Special Annual Report Issue - AgGeorgia Farm Credit

AgGeorgia Farm Credit, ACAManagement’s Management’s Discussion Discussion & Analysis & Analysis of Financialof FinancialConditionCondition& Results& Resultsof of Operations(dollars in in thousands, except as as noted)GENERAL OVERVIEWThe following commentary summarizes the financial conditionand results of operations of AgGeorgia Farm Credit, ACA(Association) for the year ended December 31, 2006 withcomparisons to the years ended December 31, 2005 andDecember 31, 2004. This information should be read inconjunction with the Consolidated Financial Statements, Notesto the Consolidated Financial Statements and other sections inthis Annual Report. The accompanying consolidated financialstatements were prepared under the oversight of the AuditCommittee of the Board of Directors. For a list of the AuditCommittee members, refer to the “Report of the AuditCommittee” reflected in this Annual Report. Information in anypart of this Annual Report may be incorporated by reference inanswer or partial answer to any other item of the Annual Report.The Association is an institution of the Farm Credit System(System), which was created by Congress in 1916 and hasserved agricultural producers for almost 90 years. TheSystem’s mission is to maintain and improve the income andwell-being of American farmers, ranchers, and producers orharvesters of aquatic products and farm-related businesses.The System is the largest agricultural lending organization inthe United States. The System is regulated by the Farm CreditAdministration, (FCA), which is an independent safety andsoundness regulator.The Association is a cooperative, which is owned by themembers (also referred to throughout this Annual Report asstockholders or shareholders) served. The territory of theAssociation extends across a diverse agricultural region ofGeorgia. Refer to Note 1, “Organization and Operations,” ofthe Notes to the Consolidated Financial Statements for countiesin the Association’s territory. The Association provides creditto farmers, ranchers, rural residents, and agribusinesses. Oursuccess begins with our extensive agricultural experience andknowledge of the market.The Association obtains funding from AgFirst Farm CreditBank (AgFirst or Bank). The Association is materially affectedand shareholder investment in the Association could beaffected by the financial condition and results of operations ofthe Bank. Copies of the Bank’s Annual and Quarterly Reportsare on the AgFirst website, www.agfirst.com, or may beobtained at no charge by calling 1-800-845-1745, extension316, or writing Wanda Martin, AgFirst Farm Credit Bank, P.O. Box 1499, Columbia, SC 29202.Copies of the Association’s Annual and Quarterly reports arealso on the Association’s website, www.AgGeorgia.com, ormay be obtained upon request free of charge by calling1-478-272-4603, extension 2023 or writing Chris Scott orCarrie McCall, AgGeorgia Farm Credit, P.O. Box 1548,Dublin GA 31040-1548. The Association prepares a quarterlyreport within 45 days after the end of each fiscal quarter,except that no report needs to be prepared for the fiscal quarterthat coincides with the end of the fiscal year of the Association.CRITICAL ACCOUNTING POLICIESThe financial statements are reported in conformity withaccounting principles generally accepted in the United States ofAmerica. Our significant accounting policies are critical to theunderstanding of our results of operations and financialposition because some accounting policies require us to makecomplex or subjective judgments and estimates that may affectthe value of certain assets or liabilities. We consider thesepolicies critical because management must make judgmentsabout matters that are inherently uncertain. For a completediscussion of significant accounting policies, see Note 2,“Summary of Significant Accounting Policies,” of the Notes tothe Consolidated Financial Statements. The following is asummary of certain critical policies. Allowance for loan losses — The allowance for loan lossesis management’s best estimate of the amount of probablelosses existing in and inherent in our loan portfolio. Theallowance for loan losses is increased through provisions forloan losses and loan recoveries and is decreased throughallowance reversals and loan charge-offs. The allowance forloan losses is determined based on a periodic evaluation ofthe loan portfolio, which generally considers relevanthistorical charge-off experience adjusted for relevant factors.These factors include types of loans, credit quality, specificindustry conditions, general economic and politicalconditions, and changes in the character, composition, andperformance of the portfolio, among other factors.Significant individual loans are evaluated based on theborrower’s overall financial condition, resources, andpayment record, the prospects for support from anyfinancially responsible guarantor, and, if appropriate, theestimated net realizable value of any collateral. Theallowance for loan losses attributable to these loans isestablished by a process that estimates the probable lossinherent in the loans, taking into account various historicaland projected factors, internal risk ratings, regulatoryoversight, and geographic, industry and other factors.Changes in the factors considered by management in theevaluation of losses in the loan portfolios could result in achange in the allowance for loan losses and could have adirect impact on the provision for loan losses and the resultsof operations.AgGeorgia.37.Winter 200762006 Annual Report