M. Kinney, Office Assistant George Birkett, Financial Services Representative
See page 35 for physical and mailing addresses for the offices.
39 YANKEE FARM CREDIT, ACA DIRECTORS
Paul E. Doton, Chairperson Rocklyn A. Giroux 202 Lakota Rd 8096 Route 9 Woodstock, VT 05091 Plattsburgh, NY 12901 (802) 457-2230 (518) 561-2537 Region 3 – Committee 3 Region 1 – Committees 1, 2, 4 Term Expires 2011 Term Expires 2009
Paul E. Gingue, Vice Chairperson Walter M. Gladstone 1800 Higgins Hill Rd. 161 Mallary Rd. Waterford, VT 05819 Bradford, VT 05033 (802) 748-8843 (802) 222-9232 Region 2 – Committees 2, 3, 5 Region 2 – Committees 1, 5 Term Expires 2009 Term Expires 2011
Alan J. Bourbeau 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, 4 Term Expires 2010 Term Expires 2011
Rupert C. Chamberlin Paul F. Saenger 1552 Chamberlin Rd. P.O. Box 205 Barton, VT 05822 Shoreham, VT 05770 (802) 525-3981 (802) 897-2101 Region 2 – Committees 2, 3 Region 3 – Committees 1, 5 Term Expires 2010 Term Expires 2010
Rocki-Lee DeWitt Charles J. Sniffen 6181 Greenbush Rd. P.O. Box 153 Charlotte, VT 05445 Holderness, NH 03245 (802) 656-0501 (603) 968-7417 Outside Director – Committees 1, 2, 5 Outside Director – Committees 1, 4 Term Expires 2010 Term Expires 2009
Alfred A. Dunklee 4370 Fort Bridgman Road Committees as of 12/31/2008 Vernon, VT 05354 1 – Audit Committee (802) 254-8073 house 2 – Compensation Committee (802) 257-7508 barn 3 – Executive Committee Region 3 – Committees 3, 4 4 – Membership/Governance Committee Term expires 2009 5 – Strategic Planning Committee
40 Yankee Farm Credit, ACA PRSRT-STD P.O. Box 467 U.S. Postage Williston, VT 05495 PAID Permit No. 478 Burlington, VT