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As filed with the Securities and Exchange Commission on
March 26, 2001
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number 0-17440
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FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
Federally chartered
instrumentality 52-1578738
of the United States
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(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
919 18th Street, N.W., Suite 200,
Washington, D.C. 20006
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(Address of principal executive (Zip code)
offices)
(202) 872-7700
(Registrant's telephone number, including
area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Exchange on Which Registered
Class A Voting Common Stock New York Stock Exchange
Class C Non-Voting Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Class B Voting
Common Stock
2
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (17 C.F.R.ss.229.405) is not contained herein, and will
not be contained, to the best of the Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market values of the Class A Voting Common Stock and
Class C Non-Voting Common Stock held by non-affiliates of the Registrant were
$23,295,628 and $221,765,076, respectively, based upon the closing prices for
the respective classes on March 9, 2001, as reported by the New York Stock
Exchange. The aggregate market value of the Class B Voting Common Stock is not
ascertainable due to the absence of publicly available quotations or prices for
the Class B Voting Common Stock as a result of the limited market for, and
infrequency of trades in, Class B Voting Common Stock and the fact that any such
trades are privately negotiated transactions.
There were 1,030,780 shares of Class A Voting Common Stock, 500,301
shares of Class B Voting Common Stock and 9,705,255 shares of Class C Non-Voting
Common Stock outstanding as of March 9, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement to be filed on or about April 20, 2001 in connection
with the Annual Meeting of Stockholders to be held on June 7, 2001 (portions of
which are incorporated by reference into Part III of this Annual Report on Form
10-K).
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PART I
Item 1. Business
General
The Federal Agricultural Mortgage Corporation ("Farmer Mac" or the
"Corporation") is a federally chartered instrumentality of the United States
that was created to establish a secondary market for agricultural real estate
and rural housing mortgage loans ("Qualified Loans"). Farmer Mac was created by
the Agricultural Credit Act of 1987 (12 U.S.C. ss.ss. 2279aa et seq.), which
amended the Farm Credit Act of 1971 (collectively, as amended, the "Act") to
provide for the existence of a secondary market for agricultural mortgages.
Farmer Mac provides liquidity to the agricultural mortgage market by: (1)
purchasing newly originated Qualified Loans directly from lenders through its
"cash window" and existing, or "seasoned," Qualified Loans from lenders and
other third parties in negotiated transactions; (2) exchanging securities issued
and guaranteed by Farmer Mac for newly originated and seasoned Qualified Loans
that back those securities through its "swap" program; (3) issuing long-term
standby purchase commitments for newly originated and seasoned Qualified Loans;
and (4) purchasing mortgage-backed bonds secured by Qualified Loans through its
"AgVantage" program. Generally, the loans involved in swap and long-term standby
purchase commitment transactions are seasoned loans.
Farmer Mac conducts its business through two programs--"Farmer Mac I"
and "Farmer Mac II." Under the Farmer Mac I Program, Farmer Mac purchases, or
commits to purchase, Qualified Loans that are not guaranteed by any
instrumentality or agency of the United States, or obligations backed by
Qualified Loans. Under the Farmer Mac II Program, Farmer Mac purchases the
guaranteed portions (the "Guaranteed Portions") of loans guaranteed by the
United States Department of Agriculture (the "USDA") pursuant to the
Consolidated Farm and Rural Development Act (7 U.S.C. ss.ss. 1921 et seq.; the
"ConAct").
Pursuant to its statutory authority, Farmer Mac guarantees timely
payments of principal and interest on securities backed by Qualified Loans or
Guaranteed Portions ("Farmer Mac Guaranteed Securities") and retains those
securities in its portfolio or sells them in the capital markets. At December
31, 2000, outstanding Farmer Mac guarantees totaled $3.08 billion. For more
information about Farmer Mac's securities and its financial performance, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Farmer Mac's principal sources of revenue are: (1) fees it receives in
connection with the issuance of its guarantee and commitments to purchase
Qualified Loans; (2) net interest income earned on its retained portfolio of
Farmer Mac Guaranteed Securities, its investments, Qualified Loans and AgVantage
bonds; and (3) gains on the sales of Farmer Mac Guaranteed Securities backed by
Qualified Loans.
Farmer Mac funds its program operations primarily through the issuance
of debt obligations of various maturities. See "Farmer Mac Guarantee Program --
Financing." As of December 31, 2000, Farmer Mac had outstanding $2.014 billion
of Discount Notes and $955.6 million of Medium-Term Notes, net of unamortized
hedging costs, discounts and premiums. During 2000, Farmer Mac continued its
strategy of using debt issuances to increase its presence in the capital markets
in order to improve the mortgage rates available to farmers, ranchers and rural
homeowners. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- Net Interest Income."
Farmer Mac is an institution of the Farm Credit System (a "System
Institution"), although it is not liable for any debt or obligation of any other
System Institution. Likewise, neither the Farm Credit System nor any other
individual System Institution is liable for any debt or obligation of Farmer
Mac.
The Farm Credit Administration (the "FCA"), acting through its Office
of Secondary Market Oversight ("OSMO"), has general regulatory and enforcement
authority over Farmer Mac, including the authority to promulgate rules and
regulations governing the activities of Farmer Mac and to apply FCA's general
enforcement powers to Farmer Mac and its activities. For a discussion of Farmer
Mac's statutory capital requirements and its capital levels, see "Government
Regulation of Farmer Mac -- Regulation -- Capital Standards" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview" and "-- Liquidity and Capital Resources."
Farmer Mac has three classes of common stock outstanding--Class A
Voting, Class B Voting and Class C Non-Voting (collectively, the "Common
Stock"). The Class A and Class B Voting Common Stock are collectively referred
to herein as the "Voting Common Stock." See "Market for Registrant's Common
Equity and Related Stockholder Matters" for information regarding Farmer Mac's
Common Stock.
As of December 31, 2000, Farmer Mac employed 29 persons, located
primarily at its principal executive offices at 919 18th Street, N.W., Suite
200, Washington, D.C. 20006. Its telephone number is (202) 872-7700.
FARMER MAC GUARANTEE PROGRAM
Farmer Mac I
Qualified Loans
Under the Farmer Mac I Program, Farmer Mac issues and guarantees
securities backed by, or representing interests in, Qualified Loans. A Qualified
Loan is a loan secured by a fee simple mortgage or a long-term leasehold
mortgage, with status as a first lien on Agricultural Real Estate or Rural
Housing (as defined below) located within the United States. A Qualified Loan
must also be an obligation of: (1) a citizen or national of the United States or
an alien lawfully admitted for permanent residence in the United States; or (2)
a private corporation or partnership whose members, stockholders or partners
holding a majority interest in the corporation or partnership are individuals
described in clause (1). A Qualified Loan must also be an obligation of a
person, corporation or partnership having sufficient indicia of creditworthiness
to indicate a reasonable likelihood of repayment of the loan according to its
terms. A Qualified Loan may be a seasoned or newly originated mortgage loan that
conforms to Farmer Mac's requirements.
Qualified Loans must be secured either by Agricultural Real Estate or
by Rural Housing. "Agricultural Real Estate" is defined for purposes of Farmer
Mac's programs as a parcel or parcels of land, which may be improved by
permanently affixed buildings or other structures , that (1) are used for the
production of one or more agricultural commodities or products; and (2) consist
of a minimum of five acres or are used in producing minimum annual receipts of
$5,000. The maximum principal amount of a Qualified Loan secured by Agricultural
Real Estate is $3.75 million (as adjusted for inflation as of October 1, 2000)
for loans secured by more than 1,000 acres of land and $10.0 million for loans
secured by 1,000 acres or less.
"Rural Housing" is defined by Farmer Mac as a one- to four-family,
owner-occupied, moderate-priced principal residence located in a community
having a population of 2,500 or fewer inhabitants, where the dwelling (excluding
the land to which the dwelling is affixed) does not have a purchase price or
current appraised value of more than $150,388 (as adjusted for inflation as of
October 1, 2000). In addition to the dwelling itself, a Rural Housing Qualified
Loan can be secured by land associated with the dwelling having an appraised
value of no more than 50 percent of the total appraised value of the combined
property. To date, Rural Housing Qualified Loans have not represented a
significant part of Farmer Mac's business.
Purchases
Qualified Loan Purchases. Farmer Mac purchases Qualified Loans directly
from approved lenders ("Sellers") for cash on a continuing basis through its
"cash window." Farmer Mac also purchases portfolios of newly originated or
seasoned Qualified Loans on a negotiated basis. Farmer Mac primarily purchases
fixed- and adjustable-rate Qualified Loans, but may also purchase other types of
Qualified Loans, including convertible mortgage loans. Qualified Loans purchased
by Farmer Mac have a variety of maturities and often include balloon payments.
Certain Qualified Loans also include provisions that require a yield maintenance
payment in the event of prepayment (depending upon the level of interest rates
at the time of prepayment). Farmer Mac seeks to develop and offer loan products
that are in demand by agricultural borrowers and the lenders who serve them and
that can be efficiently securitized and sold into the capital markets. Because
the securitization process requires the grouping of loans into uniform pools,
Farmer Mac emphasizes the importance of conformity to its program requirements,
including the interest rate, amortization, maturity and payment specifications
when it offers to purchase loans.
Through its "part-time farm" loan program, Farmer Mac purchases, or
guarantees securities backed by, Qualified Loans made to borrowers who live on
Agricultural Real Estate but generally derive a significant portion of their
income from off-farm employment. To qualify as a part-time farm, the
Agricultural Real Estate that secures the Qualified Loan must include a
single-family, owner-occupied, detached residence that generally constitutes at
least 30 percent of the total appraised value of the property. As of December
31, 2000, Farmer Mac had $109.0 million of outstanding part-time farm loans
under guarantee.
During 2000, Farmer Mac purchased $442.3 million of Qualified Loans
through its Farmer Mac I cash window program. During the year, the top 10
Sellers generated 89.3 percent of the Farmer Mac I cash window loan volume. This
included Qualified Loans sold by Zions First National Bank ("Zions"), Farmer
Mac's largest combined Class A and Class C stockholder, and Zions' "proprietary"
products sold to Farmer Mac by other Sellers, which together represented 20.6
percent of Farmer Mac's total Farmer Mac I cash window volume for the year.
While Zions represents a significant portion of Farmer Mac I cash window volume,
Zions-related loans represented only 11.2 percent of the total Farmer Mac I
Qualified Loans purchased or guaranteed during 2000. For more information
regarding loan volume, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations -- Business
Volume."
Mortgage-Backed Bond Purchases. Under the "AgVantage" program, Farmer
Mac purchases (and guarantees timely payment of principal and interest on)
mortgage-backed bonds issued by Sellers who also have been certified as
"AgVantage certified facilities" (each, an "AgVantage Issuer") based upon Farmer
Mac's assessment of their agricultural loan underwriting and servicing
capabilities, as well as their creditworthiness. AgVantage bonds, which are
general obligations of the AgVantage Issuers, are secured by eligible collateral
in an amount ranging from 120 percent to 150 percent of the bonds' outstanding
principal amount. Eligible collateral consists of Qualified Loans having an
aggregate principal balance equal to at least 100 percent of the bonds'
outstanding principal amount and cash or securities issued by the U.S. Treasury
or guaranteed by an agency or instrumentality of the United States. During 2000,
Farmer Mac purchased 37 AgVantage bonds with maturities ranging from 2 weeks to
15 years (most of which were less than one year) from 10 AgVantage Issuers
resulting in Farmer Mac guarantees of $393.9 million. As of December 31, 2000,
$28.1 million principal amount of AgVantage bonds remained outstanding.
Swap Transactions and Long-Term Standby Purchase Commitments
Farmer Mac offers two alternatives to lenders who seek the benefits of
Farmer Mac's guarantee without selling loans to Farmer Mac through the cash
window--"swap" transactions and long-term standby purchase commitments
("LTSPCs"). In a swap transaction, Farmer Mac acquires Qualified Loans from
lenders in exchange for Farmer Mac Guaranteed Securities backed by such
Qualified Loans. Unlike cash window transactions, which generally involve loans
with terms specified by Farmer Mac in advance, swap transactions usually are
negotiated with the lender and often involve loans with payment, maturity and
interest rate characteristics that differ from those of Farmer Mac's cash window
purchases. Regardless of variances in loan terms from the cash window products,
Qualified Loans must conform to Farmer Mac's credit standards to be eligible for
swap transactions. Farmer Mac's credit standards are discussed under "--
Underwriting and Appraisal Standards" below.
Farmer Mac's alternative to a swap transaction, the LTSPC, is available
for a Seller seeking to obtain all of the benefits of a swap transaction (other
than the replacement of loans with securities on the Seller's books) while
retaining title to the Qualified Loans. An LTSPC permits a Seller to segregate a
pool of loans in its portfolio and transfer to Farmer Mac the credit risk on
those loans. Under an LTSPC, Farmer Mac commits to purchase any Qualified Loan
in a segregated pool of loans if: (a) the Qualified Loan becomes four months
delinquent; (b) the Qualified Loan meets Farmer Mac's loan purchase requirements
at the time the Seller requests that Farmer Mac purchase the loan; or (c) the
Seller requests that Farmer Mac purchase all of the identified Qualified Loans.
In the case of a delinquent Qualified Loan, Farmer Mac will pay the Seller a
predetermined price for the loan--generally, principal plus accrued interest
(the payment of the accrued interest being delayed until the delinquent
Qualified Loan is liquidated); in the case of a Qualified Loan under clause (b)
or (c), the price for the Qualified Loan(s) would be negotiated at the time of
purchase. This structure permits the Seller to retain the segregated loans in
its portfolio while reducing its credit and concentration exposures and,
consequently, its regulatory capital requirements. In consideration for Farmer
Mac's assumption of the credit risk on the segregated loans, the Seller pays
fees to Farmer Mac based on the outstanding balance of the loans at a level
approximating what would have been Farmer Mac's guarantee fee had the loans been
exchanged with Farmer Mac in a swap transaction. The credit risk to Farmer Mac
related to an LTSPC is the same as that of a swap or AMBS.
In 2000, the use of the LTSPC continued its development as a
significant portion of the Farmer Mac I program and was the preferred
alternative to swaps for non-cash transactions. As of December 31, 2000, the
outstanding balance of Qualified Loans underlying Farmer Mac swap transactions
was $211.6 million. Through December 31, 2000, a total of 6,194 Qualified Loans
having an aggregate principal balance of $1.011 billion had been placed under
LTSPCs with eight System Institutions. As of December 31, 2000, a cumulative
total of 5,136 Qualified Loans with an aggregate principal balance of $862.8
million remained under LTSPCs. For more information regarding guarantee volume,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Business Volume."
Underwriting and Appraisal Standards
Farmer Mac has established Underwriting and Appraisal Standards for
Qualified Loans in an effort to reduce the risk of loss from borrower defaults
and to provide guidance concerning the management, administration and conduct of
underwriting and appraisals to all participants in the Farmer Mac I Program.
These standards were developed on the basis of industry norms for mortgage loans
qualified to be sold in the secondary market and were designed to assess the
creditworthiness of the borrower, as well as the value of the mortgaged property
relative to the amount of the Qualified Loan. Farmer Mac requires Sellers to
make representations and warranties regarding the conformity of Qualified Loans
to these standards and any other requirements it may impose from time to time.
The Underwriting Standards require, among other things, that the
loan-to-value ratio for any Qualified Loan (other than a part-time farm loan and
a loan on an agricultural facility with a related integrator contract) not
exceed 70 percent. In the case of newly originated Agricultural Real Estate
Qualified Loans that are not part-time farm loans, borrowers must also meet
certain credit ratios, including: (1) a pro forma (after closing the new loan)
debt-to-asset ratio of 50 percent or less; (2) a pro forma cash flow debt
service coverage ratio on the mortgaged property of not less than 1:1; (3) a pro
forma total debt service coverage ratio, including farm and non-farm income, of
not less than 1.25:1; and (4) a pro forma ratio of current assets to current
liabilities of not less than 1:1. In early 1998, Farmer Mac introduced a premium
loan program for loans to highly creditworthy borrowers. Under that program,
Qualified Loans meeting certain more stringent Underwriting Standards than the
foregoing loan-to-value and credit ratios would qualify for guarantee at a lower
fee than those applicable to loans not meeting the higher standards. In 1999,
Farmer Mac introduced a loan product for borrowers with high credit scores and
whose security property has a low loan-to-value ratio. For these borrowers, loan
processing has been simplified and documentation of the credit ratios described
above is not necessary.
In the case of a seasoned loan (a loan that has been outstanding for
five or more years), Farmer Mac considers sustained performance to be a reliable
alternative indicator of a borrower's ability to pay the loan according to its
terms. A seasoned loan generally will be deemed a Qualified Loan, eligible for
purchase or inclusion in a pool of loans to be securitized, if it has been
outstanding for at least five years and has a loan-to-value ratio (based on an
updated estimate of value) of 60 percent or less, and there have been no
payments more than 30 days past due during the previous three years and no
material restructurings or modifications for credit reasons during the previous
five years. Existing loans that have been outstanding for fewer than five years
must comply with the Underwriting Standards for newly originated loans when the
loan was originated.
In the case of Rural Housing Qualified Loans and Qualified Loans under
the part-time farm program, up to 85 percent of the appraised value of the
property may be financed if the amount above 80 percent is covered by private
mortgage insurance. For newly originated Qualified Loans on part-time farm
properties, the borrower must generate sufficient income from all sources to
repay all creditors. A borrower's capacity to repay debt obligations is
determined by two tests: (1) the borrower's monthly mortgage payment-to-income
ratio should be 28 percent or less and (2) the borrower's monthly debt
payment-to-income ratio should be 36 percent or less.
The Underwriting Standards provide that Farmer Mac may, on a
loan-by-loan basis, accept loans that do not conform to one or more of the
Underwriting Standards when: (1) those loans exceed one or more of the
Underwriting Standards to a degree that compensates for noncompliance with one
or more other Standards ("compensating strengths"); and (2) those loans are made
to producers of particular agricultural commodities in a segment of agriculture
in which such compensating strengths are typical of the financial condition of
sound borrowers. Farmer Mac's acceptance of loans that do not conform to one or
more of the Underwriting Standards is not intended to provide a basis for
waiving or lessening in any way the requirement that loans be of consistently
high quality in order to qualify for purchase or inclusion in a pool of loans to
be securitized.
The Appraisal Standards for newly originated Qualified Loans require,
among other things, that the appraisal function be performed independently of
the credit decision making process and conform to the Uniform Standards of
Professional Appraisal Practice promulgated by the Appraisal Standards Board.
The Appraisal Standards require the appraisal function to be conducted or
administered by an individual meeting certain qualification criteria and who (a)
is not associated, except by the engagement for the appraisal, with the credit
underwriters making the loan decision, though both the appraiser and the credit
underwriter may be directly or indirectly employed by a common employer; (b)
receives no financial or professional benefit of any kind relative to the report
content, valuation or credit decision made or based on the appraisal product;
and (c) has no present or contemplated future direct or indirect interest in the
appraised property. The Appraisal Standards also require uniform reporting of
reliable and accurate estimates of the market value, market rent and net
property income characteristics of the mortgaged property and the relative
market forces.
Sellers
A Seller may be a System Institution, bank, insurance company, business
and industrial development company, savings and loan association, association of
agricultural producers, agricultural cooperative, commercial finance company,
trust company, credit union or other financial entity. In order to participate
in the Farmer Mac I program, the Seller must meet minimum eligibility
requirements, which include: (1) maintaining stockholders' equity of at least $1
million or at least $500,000 of net worth (as defined by Farmer Mac); (2) having
a staff experienced in agricultural lending and servicing; and (3) maintaining a
fidelity bond and either an errors and omissions, mortgage impairment or
mortgagee protection policy providing coverage in an amount determined by Farmer
Mac. Sellers must also provide representations and warranties to Farmer Mac
regarding the qualifications of Qualified Loans sold to or guaranteed by Farmer
Mac. In addition, to facilitate a wide distribution of Farmer Mac's Voting
Common Stock and give program participants an ownership interest in the
secondary market, Farmer Mac has established minimum Voting Common Stock
ownership requirements for Sellers, subject to limited exceptions.
Servicing
Farmer Mac does not directly service Qualified Loans held in its
portfolio, although it does act as "master servicer" for Qualified Loans
underlying Farmer Mac Guaranteed Securities. Qualified Loans are serviced only
by Farmer Mac approved servicing entities that have entered into central
servicing contracts with Farmer Mac. Sellers of Qualified Loans sold into the
Farmer Mac I Program have a right to retain certain servicing functions
(typically direct borrower contacts) and may enter into field servicing
contracts with central servicers to specify such servicing functions. Farmer Mac
currently utilizes seven central servicers in its Farmer Mac I program.
Farmer Mac I Securities
Farmer Mac Guaranteed Securities are guaranteed by Farmer Mac as to
timely payment of principal and interest. Farmer Mac Guaranteed Securities
issued under the Farmer Mac I Program are referred to as "Farmer Mac I
Securities." Farmer Mac Guaranteed Securities issued under the Farmer Mac II
Program are referred to as "Farmer Mac II Securities."
By statute, public offerings of Farmer Mac Guaranteed Securities are
required to be registered with the U.S. Securities and Exchange Commission (the
"SEC") under the federal securities laws. Accordingly, Farmer Mac, through its
subsidiary Farmer Mac Mortgage Securities Corporation, maintains a shelf
registration statement with the SEC pursuant to which public offerings of such
securities can occur. Farmer Mac may also issue Farmer Mac Guaranteed Securities
in private, unregistered transactions. U.S. Bank Trust National Association, a
national banking association based in Minneapolis, Minnesota, serves as trustee
for each trust underlying registered Farmer Mac I Securities, although Farmer
Mac may assume some or all of the trustee function, thereby potentially
eliminating some of the cost associated with a third party trustee.
Farmer Mac I Securities are mortgage pass-through certificates issued
and guaranteed by Farmer Mac that represent beneficial interests in pools of
Agricultural Real Estate Qualified Loans or in obligations backed by pools of
Agricultural Real Estate Qualified Loans. All Farmer Mac I Securities issued
during and since 1996 have been single class or multiclass "grantor trust"
pass-through certificates, which Farmer Mac calls "Agricultural Mortgage-Backed
Securities" or "AMBS." These securities entitle each investor in a class of
securities to receive a portion of the payments of principal and interest on the
related underlying pool of Agricultural Real Estate Qualified Loans equal to the
investor's proportionate interest in the pool. AMBS may back other Farmer Mac I
Securities, including real estate mortgage investment conduit securities
("REMICs") and other agricultural mortgage-backed securities.
Farmer Mac I Securities are not assets of Farmer Mac, except when
acquired for investment purposes, nor are Farmer Mac I Securities recorded as
liabilities of Farmer Mac. Farmer Mac, however, is liable under its guarantee on
the securities to make timely payments to investors of principal (including
balloon payments) and interest based on the scheduled payments on the underlying
Qualified Loans, even if Farmer Mac has not actually received such scheduled
payments. Farmer Mac I Securities enable Farmer Mac to further its statutory
purpose of increasing the liquidity of the agricultural mortgage market and
create a source of guarantee fee income for Farmer Mac. Because it guarantees
timely payments on Farmer Mac I Securities (without the protection afforded by
the minimum 10 percent cash reserve or subordinated interest required prior to
the enactment of changes to Farmer Mac's statutory charter in 1996), Farmer Mac
assumes the ultimate credit risk of borrower defaults on the Qualified Loans
underlying its guaranteed securities. Those loans are subject to the Farmer Mac
Underwriting Standards described above in "-- Underwriting and Appraisal
Standards." See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Management -- Credit risk
management."
Farmer Mac receives guarantee fees in return for its guarantee
obligations on Farmer Mac I Securities. These fees are paid as installment
payments are received on the underlying Qualified Loans until those loans have
been repaid or otherwise liquidated (generally as a result of default). The
aggregate amount of guarantee fees received by Farmer Mac depends upon the
amount of Farmer Mac I Securities outstanding and on the guarantee fee rate,
which is capped by statute at 50 basis points (0.50 percent) per annum. The
Farmer Mac I guarantee fee rate generally ranges from 40 to 50 basis points,
depending on the credit quality of and other criteria regarding the Qualified
Loans. The amount of Farmer Mac I Securities outstanding is influenced by the
repayment rates on the underlying Qualified Loans and by the rate at which
Farmer Mac issues new Farmer Mac I Securities. In general, when the level of
interest rates declines significantly below the interest rates on loans
underlying Farmer Mac I Securities, the rate of prepayments is likely to
increase; conversely, when interest rates rise above the interest rates on the
loans underlying Farmer Mac I Securities, the rate of prepayments is likely to
decrease. In addition to changes in interest rates, the rate of principal
payments on Farmer Mac I Securities is also influenced by a variety of economic,
demographic and other considerations, including the obligation of borrowers
under most loans underlying Farmer Mac I Securities to make a yield maintenance
payment (depending upon the level of interest rates) if the borrower prepays the
underlying loan. Yield maintenance payments tend to deter prepayments in a
declining interest rate environment.
Transactions Under the Farmer Mac I Program
The following table summarizes through December 31, 2000 the loans
purchased or guaranteed under the Farmer Mac I Program after the changes to
Farmer Mac's statutory charter by the Farm Credit System Reform Act of 1996 (the
"1996 Act").
Farmer Mac I Loans
Purchased or Guaranteed
---------------------------------------------
Prior to 2000 During 2000 Total
-------------- --------------- --------------
(in thousands)
Post-1996 Act:
Purchases $1,124,214 $ 442,246 $1,566,460
Swaps 261,143 - 261,143
LTSPCs 637,685 373,202 1,010,887
-------------- ------------ --------------
Total $2,023,042 $ 815,448 $2,838,490
-------------- ------------ --------------
In addition, as of December 31, 2000, $83.5 million of Farmer Mac I
Guaranteed Securities issued prior to the 1996 Act were outstanding. These
securities are supported by unguaranteed subordinate interests that represented
10 percent of the balance of the loans underlying the securities at issuance.
Funding of Guarantee Claims
The primary source of funding for the payment of claims made under
Farmer Mac guarantees is the fees Farmer Mac receives for providing its
guarantees. The Act requires Farmer Mac to set aside a portion of the guarantee
fees it receives as a reserve against losses from its guarantee activities.
Among other things, this reserve account must be exhausted before Farmer Mac may
issue obligations to the Secretary of the Treasury against the $1.5 billion
Farmer Mac is authorized to borrow from the Secretary of the Treasury pursuant
to the Act to fulfill its guarantee obligations. This authorization is not
intended to be used as a routine funding source, and has never been used.
Although total outstanding guarantees exceed the amount held in reserve
and the amount it may borrow from the Treasury, Farmer Mac does not expect
claims under the guarantees to exceed amounts available to satisfy those claims.
For information regarding the reserve account, see Note 6 to the Consolidated
Financial Statements. For a more detailed discussion of Farmer Mac's borrowing
authority from the Treasury, see "Farmer Mac's Borrowing Authority From The U.S.
Treasury."
Portfolio Diversification
One of Farmer Mac's policy goals is to diversify its portfolio of
Qualified Loans both geographically and by commodity. For information regarding
the diversification of Farmer Mac's existing portfolio of Qualified Loans, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Management" and Note 10 to the Consolidated Financial
Statements.
Farmer Mac II
General
The Farmer Mac II Program was initiated in 1992 and is authorized under
Sections 8.0(3) (12 U.S.C. ss. 2279aa(3)) and 8.0(9)(B) (12 U.S.C. ss.
2279aa(9)(B)) of the Act. Under those Sections: (1) Guaranteed Portions are
statutorily included in the definition of loans eligible as "Qualified Loans"
for Farmer Mac's secondary market programs; (2) Guaranteed Portions are exempted
from the underwriting, appraisal and repayment standards that all other
Qualified Loans must meet, and pools of Guaranteed Portions are exempted from
any diversification and internal credit enhancement that may be required of
pools of Qualified Loans that are not Guaranteed Portions; and (3) Farmer Mac is
authorized to pool Guaranteed Portions and issue Farmer Mac II Securities backed
by such Guaranteed Portions.
United States Department of Agriculture Guaranteed Loan Programs
USDA, acting through its various agencies, currently administers the
federal rural credit programs first developed in the mid-1930s. The USDA makes
direct loans and also issues guarantees on loans made and serviced by
USDA-qualified loan originators (each, a "Lender") for various purposes.
Under the Farmer Mac II Program, Farmer Mac is one of several competing
purchasers of Guaranteed Portions of farm ownership loans, farm operating loans,
business and industry loans and other loans that are guaranteed by the Secretary
of Agriculture pursuant to the ConAct (collectively, the "Guaranteed Loans").
Guaranteed Portions, which represent up to 95 percent of the principal amount of
Guaranteed Loans, are fully guaranteed as to principal and interest by the USDA,
which guarantee is supported by the full faith and credit of the United States.
USDA Guarantees. The maximum loss covered by a USDA guarantee can never
exceed the lesser of: (1) 95 percent of the principal and interest indebtedness
on the Guaranteed Loan, any loan subsidy due, and 95 percent of principal and
interest indebtedness on secured protective advances for protection and
preservation of the related mortgaged property made with USDA authorization; and
(2) 95 percent of the principal advanced to or assumed by the borrower under the
Guaranteed Loan and any interest due (including a loan subsidy).
Each USDA guarantee is a full faith and credit obligation of the United
States and becomes enforceable if a Lender fails to repurchase the Guaranteed
Portion from the owner thereof (the "Owner") within thirty (30) days after
written demand from the Owner when (a) the borrower under the Guaranteed Loan
(the "Borrower") is in default not less than sixty (60) days in the payment of
any principal or interest due on the Guaranteed Portion, or (b) the Lender has
failed to remit to the Owner the payment made by the Borrower on the Guaranteed
Portion or any related loan subsidy within thirty (30) days after the Lender's
receipt thereof.
If the Lender does not repurchase the Guaranteed Portion as provided
above, the USDA is required to purchase the unpaid principal balance of the
Guaranteed Portion together with accrued interest (including any loan subsidy)
to the date of purchase, less the servicing fee, within thirty (30) days after
written demand to USDA from the Owner. While the USDA guarantee will not cover
the note interest to the Owner on Guaranteed Portions accruing after ninety (90)
days from the date of the original demand letter of the Owner to the Lender
requesting repurchase, Farmer Mac has established procedures to require prompt
tendering of Guaranteed Portions.
If in the opinion of the Lender (with the concurrence of the USDA) or
in the opinion of the USDA, repurchase of the Guaranteed Portion is necessary to
service the related Guaranteed Loan adequately, the Owner will sell the
Guaranteed Portion to the Lender or USDA for an amount equal to the unpaid
principal balance and accrued interest (including any loan subsidy) on such
Guaranteed Portion less the Lender's servicing fee. Federal regulations prohibit
the Lender from repurchasing Guaranteed Portions for arbitrage purposes.
Lenders. All Guaranteed Loans must be originated and serviced by
eligible Lenders. Under applicable regulations, all eligible Lenders must be
subject to credit examination and supervision by either an agency of the United
States or a state, must be in good standing with their licensing authorities and
must have met any licensing, lending, loan servicing and other applicable
requirements of the state in which the collateral for a Guaranteed Loan will be
located. Each Lender must inform the USDA that it qualifies as an eligible
Lender and which agency or authority supervises it.
Loan Servicing. The Lender on each Guaranteed Loan is required by
regulation to retain the unguaranteed portion of the Guaranteed Loan (the
"Unguaranteed Portion"), to service the entire underlying Guaranteed Loan,
including the Guaranteed Portion, and to remain mortgagee and/or secured party
of record. The Guaranteed Portion and the Unguaranteed Portion of the underlying
Guaranteed Loan are to be secured by the same security with equal lien priority.
The Guaranteed Portion cannot be paid later than or in any way be subordinated
to the related Unguaranteed Portion.
Farmer Mac II Securities
Farmer Mac issues and guarantees the timely payment of principal and
interest on Farmer Mac II Securities, which are backed by Guaranteed Portions.
Farmer Mac does not guarantee the repayment of the Guaranteed Portions, only the
Farmer Mac II Securities that are backed by Guaranteed Portions. In addition to
issuing Farmer Mac II Securities to Lenders in swap transactions or to other
investors for cash, Farmer Mac purchases Guaranteed Portions for retention in
its portfolio.
Transactions Under Farmer Mac II Program
As of December 31, 2000, Farmer Mac had issued and guaranteed $794.3
million of Farmer Mac II Securities, of which $193.5 million were issued in
2000. Of the $794.3 million of Farmer Mac II Securities issued and guaranteed
through December 31, 2000, $517.7 million were outstanding as of that date. Of
the $517.7 million of outstanding Farmer Mac II Securities, Farmer Mac held
$427.5 million in its portfolio and other investors owned $90.2 million. See
Notes 4 and 10 to the Consolidated Financial Statements.
Financing
Debt Issuances
Farmer Mac issues debt obligations, consisting of Discount Notes and
Medium-Term Notes ("Notes"), to obtain funds for the Farmer Mac I and Farmer Mac
II Programs to cover transaction costs, guarantee payments and the costs of
purchasing Guaranteed Portions, Qualified Loans and securities (including Farmer
Mac Guaranteed Securities). Farmer Mac also issues Notes to meet other needs
associated with its business operations, including liquidity, and to increase
its presence in the capital markets in order to enhance the efficiency of its
debt and AMBS securities transactions and so improve the mortgage rates
available to farmers, ranchers and rural homeowners. Farmer Mac's Board of
Directors has authorized the issuance of up to $4.0 billion of Notes, subject to
periodic review of the adequacy of that level relative to Farmer Mac's borrowing
requirements. Farmer Mac invests part of the proceeds of such issuances in
program assets, with the remainder invested in non-program assets in accordance
with policies established by its Board of Directors. The current policies
authorize Farmer Mac to invest in U.S. Treasury, agency and instrumentality
obligations; repurchase agreements; commercial paper; guaranteed investment
contracts; certificates of deposit; federal funds and bankers acceptances;
certain securities and debt obligations of corporate issuers; asset-backed
securities; and corporate money market funds. For information about Farmer Mac's
outstanding investments and indebtedness, see Notes 3 and 5 to the Consolidated
Financial Statements.
Equity Issuances
By statute, Farmer Mac is authorized to issue Voting Common Stock,
non-voting common stock and non-voting preferred stock. Voting Common Stock may
be held only by banks, other financial entities, insurance companies and System
Institutions that qualify as eligible participants in the Farmer Mac programs.
Under the Act, no holder of Class A Voting Common Stock may directly or
indirectly be a beneficial owner of more than 33 percent of the outstanding
shares of Class A Voting Common Stock. There are no ownership restrictions
applicable to non-voting common stock or preferred stock. To date, Farmer Mac
has not issued any preferred stock. Any preferred stock issued by Farmer Mac
would have priority over the Common Stock in payment of dividends and
liquidation proceeds. The Class C Non-Voting Common Stock is, and any preferred
stock would be, freely transferable. The holders of preferred stock would be
paid in full at par value, plus all accrued dividends, before the holders of
shares of Common Stock received any payment upon liquidation, dissolution or
winding up of the business of Farmer Mac. To date, Farmer Mac has not paid any
dividends on its Common Stock, nor does it expect to pay dividends in the near
future. Farmer Mac's ability to declare and pay dividends could be restricted if
it were to fail to comply with regulatory capital requirements. See Note 7 to
the Consolidated Financial Statements and "Government Regulation of Farmer Mac
- -- Regulation -- Capital Standards -- Enforcement levels."
Effective August 2, 1999, after obtaining the consent of the holders of
its Class C Non-Voting Common Stock, Farmer Mac amended its By-Laws to eliminate
the three-to-one preference with respect to dividends and liquidation proceeds
which had been applicable to each share of Class C Non-Voting Common Stock
relative to each share of Voting Common Stock. In conjunction with this By-Law
amendment, Farmer Mac effected a three-for-one split of its Class C Non-Voting
Common Stock. The two principal reasons for making these changes were to
simplify the reporting of Farmer Mac's earnings per share and improve the
liquidity of Farmer Mac's Class C Stock.
As of December 31, 2000, 1,030,780 shares of Class A Stock, 500,301
shares of Class B Stock and 9,620,112 shares of Class C Stock were outstanding.
Farmer Mac may obtain additional capital from future issuances of common stock
(both voting and non-voting) or non-voting preferred stock. Farmer Mac has no
current plans to issue any additional shares of Common Stock, except pursuant to
programs in which employees, members of management or the Board of Directors may
be granted Class C Non-Voting Common Stock as part of their compensation
arrangements.
Authority to Borrow from Treasury
The Act authorizes Farmer Mac to borrow, in extreme circumstances, up
to $1.5 billion from the Secretary of the Treasury, subject to certain
conditions, to enable Farmer Mac to fulfill the obligations under its
guarantees. See "Farmer Mac's Borrowing Authority from the U.S. Treasury."
Administrative Expenses
By statute, Farmer Mac is authorized to impose charges or fees in
reasonable amounts to recover the costs of administering its activities. In that
regard, Farmer Mac is authorized to require program participants to make
nonrefundable capital contributions to meet the administrative expenses of
Farmer Mac. Farmer Mac would issue shares of Voting Common Stock in exchange for
such capital contributions. No such capital contributions have been required,
and Farmer Mac has no present intention to exercise its statutory authority to
require such contributions.
FARMER MAC'S BORROWING AUTHORITY FROM THE U.S. TREASURY
Farmer Mac may issue obligations to the U.S. Treasury in a cumulative
amount not to exceed $1.5 billion. The proceeds of such obligations may be used
solely for the purpose of fulfilling Farmer Mac's guarantee obligations under
the Farmer Mac I and Farmer Mac II Programs. The Act provides that the U.S.
Treasury is required to purchase such obligations of Farmer Mac if Farmer Mac
certifies that: (1) a portion of the guarantee fees assessed by Farmer Mac has
been set aside as a reserve against losses arising out of Farmer Mac's guarantee
activities in an amount determined by Farmer Mac's Board to be necessary and
such reserve has been exhausted; and (2) the proceeds of such obligations are
needed to fulfill Farmer Mac's guarantee obligations. Such obligations would
bear interest at a rate determined by the U.S. Treasury, taking into
consideration the average rate on outstanding marketable obligations of the
United States as of the last day of the last calendar month ending before the
date of the purchase of such obligations, and would be required to be repaid to
the U.S. Treasury within a "reasonable time," which the Act does not define.
The United States government does not guarantee payments due on Farmer
Mac Guaranteed Securities, funds invested in the stock or indebtedness of Farmer
Mac, any dividend payments on shares of Farmer Mac stock or the profitability of
Farmer Mac.
GOVERNMENT REGULATION OF FARMER MAC
General
Public offerings of Farmer Mac Guaranteed Securities must be registered
with the SEC under the federal securities laws. Farmer Mac also is required to
file reports with the SEC pursuant to the SEC's periodic reporting requirements.
Regulation
Office of Secondary Market Oversight
As a System Institution, Farmer Mac is subject to the regulatory
authority of the FCA. The FCA, acting through OSMO, has general regulatory and
enforcement authority over Farmer Mac, including the authority to promulgate
rules and regulations governing the activities of Farmer Mac and to apply its
general enforcement powers to Farmer Mac and its activities. The Director of
OSMO, who was selected by and reports to the FCA Board, is responsible for the
examination of Farmer Mac and the general supervision of the safe and sound
performance by Farmer Mac of the powers and duties vested in it by the Act. The
Act requires an annual examination of the financial transactions of Farmer Mac
and authorizes the FCA to assess Farmer Mac for the cost of its regulatory
activities, including the cost of any examination. Farmer Mac is required to
file quarterly reports of condition with the FCA, as well as copies of all
documents filed with the SEC under the federal securities laws.
Department of the Treasury
In connection with the passage of the 1996 Act, the Chairmen of the
House and Senate Agriculture Committees requested the FCA, in a cooperative
effort with the Department of the Treasury, to "monitor and review the
operations and financial condition of Farmer Mac and to report in writing to the
appropriate subcommittees of the House Agriculture Committee, the House
Financial Services Committee and the Senate Agriculture, Nutrition and Forestry
Committee at six-month intervals during the capital deferral period and beyond,
if necessary." Although the "capital deferral period" expired on January 1,
1999, Farmer Mac anticipates this cooperative monitoring effort between the
Treasury and the FCA will continue at least until the date, expected to be
during the second quarter of 2002, that Farmer Mac is required to comply with
the final risk-based capital standards adopted by the FCA.
Comptroller General/General Accounting Office
The Act requires the Comptroller General of the United States to
perform an annual review of the actuarial soundness and reasonableness of the
guarantee fees established by Farmer Mac.
Capital Standards
General. The Act, as amended by the 1996 Act, establishes three capital
standards for Farmer Mac--minimum, critical and risk-based. The minimum and
critical capital requirements are expressed as a percentage of on-balance sheet
assets and a lower percentage of "off-balance sheet obligations" (primarily
outstanding Farmer Mac Guaranteed Securities not owned by Farmer Mac or an
affiliate). The Act does not specify the required level of risk-based capital,
but directs the FCA to establish a risk-based capital test for Farmer Mac, which
was published for comment on November 12, 1999. Farmer Mac submitted its timely
comments on the proposed risk-based capital test on June 12, 2000. On February
22, 2001, the FCA Board approved a final risk-based capital rule for Farmer Mac.
As of March 15, 2001, the final rule had not been published in the Federal
Register nor made available for public review. See "-- Risk-based capital"
below. In the event that Farmer Mac were unable to comply with existing capital
requirements or higher capital requirements that may be imposed in the future,
the FCA could take enforcement actions against Farmer Mac, including curtailing
its business activities. See "-- Enforcement levels" below.
As of December 31, 2000, Farmer Mac's minimum and critical capital
requirements were $96.9 million and $48.4 million, respectively, and its actual
core capital level was $101.2 million, $4.3 million above the minimum
requirement. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" for a presentation
of Farmer Mac's current regulatory capital position.
Minimum capital. Farmer Mac's minimum capital level is an amount of
core capital equal to the sum of 2.75 percent of Farmer Mac's aggregate
on-balance sheet assets, as calculated for regulatory purposes, plus 0.75
percent of the aggregate off-balance sheet obligations of Farmer Mac,
specifically including: (1) the unpaid principal balance of outstanding Farmer
Mac Guaranteed Securities; (2) instruments issued or guaranteed by Farmer Mac
that are substantially equivalent to Farmer Mac Guaranteed Securities; and (3)
other off-balance sheet obligations of Farmer Mac.
Critical capital. By statute, Farmer Mac's critical capital level at
any time must be an amount of core capital equal to 50 percent of the total
minimum capital requirement at that time.
Risk-based capital. The 1996 Act directs the FCA to establish a
risk-based capital test for Farmer Mac, using stress-test parameters set forth
therein. While the Act does not specify the required level of risk-based
capital, that level is permitted to exceed the statutory minimum capital
requirement applicable to Farmer Mac.
In November 1999, the FCA published a notice of proposed rulemaking
setting forth a proposed risk-based capital test. The framework for the proposed
rule is specified in Farmer Mac's statutory charter. The model underlying the
proposed risk-based capital test was intended by Congress to measure the amount
of capital needed for Farmer Mac to maintain adequate capital levels during a
10-year period of economic stress, based on the Corporation's credit and
interest rate risk profile at the beginning of such period. Comments on the
proposed rulemaking were initially due by March 13, 2000. The FCA granted an
extension of the time for filing comments on the proposed rulemaking until June
12, 2000, due, in part, to a request by Farmer Mac. Farmer Mac filed its
comments on the proposed rulemaking on June 12, 2000.
On February 22, 2001, the FCA Board adopted the final risk-based
capital regulation for Farmer Mac. As of March 15, 2001, the final rule had not
been published in the Federal Register or made available for public review.
Based on preliminary information from the FCA regarding the nature of the
regulation adopted by the FCA Board, and without having obtained access to the
FCA's economic "stress test" model underlying the final regulation, Farmer Mac
understands that it would have been in compliance with the final risk-based
capital regulation as of December 31, 2000, had the regulation been in effect on
that date, and that the final rule would not have required Farmer Mac to
increase its capital based upon its financial position and risk profile. Based
upon its review of preliminary information from the FCA, Farmer Mac understands
that the overall risk-based capital requirement generated by the stress test
will be a weighted average of the risk-based capital requirements of individual
Qualified Loans backing securities guaranteed by Farmer Mac or held by it.
Farmer Mac further understands that Qualified Loans with certain characteristics
will contribute to a lower requirement (but not less than the statutory minimum
capital level), while Qualified Loans with other characteristics will contribute
to a higher requirement. These considerations may cause Farmer Mac to emphasize
those characteristics of Qualified Loans that produce lower risk-based capital
requirements as its business continues to develop, to ensure that the
Corporation remains in compliance with the risk-based capital regulation.
Based on FCA's application of the final risk-based capital regulation
to Farmer Mac's business as of September 30, 2000, had the regulation been in
effect on that date, Farmer Mac's risk-based capital requirement would have been
less than the statutory minimum capital level, in which case the statutory
minimum capital level would have governed. Because the characteristics of Farmer
Mac's portfolio of assets did not change significantly from September 30, 2000
to December 31, 2000, Farmer Mac's risk-based capital as of December 31, 2000
should also have been less than the statutory minimum capital level had the
regulation been in effect on that date. There can be no assurance that future
risk-based capital levels will always be below statutory minimum capital levels,
though Farmer Mac expects that it will be able to manage its business to
maintain capital levels consistent with the regulation. After Farmer Mac has had
an opportunity to evaluate the final regulation fully, management may engage FCA
staff in further discussions, as appropriate, to recommend revisions to the
regulation.
Based on preliminary information from the FCA, the final risk-based
capital regulation most likely will become effective in April or May 2001, but
Farmer Mac will not be required to comply with the risk-based capital standard
established under the regulation until one year after its effective date. While
a risk-based capital requirement significantly above the statutory minimum
capital level could have a material adverse effect on Farmer Mac, the ultimate
impact of the risk-based capital test adopted by the FCA in February 2001 will
have to be evaluated in light of the level of risk-based capital required
relative to Farmer Mac's existing capital position, the categories of assets
against which risk-based capital would have to be maintained, growth in Farmer
Mac's business, Farmer Mac's ability and need to raise additional equity in the
capital markets, alternative business strategies available to Farmer Mac, as
well as legal and public policy considerations affecting the applicability to
Farmer Mac of the risk-based capital requirement.
Enforcement levels. The Act directs the FCA to classify Farmer Mac
within one of four enforcement levels for purposes of determining compliance
with capital standards. Prior to the effective date of the final risk-based
capital regulation for Farmer Mac, the Act provides that Farmer Mac shall be
classified as within "level I" (the highest compliance level) so long as its
capital equals or exceeds the then applicable minimum capital level. As of
December 31, 2000, Farmer Mac was classified as within level I.
Failure to comply with the applicable minimum capital level in the Act
would result in Farmer Mac being classified as within level III (below the
minimum but above the critical capital level) or level IV (below the critical
capital level). (Level II is not applicable prior to the effective date of the
final risk-based capital regulation since it contemplates the failure to comply
with the risk-based capital standard.) In the event that Farmer Mac were
classified as within level III or IV, the Act requires the Director of OSMO to
take a number of mandatory supervisory measures and provides the Director with
discretionary authority to take various optional supervisory measures depending
on the level in which Farmer Mac is classified. The mandatory measures
applicable to level III include: requiring Farmer Mac to submit (and comply
with) a capital restoration plan; prohibiting the payment of dividends if such
payment would result in Farmer Mac being reclassified as within level IV and
requiring the pre-approval of any dividend payment even if such payment would
not result in reclassification as within level IV; and reclassifying Farmer Mac
as within a lower level if it does not submit a capital restoration plan that is
approved by the Director or the Director determines that Farmer Mac has failed
to make, in good faith, reasonable efforts to comply with such a plan and
fulfill the schedule for the plan approved by the Director.
If Farmer Mac were classified as within level III, then, in addition to
the foregoing mandatory supervisory measures, the Director of OSMO could take
any of the following discretionary supervisory measures: imposing limits on any
increase in, or ordering the reduction of, any obligations of Farmer Mac,
including off-balance sheet obligations; limiting or prohibiting asset growth or
requiring the reduction of assets; requiring the acquisition of new capital in
an amount sufficient to provide for reclassification as within a higher level;
terminating, reducing or modifying any activity the Director determines creates
excessive risk to Farmer Mac; or appointing a conservator or a receiver for
Farmer Mac. The Act does not specify any supervisory measures, either mandatory
or discretionary, to be taken by the Director in the event Farmer Mac were
classified as within level IV.
The Director of OSMO has the discretionary authority to reclassify
Farmer Mac to a level that is one level below its then current level (i.e., from
level III to level IV) if the Director determines that Farmer Mac is engaging in
any action not approved by the Director that could result in a rapid depletion
of core capital or if the value of property subject to mortgages backing Farmer
Mac Guaranteed Securities has decreased significantly.
Item 2. Properties
On September 30, 1991, Farmer Mac entered into a long-term lease for
its principal offices, which are located at 919 18th Street, N.W., Suite 200,
Washington, D.C. 20006. The lease, which expires January 6, 2002, covers
approximately 7,500 square feet of office space. Farmer Mac's offices are
suitable and adequate for its present needs. As of March 15, 2001, Farmer Mac
was reviewing several possible locations for its future office needs.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Farmer Mac has three classes of common stock outstanding. Class A
Voting Common Stock may be held only by banks, insurance companies and other
financial institutions or similar entities that are not System Institutions.
Class B Voting Common Stock may be held only by System Institutions. There are
no ownership restrictions on the Class C Non-Voting Common Stock.
The Class A and Class C Common Stock trade on the New York Stock
Exchange (the "NYSE") under the symbols AGMA and AGM, respectively. Prior to
June 18, 1999, Class A Common Stock traded on The Nasdaq SmallCap Market tier of
The Nasdaq Stock Market under the symbol FAMCA, and the Class C Common Stock
traded on The Nasdaq National Market tier of The Nasdaq Stock Market under the
symbol FAMCK. The Class B Voting Common Stock, which has a limited market and
trades infrequently, is not listed or quoted on any exchange or other medium,
and Farmer Mac is unaware of any publicly available quotations or prices for
that class.
The information below represents the high and low closing sale prices
for the Class A and Class C Common Stock for the periods indicated as reported
by the NYSE and the high and low bids for the periods indicated as reported by
The Nasdaq Stock Market.
Sales Price
--------------------------------------------------
Class A Stock Class C Stock
------------------------ ------------------------
High Low High Low
------------ ----------- ----------- ------------
(dollars per share)
1999
First quarter $ 18.50 $ 17.38 $ 18.00 $ 13.08
Second quarter 18.25 16.38 24.83 15.06
Third quarter 16.75 15.25 23.13 17.50
Fourth quarter 18.63 14.81 22.63 15.63
2000
First quarter 16.50 15.63 20.75 15.50
Second quarter 17.13 14.75 16.13 13.31
Third quarter 17.88 16.75 18.06 13.63
Fourth quarter 18.38 16.13 23.38 17.50
2001
First quarter (through March 9) $ 23.25 $ 19.00 $ 27.94 $ 22.85
As of March 9, 2001, it was estimated that there were 1,506 registered
owners of the Class A Voting Common Stock, 104 registered owners of the Class B
Voting Common Stock and 1,441 registered owners of the Class C Non-Voting Common
Stock outstanding.
For information about Farmer Mac's dividend policy, see "Business --
Financing -- Equity Issuances" and Note 7 to the Consolidated Financial
Statements.
Item 6. Selected Financial Data
December 31,
-------------------------------------------------------------------
Summary of Financial Condition: 2000 1999 1998 1997 1996
------------ ------------- ------------- ------------ -------------
(dollars in thousands)
Cash and cash equivalents $537,871 $336,282 $540,626 $177,617 $ 68,912
Investment securities 836,757 847,220 643,562 656,737 85,799
Farmer Mac guaranteed securities 1,679,993 1,306,223 552,205 442,311 419,260
Loans 30,279 38,509 168,064 47,177 12,999
Total assets 3,160,899 2,590,410 1,935,971 1,348,135 603,104
Notes and bonds payable
Due within one year 2,201,691 1,722,061 1,473,688 856,028 259,164
Due after one year 767,492 750,337 366,122 402,803 287,128
Total liabilities 3,028,238 2,503,267 1,855,057 1,273,074 555,899
Stockholders' equity 132,661 87,143 80,914 75,061 47,205
Selected Financial Ratios:
Return on average assets 0.36% 0.31% 0.35% 0.47% 0.14%
Return on average equity 9.50% 8.24% 7.36% 7.57% 2.64%
Average equity to assets 3.82% 3.71% 4.75% 6.27% 5.28%
Year ended December 31,
-------------------------------------------------------------------
Summary of Operations: 2000 1999 1998 1997 1996
------------ ------------- ------------- ------------ -------------
(dollars in thousands, except per share amounts)
Interest income $195,420 $140,377 $103,561 $ 80,153 $ 37,353
Interest expense 177,722 125,419 92,992 72,992 34,623
------------ ------------- ------------- ------------ -------------
Net interest income 17,698 14,958 10,569 7,161 2,730
Guarantee fee income 11,677 7,396 3,727 2,575 1,623
Gain on issuance of AMBS - - 1,400 2,362 1,070
Miscellaneous 399 220 142 253 63
------------ ------------- ------------- ------------ -------------
Total revenue 29,774 22,574 15,838 12,351 5,486
Total expenses 13,588 11,983 9,323 7,840 5,081
------------ ------------- ------------- ------------ -------------
Income before income taxes and
extraordinary item 16,186 10,591 6,515 4,511 405
Income tax expense/(benefit) 5,749 3,670 772 (115) 12
Extraordinary gain - - - - 384
------------ ------------- ------------- ------------ -------------
Net income $ 10,437 $ 6,921 $ 5,743 $ 4,626 $ 777
------------ ------------- ------------- ------------ -------------
Earnings Per Share:
Basic earnings before extraordinary item $ 0.94 $ 0.64 $ 0.53 $ 0.48 $ 0.07
Basic net earnings $ 0.94 $ 0.64 $ 0.53 $ 0.48 $ 0.15
Diluted earnings before extraordinary item $ 0.92 $ 0.62 $ 0.52 $ 0.46 $ 0.07
Diluted net earnings $ 0.92 $ 0.62 $ 0.52 $ 0.46 $ 0.14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial information at and for the twelve months ended December 31, 2000,
1999 and 1998 is consolidated to include the accounts of Farmer Mac and its
wholly owned subsidiary, Farmer Mac Mortgage Securities Corporation ("FMMSC").
During 1999, the operations of Farmer Mac Acceptance Corporation were merged
into FMMSC. All material inter-company transactions have been eliminated in
consolidation. The following discussion should be read together with Farmer
Mac's consolidated financial statements and is not necessarily indicative of our
future results.
Forward-Looking Statements
Certain statements made in this Form 10-K are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 pertaining to management's current expectations as to Farmer Mac's
future financial results, business prospects and business developments.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate or imply future results, performance or
achievements, and typically are accompanied by, and identified with, such terms
as "anticipates," "believes," "expects," "intends," "should" and similar
phrases. The following management's discussion and analysis includes
forward-looking statements addressing Farmer Mac's prospects for earnings and
growth in loan purchase, guarantee and securitization volume; trends in net
interest income and provision for losses; changes in capital position; and other
business and financial matters. Management's expectations for Farmer Mac's
future necessarily involve a number of assumptions, estimates and the evaluation
of risks and uncertainties. Various factors could cause Farmer Mac's actual
results or events to differ materially from the expectations as expressed or
implied by the forward-looking statements, including: uncertainties regarding
the rate and direction of development of the secondary market for agricultural
mortgage loans; the possible establishment of additional statutory or regulatory
restrictions applicable to Farmer Mac, such as the imposition of regulatory
risk-based capital requirements in excess of statutory minimum and critical
capital levels or restrictions on Farmer Mac's investment authority; substantial
changes in interest rates, agricultural land values, commodity prices and the
general economy; protracted adverse weather, market or other conditions
affecting particular geographic regions or particular commodities related to
agricultural mortgage loans backing Farmer Mac Guaranteed Securities;
legislative or regulatory developments or interpretations of Farmer Mac's
statutory charter that could adversely affect Farmer Mac or the ability of
certain lenders to participate in its programs or the terms of any such
participation; the availability of debt funding in sufficient quantities and at
favorable rates to support continued growth; the rate of growth in agricultural
mortgage indebtedness; the size of the agricultural mortgage market; borrower
preferences for fixed-rate agricultural mortgage indebtedness; the willingness
of lenders to sell agricultural mortgage loans into the Farmer Mac secondary
market; the willingness of investors to invest in agricultural mortgage-backed
securities; competition in the origination or purchase of agricultural mortgage
loans and the sale of agricultural mortgage-backed and debt securities; or
changes in Farmer Mac's status as a government-sponsored enterprise.
The foregoing factors are not exhaustive. Other sections of this report
may include additional factors that could adversely impact Farmer Mac's business
and its financial performance. Given these potential risks and uncertainties, no
undue reliance should be placed on any forward-looking statements expressed
herein. Furthermore, Farmer Mac undertakes no obligation to release publicly the
results of revisions to any forward-looking statements that may be made to
reflect any future events or circumstances.
Overview
2000 was another year of solid growth and strong financial performance
for Farmer Mac, notwithstanding challenges created by the continuing
industry-wide weakness in new agricultural mortgage volume due to uncertainties
in the agricultural sector. Diluted earnings per share were $0.92 for 2000, a 48
percent increase over 1999 diluted earnings per share, marking the fifth
consecutive year during which Farmer Mac achieved significant increases in
profitability. Net income rose from $6.9 million in 1999 to $10.4 million in
2000.
The principal factors contributing to the year's record earnings were
increases in net interest income from spread on portfolio retention of cash
window and portfolio purchases and guarantee fees on the higher cumulative
amount of guarantees outstanding. Net interest income was up $2.7 million to
$17.7 million in 2000, from $15.0 million in 1999, as Farmer Mac Guaranteed
Securities and loans held by Farmer Mac increased by $365.5 million. Guarantee
fee income grew 58 percent from $7.4 million in 1999 to $11.7 million in 2000,
as outstanding guarantees increased $736.8 million, or 31 percent, to $3.08
billion and surpassed the $3.0 billion level for the first time in Farmer Mac's
history. The year's increase in guarantee fee income is indicative of the
annuity-like nature of that income. The increase in outstanding guarantee volume
was achieved while Farmer Mac continued to maintain control over its operating
expenses. During 2000, operating expenses increased by only 6.5 percent over
1999 and equaled 30 percent of total revenues, compared to 37 percent in 1999.
While increasing its level of guarantees, Farmer Mac maintained a close
watch on the quality of mortgages covered by its guarantee, despite continued
stress in some segments of the U.S. agricultural economy in 2000. At year-end,
Farmer Mac I loans purchased or guaranteed after changes to the Corporation's
statutory charter in 1996 placed Farmer Mac in the position of first loss
guarantor ("post-1996 Act loans") showed a modest increase in delinquency rates
of 90 days or longer, to 1.25 percent of the principal amount of all post-1996
Act loans, compared to 0.94 percent at the end of 1999. (External 10 percent
first loss interests mitigate Farmer Mac's credit exposure to pre-1996 Act
loans.) Farmer Mac anticipates fluctuations in the delinquency rate from quarter
to quarter, with higher levels likely in the first and third quarters of each
year, due to the semiannual payment characteristics of most Farmer Mac loans.
Farmer Mac experienced no loan losses resulting in net charge-offs to the
reserve in 2000, compared with losses totaling $347,000 in 1999.
It is anticipated that delinquencies will likely increase and some loan
losses will likely be incurred in 2001, due both to the aging of the guarantee
portfolio and to pressures from growing inventories and weak markets for
agricultural commodities and products worldwide along with low prices and
economic uncertainty in the agricultural sector, following the trend of the last
several years. Nevertheless, as reported by the USDA, agricultural income during
2000 was strong, due in large part to record government support payments made to
farmers during the year, which generally helped to maintain economic stability
in the agricultural sector and contributed to stable agricultural land prices in
most regions of the nation during 2000. As a result, the overall financial
condition of the agricultural sector, with the exception of certain producer
groups that do not receive significant government payments, remains sound and
agricultural mortgage credit quality general remains good.
It is too early to predict what level of federal support will be
provided to agriculture in 2001, but Farmer Mac believes that the preservation
of the economic stability of the agricultural sector will continue to be a high
priority for both Congress and the new Administration, as it has been during the
last several years. Though increased reliance on government payments enabled
farmers and ranchers to meet their existing mortgage obligations more easily
during 2000, the economic uncertainty of the agricultural economy is likely to
continue to mute farmers' demand for new agricultural mortgage loans during
2001. We believe that Farmer Mac has responded effectively to these market
conditions by expanding its product offerings to include, among other things,
revolving lines of credit backed by agricultural mortgages to help farm
borrowers with equity in their land meet short-term liquidity needs. In
addition, by re-emphasizing to agricultural lenders the opportunity to reduce
their concentrated exposures to local agricultural credit risks, Farmer Mac
believes it can develop swap and LTSPC transactions and similar structures
during 2001, as lenders become more attentive to their own issues of liquidity
and portfolio diversification. Also, anticipated lower interest rates during
2001 should contribute to lower debt expenses for farm borrowers and increased
long-term, fixed-rate mortgage activity.
As we evaluate Farmer Mac's business prospects for 2001 and beyond,
certain factors and conditions remain likely to constrain our progress. Many
institutions that dominate agricultural lending today have an organizational
bias toward retaining loans in portfolio rather than selling them,
notwithstanding corporate finance and capital planning benefits they might
realize through participation in Farmer Mac's programs. Some lending
institutions subsidize their agricultural mortgage loan rates out of higher
rates on non-mortgage loans, or by low-return use of equity, both of which
generate uneconomic competition with Farmer Mac's loan rates.
Further potentially affecting the growth of Farmer Mac's business is
the expanded authority of Federal Home Loan Banks ("FHLBs"), under legislation
enacted in November 1999, to accept agricultural loans as collateral for their
own advances and to relax their membership requirements for small banks. At this
time, it is still too early to assess fully the impact, if any, of these changes
upon Farmer Mac. There are, however, several important distinctions between the
expanded FHLB authority and the benefits Farmer Mac brings to agricultural
lenders, including the capital relief available under Farmer Mac's loan sale and
purchase commitment programs, the lower over-collateralization requirements
under Farmer Mac's AgVantage program and the lower interest rate risk of
participation in the Farmer Mac programs.
Although Farmer Mac has grown steadily stronger during the last five
years, that growth has depended, and will continue to depend, upon ongoing
increases in the volume of loans covered by its guarantee. Farmer Mac's current
share of the agricultural mortgage market remains relatively small, due to the
gradual nature of market penetration in a mature market. However, our dramatic
growth rates in the years since 1996 implies a significant ongoing opportunity
for expansion of business volume. Over the long term, our strategy for realizing
Farmer Mac's business development and profitability goals is to prompt
agricultural mortgage lenders, whether traditional or non-traditional, to
continue to expand their use of our guarantee through market-oriented programs
and products that clearly benefit the nation's farmers, ranchers and rural
homeowners.
A detailed presentation of Farmer Mac's financial results for the years
ended December 31, 2000, 1999 and 1998 follows.
Average Balances and Rates
The following table provides information regarding interest-earning
assets and interest-bearing liabilities for the years ended December 31, 2000,
1999 and 1998.
2000 1999 1998
--------------------------------- ---------------------------------- ----------------------------
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
--------- --------- ---------- ---------- --------- ---------- -------- --------- --------
(dollars in thousands)
Interest-earning assets:
Cash and cash
equivalents $ 510,779 $ 32,675 6.40% $ 568,398 $29,384 5.17% $ 440,815 $ 24,306 5.51%
Investments 888,765 59,230 6.66% 737,275 41,170 5.58% 658,665 38,915 5.91%
Farmer Mac guaranteed
securities 1,379,660 100,649 7.30% 958,593 63,054 6.58% 474,083 32,922 6.94%
Loans 39,048 2,866 7.34% 99,518 6,769 6.80% 108,743 7,418 6.82%
---------- --------- ---------- ----------- ---------- ---------- ---------- --------- ------
Total interest-earning
assets $2,818,252 195,420 6.93% $2,363,784 140,377 5.94% $1,682,306 103,561 6.16%
---------- ------------ -----------
Funding:
Discount notes $1,945,276 125,952 6.47% $1,725,647 88,062 5.10% $1,253,557 68,102 5.43%
Medium term notes 825,433 51,770 6.27% 580,164 37,357 6.44% 360,410 24,890 6.91%
---------- --------- ---------- ----------- ----------- ---------- ----------- --------- ------
Total interest-bearing
liabilities 2,770,709 177,722 6.41% 2,305,811 125,419 5.44% 1,613,967 92,992 5.76%
Net non-interest-bearing
funding 47,543 - 0.00% 57,973 - 0.00% 68,339 - 0.00%
---------- --------- ---------- ----------- ----------- ---------- ----------- --------- ------
Total funding $2,818,252 177,722 6.31% $2,363,784 125,419 5.31% $1,682,306 92,992 5.53%
---------- --------- ---------- ----------- ----------- ---------- ----------- --------- ------
Net interest income/
yield $ 17,698 0.63% $14,958 0.63% $ 10,569 0.63%
--------- ---------- ----------- ---------- --------- -------
The table below sets forth the effects of changes in rates and volume
on the components of net interest income for the years ended December 31, 2000
and 1999. Combined rate/volume variances are allocated based on their relative
size.
2000 vs. 1999 1999 vs. 1998
----------------------------------- -----------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
----------------------------------- -----------------------------------
Rate Volume Total Rate Volume Total
----------- ----------- ----------- ----------- ----------- -----------
(in thousands)
Income from interest-earning assets:
Cash and cash equivalents $ 6,482 $ (3,191) $ 3,291 $ (1,595) $ 6,673 $ 5,078
Investments 8,756 9,304 18,060 (2,213) 4,468 2,255
Farmer Mac guaranteed securities 7,481 30,114 37,595 (1,828) 31,960 30,132
Loans held for securtization 495 (4,398) (3,903) (21) (628) (649)
----------- ----------- ----------- ----------- ----------- -----------
Total 23,214 31,829 55,043 (5,657) 42,473 36,816
Expense from interest-bearing liabilities 24,616 27,687 52,303 (5,464) 37,891 32,427
----------- ----------- ----------- ----------- ----------- -----------
Change in net interest income $ (1,402) $ 4,142 $ 2,740 $ (193) $ 4,582 $ 4,389
----------- ----------- ----------- ----------- ----------- -----------
Results of Operations
Net Interest Income. Net interest income totaled $17.7 million in 2000
compared to $15.0 million in 1999, and the net interest yield was 0.63 percent
in both 2000 and 1999. The increase in net interest income was due to a 19.2
percent increase in the average balance of interest-earnings assets, driven by a
34.1 percent increase in average on-balance sheet program assets (Farmer Mac
Guaranteed Securities and loans). The increase in on-balance sheet program
assets resulted from Farmer Mac's retention of cash purchases during 2000 (for
further information, see "-- Business Volume" and "-- Balance Sheet Review --
Assets"). During 2000, the average balance of non-program assets (cash and cash
equivalents and investments) increased by 7.2 percent.
Net interest income totaled $10.6 million in 1998. The $4.4 million
increase from 1998 to 1999 was due to a 41 percent increase in the average
balance of interest-earning assets, driven by an 82 percent increase in average
on-balance sheet program assets. Net interest yield for 1998 was also 0.63
percent.
Other Income. Other income, which is comprised of guarantee fee income,
gain on issuance of AMBS and miscellaneous income, totaled $12.1 million for
2000, compared to $7.6 million for 1999. During 2000, total outstanding
guarantees increased by 31 percent. Similarly, guarantee fee income, the largest
component of other income, increased to $11.7 million from $7.4 million the
prior year, an increase of 58 percent. Miscellaneous income totaled $399,000 for
2000, compared to $220,000 for 1999. Miscellaneous income includes fees and
hedging gains and losses related to program activities, which fluctuate from
period to period due to various factors including the level of program activity
and delinquencies.
Other income increased 43 percent to $7.6 million in 1999 from $5.3
million in 1998. Guarantee fee income, the largest component of other income,
increased to $7.4 million in 1999 from $3.7 million in 1998 due to a
corresponding increase in the outstanding balance of guaranteed securities. Gain
on sale of AMBS totaled $1.4 million in 1998. There were no sales of AMBS during
1999 because market conditions favored the retention of AMBS. See "-- Business
Volume."
Other Expenses. Operating expenses totaled $8.9 million in 2000,
compared to $8.3 million in 1999 and $7.7 million in 1998. Operating expenses
equaled 30 percent of total revenues in 2000, compared to 37 percent in 1999 and
49 percent in 1998. Farmer Mac's provision for losses totaled $4.7 million in
2000, compared to $3.7 million in 1999 and $1.6 million in 1998. The increases
in the provision for losses were due to increases in outstanding AMBS for which
Farmer Mac assumes 100 percent of the credit risk. See "-- Risk Management --
Credit risk management."
Income Tax Expense/Benefit. Income tax expense totaled $5.8 million in
2000, compared to an expense of $3.7 million in 1999 and a benefit of $772,000
in 1998. During 1998, Farmer Mac recognized $1.5 million of previously
unrecognized tax benefits, which related primarily to net operating losses
incurred in prior years. Excluding previously deferred tax benefits, Farmer Mac
would have reported income tax expense of $2.3 million and net income on a fully
taxable equivalent basis of $4.2 million for 1998. Farmer Mac expects its
effective tax rate in 2001 to approximate 35 percent due to the effects of
non-deductible expenses. For more information about income taxes, see Note 8 to
the Consolidated Financial Statements.
Business Volume. The following table sets forth information regarding
the volume and balance of loans purchased or guaranteed by Farmer Mac for the
periods indicated:
2000 1999 1998
--------------- -------------- ---------------
(in thousands)
Purchase and guarantee volume:
Farmer Mac I
Cash purchases $ 442,246 $ 391,448 $ 339,904
Swap transactions - 176,788 84,355
LTSPCs 373,202 637,685 -
--------------- -------------- ---------------
Total Farmer Mac I volume 815,448 1,205,921 424,259
Farmer Mac II 193,505 116,148 119,786
--------------- -------------- ---------------
Total loans and guaranteed portions $1,008,952 $1,322,069 $ 544,045
purchased or guaranteed --------------- -------------- ---------------
AMBS issuances:
Retained 360,037 $ 517,801 $ 75,533
Sold 159,910 - 141,758
Swap transactions - 176,788 84,355
--------------- -------------- ---------------
Total AMBS issuances $ 519,947 $ 694,589 $ 301,646
--------------- -------------- ---------------
Outstanding balance of loans held or
guaranteed by Farmer Mac at December 31 $3,110,213 $2,381,608 $1,300,930
--------------- -------------- ---------------
During 2000, the volume of loans purchased or guaranteed by Farmer Mac
totaled $1.0 billion, a 24 percent decrease from 1999 volume. This was largely a
result of decreases in swaps and LTSPCs from $814.5 million in 1999 to $373.2
million in 2000. See "-- Risk Management -- Credit risk management" for a
description of LTSPCs. These decreases were partially offset by increases of 13
percent and 67 percent in Farmer Mac I cash purchases and Farmer Mac II
guarantees, respectively. The net balance of loans held or guarantees
outstanding increased 31 percent from $2.4 billion to $3.1 billion.
Swaps and LTSPCs typically involve seasoned loans, while cash purchase
transactions usually represent acquisitions of newly originated loans. The
overall decreases for 2000 from 1999 are a result of economic stress in the
agricultural sector, which reduced demand for new originations of agricultural
mortgages.
Farmer Mac decides whether to retain AMBS or to sell AMBS to capital
market investors based on market conditions. During 2000, Farmer Mac issued
$519.9 million of AMBS, $360.0 million of which were retained by Farmer Mac.
Indicators of future purchase and guarantee volume, particularly cash
purchase activity, include outstanding commitments to purchase Farmer Mac I
loans and the total balance of loans submitted for approval or approved but not
yet purchased. Most purchase commitments entered into by Farmer Mac are
mandatory delivery commitments. If a Seller obtains a mandatory commitment and
is unable to deliver the loans required thereunder within the specified time
period, Farmer Mac requires the Seller to pay a fee to extend or cancel the
commitment. At December 31, 2000, outstanding commitments to purchase Farmer Mac
I loans totaled $13.2 million, compared to $12.5 million at December 31, 1999,
while loans submitted for approval or approved but not yet committed to purchase
totaled $58.0 million at December 31, 2000, compared to $110.7 million at
December 31, 1999. Not all of these loans are purchased, as some are denied for
credit reasons or withdrawn by the Seller.
While significant progress has been made in developing the secondary
market for agricultural mortgages, Farmer Mac continues to face the challenges
of establishing a new market where none previously existed. Acceptance of Farmer
Mac's programs is increasing among lenders, reflecting the competitive rates,
terms and products offered and the advantages Farmer Mac believes its programs
provide. For Farmer Mac to succeed in realizing its business development and
profitability goals over the longer term, the use of Farmer Mac's programs and
products by agricultural mortgage lenders, whether traditional or
non-traditional, must continue to expand.
Balance Sheet Review
Assets. As of December 31, 2000, total assets were $3.2 billion
compared to $2.6 billion at December 31, 1999. The increase in total assets was
primarily due to growth in program assets, which increased $365.5 million during
2000 to a total of $1.7 billion. During 2000, Farmer Mac purchased $635.8
million of Farmer Mac I and II loans. During the same period, non-program assets
increased to $1.4 billion as of December 31, 2000, from $1.2 billion as of
December 31, 1999.
The remaining growth in total assets was due to increases in the
balance of interest and guarantee fees receivable, which increased in proportion
to the growth of program assets and total guarantees.
Liabilities. Total liabilities increased from $2.5 billion at December
31, 1999, to $3.0 billion at December 31, 2000. The increase in liabilities was
primarily due to growth in notes payable, which corresponded to the growth in
on-balance sheet program assets. The remaining increase in total liabilities was
due to increases in accrued interest payable, as a result of the increase in
outstanding notes payable, and the reserve for losses. See "-- Risk Management
- -- Credit risk management." For more information about Farmer Mac's funding and
interest rate risk practices, see "-- Risk Management -- Interest-rate risk
management."
Capital. At December 31, 2000, stockholders' equity totaled $132.7
million, compared to $87.1 million at December 31, 1999. The increase was due to
net income earned during 2000 of $10.4 million and an increase in net unrealized
gains and losses of $33.2 million. At December 31, 2000 and December 31, 1999,
Farmer Mac's regulatory required minimum capital was $96.9 million and $79.6
million, compared with actual regulatory capital of $101.2 million and $88.8
million, respectively. See "-- Liquidity and Capital Resources -- Capital
Requirements."
Off-Balance Sheet Guarantees. At December 31, 2000, outstanding
off-balance sheet guarantees totaled $1.5 billion, compared to $1.1 billion at
December 31, 1999. For more information about off-balance sheet Farmer Mac
Guaranteed Securities, see "-- Risk Management -- Credit risk management."
Risk Management
Interest-rate risk management. Interest-rate risk is the risk that
interest rate changes could materially affect the value, or future earnings, of
Farmer Mac. Farmer Mac is exposed to two primary sources of interest-rate risk:
(a) Farmer Mac I and II Securities and other assets held for investment, and (b)
loans.
Farmer Mac is subject to interest-rate risk on all assets held for
investment because of possible timing differences in the cash flows of the
assets and related liabilities. This risk is primarily related to Farmer Mac I
and II Securities because of the ability of borrowers to prepay their mortgages
before the scheduled maturities, thereby increasing the risk of asset and
liability cash flow mismatches. Cash flow mismatches in a changing rate
environment can reduce the value or earnings of the Corporation if assets repay
sooner than expected and the resulting cash flows must be reinvested in
lower-yielding investments when Farmer Mac's funding costs cannot be
correspondingly reduced, or if assets repay more slowly than expected and the
associated debt must be replaced by higher-cost debt. Yield maintenance
provisions associated with many of the loans underlying Farmer Mac I Securities
reduce, but do not eliminate, this risk. Yield maintenance provisions require
borrowers to make an additional payment to Farmer Mac when they prepay their
loans. When reinvested with the prepaid principal, this payment generates
substantially the same cash flows that would have been generated had the loan
not prepaid. None of the loans underlying Farmer Mac II Securities have yield
maintenance provisions, although some carry fixed or declining percentage
prepayment penalties. Fixed-rate loans without yield maintenance provisions
represented 12 percent and 28 percent of the total balance of loans underlying
on-balance sheet Farmer Mac I and II Securities as of December 31, 2000, and
December 31, 1999, respectively.
There is less interest-rate risk related to Farmer Mac's portfolio of
non-program assets because it consists almost entirely of investments that
mature or reprice within one year. However, Farmer Mac does invest in certain
adjustable-rate investments that limit or "cap" the amount that an investment
coupon rate can increase. Such capped investments totaled $370.4 million and
$441.4 million at December 31, 2000, and December 31, 1999, respectively.
Farmer Mac's primary strategy for managing interest-rate risk related
to Farmer Mac I and II Securities and other assets held for investment is to
fund them with liabilities that have similar durations, or average cash flow
patterns over time, and provide flexibility to accommodate changing prepayment
rates in changing interest rate environments. To achieve the desired funding
objective, Farmer Mac uses a mix of short-term Discount Notes and callable and
non-callable Medium-Term Notes. See Note 5 to the Consolidated Financial
Statements. By using a mix of liabilities that includes callable debt, the
duration of the liabilities will tend to increase or decrease as interest rates
change in a manner similar to changes in the duration of the assets (the rate of
change in the duration of an asset or liability to a change in interest rates is
referred to as convexity). Farmer Mac manages the interest-rate risk related to
capped adjustable-rate investments by purchasing interest rate contracts that
effectively "uncap" the investments. See Note 10 to the Consolidated Financial
Statements.
Farmer Mac is also subject to interest-rate risk on loans, including
loans that Farmer Mac has committed to acquire, but not yet purchased. When
Farmer Mac commits to purchase a Qualified Loan, it is exposed to interest-rate
risk between the time it commits to purchase the loan and the time it either:
(a) sells AMBS backed by the loan, or (b) issues debt to retain the loan in its
portfolio (although issuing debt to fund the loans as an investment does not
fully mitigate interest rate risk due to the possible timing differences in the
cash flows of the assets and related liabilities, as discussed above). As of
December 31, 2000, the balance of loans committed or purchased and not yet sold
or funded as retained investments totaled $12.9 million. Farmer Mac manages the
interest-rate risk related to such loans, and the debt to be issued to fund the
loans as retained investments, through the use of forward sale contracts on the
debt and mortgage-backed securities of other government-sponsored enterprises
("GSEs") and futures contracts involving U.S. Treasury securities. At December
31, 2000, Farmer Mac did not own Treasury futures contracts and the total
notional balance of GSE forward sale contracts was $8.6 million. Farmer Mac
primarily uses GSE forward sale contracts since such instruments reduce Farmer
Mac's interest rate exposure to changes in both Treasury rates and AMBS and debt
spreads. For more information about off-balance sheet derivative financial
instruments, see Note 10 to the Consolidated Financial Statements.
Farmer Mac has established policies and implemented interest-rate risk
management procedures to monitor its exposure to interest rate risk. The primary
methodology used by management to monitor Farmer Mac's interest rate risk
exposure is measurement of the sensitivity of Farmer Mac's market value of
equity (MVE) to changes in interest rates. This and other risk measures are
reviewed regularly by management's Asset and Liability Committee and the Finance
Committee of the Board of Directors to monitor compliance with Farmer Mac's
interest-rate risk policy limits.
The simulation of MVE involves generating multiple paths for future
interest rates starting from a "base" yield curve and then discounting the
estimated cash flows under those rate paths to arrive at the estimated fair
value of Farmer Mac's assets, liabilities and off-balance sheet items. Farmer
Mac uses a commercially developed model to perform the MVE analyses. The
analysis, which is based on Farmer Mac's existing assets, liabilities and
off-balance sheet financial instruments, and does not assume any new business,
measures the change in MVE under seven interest rate scenarios. The interest
rate scenarios include a "base case" in which the "base" yield curve is equal to
the current yield curve, and six parallel and instantaneous shocks to the "base"
yield curve (plus and minus 100, 200 and 300 basis points). Inherent in the MVE
sensitivity analysis presented is the assumption that interest rate changes
occur as instantaneous parallel shifts in the yield curve; in reality, such
shifts are rarely instantaneous or parallel. In addition, actual future market
conditions may differ materially from those assumed in the analysis. For
example, actual loan prepayments and Farmer Mac AMBS and debt spreads may differ
significantly from those assumed in the analysis. Accordingly, the results of
the MVE sensitivity analysis should not be viewed as a projection of future
results. The following schedule summarizes the results of Farmer Mac's MVE
sensitivity analysis at December 31, 2000 and 1999.
Percentage Change in MVE from Base Case
---------------------------------------
December 31,
Interest Rate ---------------------------------------
Scenario 2000 1999
--------------- ----------------- -----------------
+ 300 bp -10.2% -9.4%
+ 200 bp -5.9% -5.6%
+ 100 bp -2.0% -2.1%
- 100 bp -0.5% -1.1%
- 200 bp -3.2% -6.5%
- 300 bp -6.5% -15.0%
As of December 31, 2000, Farmer Mac was in compliance with the policy
limits established by the Corporation to monitor its exposure to interest-rate
risk.
Credit risk management. Farmer Mac's primary exposure to credit risk is
the risk of loss resulting from the inability of borrowers to repay their
mortgages. Farmer Mac is exposed to credit risk on loans it holds, as well as on
loans backing securities issued to third parties, because of Farmer Mac's
guarantee of the timely payment of principal, including any balloon payments,
and interest on the securities. Farmer Mac is also exposed to credit risk on
loans it has committed to purchase through LTSPC transactions. The LTSPC
transaction, which is a variation on a swap transaction, permits a lender to
segregate a pool of loans in its portfolio and transfer the credit risk on those
loans to Farmer Mac. In return, Farmer Mac receives fees based on the
outstanding balance of the segregated loans which approximate what would have
been Farmer Mac's guarantee fee had the loans been exchanged with Farmer Mac in
a swap transaction.
For several years, Farmer Mac has conducted its own guarantee fee
adequacy analyses, using stress-test models developed internally and with the
assistance of outside experts. Those analyses have taken into account the
diverse and dissimilar characteristics of the various asset categories for which
Farmer Mac must manage its risk exposures, and have evolved as the mix and
character of assets under management shifts with growth in the business and the
addition of new asset categories.
Loans held or guaranteed by Farmer Mac can be divided into three
groups: (a) pre-1996 Act Farmer Mac I loans; (b) post-1996 Act Farmer Mac I
loans; and (c) Farmer Mac II loans. For pre-1996 Act loans, Farmer Mac's credit
risk exposure is mitigated by subordinated interests. Before Farmer Mac incurs a
credit loss, full recourse must first be taken against the subordinated
interest. The 1996 Act eliminated the subordinated interest requirement. As a
result, Farmer Mac assumes 100 percent of the credit risk on post-1996 Act
Farmer Mac I loans. Farmer Mac mitigates the credit risk related to pre- and
post-1996 Act loans through the application of its Underwriting and Appraisal
Standards and by requiring collateral in the form of agricultural real estate.
See "Business -- Farmer Mac I -- Underwriting and Appraisal Standards." In
response to the increased credit risk related to post-1996 Act loans, Farmer Mac
increased the guarantee fee rate and lowered the loan-to-value requirements for
post-1996 Act loans relative to those previously required for pre-1996 Act
loans. Farmer Mac's credit exposure on Farmer Mac II loans is covered by the
"full faith and credit" of the United States by virtue of the USDA guarantee of
the principal and interest on all Guaranteed Portions. Farmer Mac believes it
has little or no credit risk exposure to pre-1996 Act Farmer Mac I loans because
of the subordinated interests, or to Farmer Mac II loans because of the USDA
guarantee. The outstanding principal balance of loans held or guaranteed by
Farmer Mac is summarized in the table below.
December 31,
-----------------------------------
2000 1999
----------------- ----------------
(in thousands)
Farmer Mac I loans
Post-1996 Act $ 2,509,007 $ 1,879,978
Pre-1996 Act 83,503 118,214
Farmer Mac II loans 517,703 383,266
--------------- ----------------
$ 3,110,213 $ 2,381,458
--------------- ----------------
Farmer Mac continually assesses its credit risk exposure related to
post-1996 Act Farmer Mac I loans by monitoring agricultural economic conditions
and evaluating the credit quality of those loans. Despite adverse trends in
agricultural economic conditions, including low commodity prices and reduced
export demand, in 2000 and continuing into 2001, Farmer Mac believes that the
credit quality of the post-1996 Act Farmer Mac I loans remains good, based on
Farmer Mac's credit underwriting, appraisal and diversification standards and
the actual performance of the loans. Farmer Mac's diversification standards
limit its credit exposure in a particular geographic region or commodity to a
percentage of the total principal amount of all loans outstanding, adjusted for
the credit quality of the loans in that particular geographic region or
commodity group based on the loan-to-value, debt service coverage,
equity-to-asset and working capital-to-current asset ratios. The following
tables set forth the loan-to-value (based on current loan balance), geographic
and commodity distributions of the post-1996 Act Farmer Mac I loans as of
December 31, 2000 and 1999. For information regarding loan-to-value, commodity
and geographic distributions of all Farmer Mac I loans, see Note 10 to the
Consolidated Financial Statements.
Distribution of Post-1996
Act Loans at December 31,
----------------------
2000 1999
----------- ----------
By original loan-to-value ratio:
0.00% to 40.00% 23% 28%
40.01% to 50.00% 21% 22%
50.01% to 60.00% 25% 24%
60.01% to 70.00% 26% 24%
70.01% to 80.00% 4% 2%
80.01% to 90.00% 1% 0%
----------- ----------
Total 100% 100%
----------- ----------
Weighted average loan-to-value ratio 51% 48%
----------- ----------
By geographic region (1):
Mid-North 16% 19%
Mid-South 5% 4%
Northeast 4% 3%
Northwest 33% 41%
Southeast 2% 1%
Southwest 40% 32%
----------- ----------
Total 100% 100%
----------- ----------
By commodity:
Crops 51% 52%
Livestock 18% 20%
Permanent plantings 27% 24%
Part-time farms 4% 4%
----------- ----------
Total 100% 100%
----------- ----------
(1) Regions are defined in Note 10 to the Consolidated Financial Statements.
As of December 31, 2000, Farmer Mac's highest geographic concentrations
were in the Southwest and Northwest regions. Farmer Mac's largest commodity
concentration at December 31, 2000 was crops; however, this group consists of
several specific commodities, including cotton, feed grains, vegetables and
other crops, none of which comprised more than 13 percent of the total
portfolio.
The effectiveness of Farmer Mac's underwriting, appraisal and
diversification standards is reflected primarily through the level of defaulted
loans and related credit losses. At December 31, 2000, post-1996 Act Farmer Mac
I loans that were 90 days or more past due (referred to as non-performing or
"impaired" loans) totaled $38.8 million, or 1.53 percent of the total principal
amount of all post-1996 Act loans. The balance of non-performing loans at
December 31, 1999, was $17.6 million, or 0.94 percent of all post 1996-Act
loans. The increase in the delinquency rate of the post-1996 Act Farmer Mac I
loans from December 31, 1999 to December 31, 2000, was due to the growing number
of loans that are approaching their anticipated peak default years and adverse
conditions affecting the agricultural economy. The following table segregates
the post-1996 Act delinquency rate at December 31, 2000 by year of origination,
geographic region and commodity.
Post-1996 Act
Delinquency
Rates
---------------
By year of origination:
Prior to 1996 0.89%
1996 4.40%
1997 2.20%
1998 1.70%
1999 0.22%
2000 0.22%
By geographic region (1):
Mid-north 0.37%
Mid-south 0.00%
Northeast 0.62%
Northwest 2.38%
Southeast 2.61%
Southwest 0.78%
By commodity:
Crops 1.68%
Livestock 0.87%
Permanent plantings 0.92%
Part-time farms 0.55%
(1) Regions are defined in Note 10 to the Consolidated Financial Statements.
Although total government payments to farmers during 2000 reached a
record $22.1 billion as estimated by the USDA and so contributed to high levels
of farm income and stable agricultural land values during the year, low
commodity prices and weak demand for U.S. agricultural products are projected to
continue through 2001. Farmer Mac anticipates that delinquencies may increase
again in 2001, due to both the growing number of loans held or securitized by
Farmer Mac that are gradually approaching their anticipated peak default years
and the continuing stress expected in the agricultural economy. Nevertheless,
based on strong agricultural income figures reported by the USDA for 2000,
continued stable agricultural land values in most regions of the country,
expected lower interest rates and anticipated federal financial support for
agricultural producers again in 2001, Farmer Mac believes that overall credit
quality and sound business development opportunities remain strong.
The primary determinant of the loss that may be incurred on
non-performing loans is loan-to-value. As of December 31, 2000, the weighted
average loan-to-value ratio for all post-1996 Act loans was 51 percent, and the
weighted average loan-to-value ratio for all post-1996 Act loans that were 90
days or more past due, in foreclosure or in bankruptcy was 57 percent. The
following table illustrates the distribution of non-performing loans at December
31, 2000 by loan-to-value (based on current loan balance and appraised value at
the date of initial guarantee by Farmer Mac):
Distribution of
Post-1996 Act
Delinquencies
----------------
By loan-to-value ratio:
0.00% to 40.00% 15%
40.01% to 50.00% 13%
50.01% to 60.00% 39%
60.01% to 70.00% 31%
70.01% to 80.00% 2%
----------------
Total 100%
----------------
Farmer Mac maintains a reserve to cover potential credit losses on
post-1996 Act loans underlying Farmer Mac I Securities and LTSPCs. As of
December 31, 2000, Farmer Mac's loan loss reserve was $11.3 million, compared to
$6.6 million at December 31, 1999. Farmer Mac's provision for losses was $4.7
million for 2000, compared to $3.7 million for 1999. Farmer Mac incurred no
direct charge-offs against the loan loss reserve during 2000. The cost basis in
property acquired through foreclosure and held by Farmer Mac at December 31,
2000, was $208,000.
The reserve, as a percentage of outstanding post-1996 Act Farmer Mac I
loans, was 0.45 percent and 0.35 percent at December 31, 2000 and 1999,
respectively. Management evaluates the adequacy of the reserve on a monthly
basis and considers a number of factors, including: historical charge-off and
recovery activity; trends in delinquencies, bankruptcies and non-performing
loans; trends in loan volume and the size of credit risks; current and
anticipated economic conditions; the condition of agricultural segments,
commodities and geographic areas experiencing or expected to experience
particular economic adversities, particularly areas where Farmer Mac may have
geographic or commodity concentrations; the degree of risk inherent in the
composition of Farmer Mac's guaranteed portfolio; the results of quality control
reviews; and underwriting standards.
To a lesser extent, Farmer Mac is also exposed to institutional credit
risk related to: (1) issuers of AgVantage bonds and other investments held by
Farmer Mac; (2) Sellers and servicers; and (3) interest-rate contract
counterparties. AgVantage bonds are general obligations of the AgVantage Issuers
and are secured by collateral in an amount ranging from 120 percent to 150
percent of the bond amount. In addition to requiring collateral, Farmer Mac
mitigates credit risk related to AgVantage bonds by evaluating and monitoring
the financial condition of the AgVantage Issuers. Outstanding AgVantage bonds
totaled $28.1 million at December 31, 2000, and $66.4 million at December 31,
1999. The credit risk inherent in other investments held by Farmer Mac is
mitigated by Farmer Mac's policy of establishing concentration limits and
investing in highly-rated instruments, which reduce exposure to any one
counterparty. Farmer Mac's policy limits the dollar amount of investments with
one entity, excluding GSEs and agencies of the U.S. government, to the lesser of
20 percent of Farmer Mac's stockholders' equity or $25 million. The policy also
requires the entity to be rated in one of the three highest rating categories by
at least one nationally recognized statistical rating organization for
investments with terms greater than 270 days and in one of the two highest
rating categories for investments with terms of 270 days or less. As of December
31, 2000, Farmer Mac had investments comprised of commercial paper, corporate
debt securities and asset-backed securities outstanding with 78 entities
totaling $637 million, of which 20 exceeded 10 percent of Farmer Mac's
stockholders' equity (the cumulative balance of investments in such entities
totaled $315 million), but none of which exceeded 15 percent of stockholders'
equity. In addition, at December 31, 2000, Farmer Mac held $470.8 million of
securities issued by GSEs or agencies of the U.S. government and $230.1 million
in money market investment accounts, with the maximum amount held in any one
money market investment fund at any time during 2000 being approximately $141
million. The short-term nature of the investment portfolio also limits Farmer
Mac's credit risk. As of December 31, 2000, 56 percent of the investment
portfolio, excluding GSE and agency investments, consisted of short-term highly
liquid investments. Farmer Mac manages institutional credit risk related to
Sellers and servicers by requiring such institutions to meet certain standards
and by monitoring their financial condition and servicing performance. Credit
risk related to interest-rate contracts is discussed in Note 10 to the
Consolidated Financial Statements.
Liquidity and Capital Resources
Liquidity. The funding needs of Farmer Mac's business programs are
driven by the purchase of Qualified Loans, payment of principal and interest on
Farmer Mac Guaranteed Securities and the maturities of debt. Farmer Mac's
primary sources of funds to meet these needs are issuances of debt obligations,
principal and interest payments on mortgages underlying Farmer Mac Guaranteed
Securities and net operating cash flows. Because of Farmer Mac's regular
participation in the capital markets and its status as a GSE, Farmer Mac has
been able to access the capital markets at favorable rates. Farmer Mac also
maintains a portfolio of cash equivalents, comprised of commercial paper and
other short-term investments, to draw upon as necessary. At December 31, 2000
and 1999, Farmer Mac's cash and cash equivalents totaled $537.9 million and
$336.3 million, respectively.
Capital Requirements. The Act, as amended by the 1996 Act, establishes
three capital standards for Farmer Mac--minimum, critical and risk-based. The
minimum capital requirement is expressed as a percentage of on-balance sheet
assets and off-balance sheet obligations, with the critical capital requirement
equal to one-half of the minimum capital amount. Higher minimum and critical
capital requirements were phased in over a transition period, which ended on
January 1, 1999, when the highest level of minimum capital became applicable.
The Act does not specify the required level of risk-based capital. It directs
the FCA to establish a risk-based capital test for Farmer Mac, using stress-test
parameters set forth therein. For a discussion of risk-based capital, including
the potential future impact on Farmer Mac of risk-based capital requirements
recently adopted by the FCA, see "Government Regulation of Farmer Mac --
Regulation -- Capital Standards -- Risk-based capital."
Certain enforcement powers are given to the FCA depending upon Farmer
Mac's compliance with the capital standards. See "Government Regulation of
Farmer Mac -- Regulation -- Capital Standards -- Enforcement levels." As of
December 31, 2000 and 1999, Farmer Mac was classified as within "level I" (the
highest compliance level). The following table sets forth Farmer Mac's minimum
capital requirement as of December 31, 2000 and 1999 based on the fully
phased-in requirements.
December 31, 2000 December 31, 1999
---------------------------------------- ----------------------------------------
Capital Capital
Amount Ratio Required Amount Ratio Required
--------------- ------------ ----------- ---------------- ------------ ----------
(dollars in thousands)
On-balance sheet assets $3,112,058 2.75% $85,582 $2,590,410 2.75% $71,236
Outstanding balance of Guaranteed -
Mortgage Securities held by others 1,498,029 0.75% 11,235 1,105,476 0.75% 8,291
Other off-balance sheet obligations 8,061 0.75% 60 8,657 0.75% 65
----------- ------------
Minimum capital level 96,877 79,592
Actual core capital 101,163 88,801
----------- ------------
Capital surplus $ 4,286 $ 9,209
----------- ------------
Based on the current minimum capital requirements established in the
1996 Act, Farmer Mac's current capital surplus of $4.3 million would support
additional guarantee growth in amounts ranging from $149 million of on-balance
sheet guarantees to $546 million of off-balance sheet guarantees. Furthermore,
should Farmer Mac deem it appropriate, on-balance sheet non-program assets (cash
and cash equivalents and investment securities) of $1.4 billion could be
replaced with on- and off-balance sheet program guarantees, resulting in the
ability to carry additional guarantees ranging from approximately $1.4 billion
of on-balance sheet guarantees to over $5.1 billion of off-balance sheet
guarantees. Ultimately, Farmer Mac could sell on-balance sheet program assets of
$1.6 billion in order to support further increases of on- and off-balance sheet
program guarantees, resulting in the cumulative ability to carry an additional
$9.9 billion of off-balance sheet guarantees. Any of these transactions would,
of course, be evaluated to optimize Farmer Mac's return on equity and capital
flexibility. Accordingly, in the opinion of management, Farmer Mac has
sufficient capital and liquidity for the next twelve months.
Other Matters
New Accounting Standards. Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133") became effective as of January 1, 2001. Farmer Mac is fully in compliance
with SFAS 133, the adoption of which by reporting companies was mandatory. SFAS
133 requires derivative instruments, which Farmer Mac uses primarily to hedge
interest rate risk, to be marked to their market values and included on the
balance sheet. The cumulative net effect of this change in accounting principle,
which requires the acceleration of certain expenses associated with derivative
instruments to January 1, 2001 and had no effect on fourth quarter 2000 results,
is expected to be a negative adjustment to earnings of approximately $1 million
as of January 1, 2001. Farmer Mac anticipates that this adjustment will be
offset over time (predominantly over the next two years) as the Corporation
recognizes income that is hedged by the derivative instruments.
The adoption of SFAS 133 is also expected to produce a change to
stockholders' equity during the first quarter of 2001 in the form of an
approximately $8.5 million reduction in accumulated other comprehensive income
that partially offsets the $31.5 million of net unrealized gains recognized in
fourth quarter 2000. Those unrealized gains resulted from the appreciation of
the Corporation's AMBS portfolio during fourth quarter 2000 due to the decline
in interest rates in the fourth quarter.
Beginning in the first quarter of 2001, Farmer Mac will disclose an
additional earnings per share measure that will exclude the effects of the
mark-to-market of derivative instruments and the one-time transition adjustment
that results from the implementation of SFAS 133. This operating earnings per
share measure will be determined on a basis consistent with pre-SFAS 133
earnings per share.
In September 2000, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
("SFAS 140"). SFAS 140 will be applied prospectively beginning April 1, 2001 as
required by the standard. Management does not expect the implementation of this
standard to materially affect the Corporation's reported results of operations
and financial position.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Farmer Mac is exposed to market risk from changes in interest rates.
Farmer Mac manages this market risk by entering into various financial
transactions, including off-balance sheet derivative financial instruments, and
by monitoring its exposure to changes in interest rates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Management -- Interest rate risk management" for more information about Farmer
Mac's exposure to interest rate risk and strategies to manage such risk. For
information regarding Farmer Mac's use of off-balance sheet derivative financial
instruments, including Farmer Mac's accounting policies for such instruments,
see Notes 2(k) and 10 to the Consolidated Financial Statements.
Item 8. Financial Statements
Report of Independent Public Accountants
The Board of Directors and Stockholders of
Federal Agricultural Mortgage Corporation:
We have audited the accompanying consolidated balance sheets of the Federal
Agricultural Mortgage Corporation and subsidiaries ("Farmer Mac") as of December
31, 2000 and 1999, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. These financial statements are the
responsibility of Farmer Mac'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. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Farmer Mac as of December 31,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
Arthur Andersen LLP
Vienna, VA
January 17, 2001
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
2000 1999
-------------- --------------
(in thousands)
Assets:
Cash and cash equivalents $ 537,871 $ 336,282
Investment securities 836,757 847,220
Farmer Mac guaranteed securities 1,679,993 1,306,223
Loans 30,279 38,509
Interest receivable 55,681 42,900
Guarantee fees receivable 5,494 4,358
Prepaid expenses and other assets 14,824 14,918
-------------- --------------
Total Assets $3,160,899 $2,590,410
-------------- --------------
Liabilities and Stockholders' Equity:
Liabilities:
Notes payable:
Due within one year $2,201,691 $1,722,061
Due after one year 767,492 750,337
-------------- --------------
Total notes payable 2,969,183 2,472,398
Accrued interest payable 20,852 18,549
Accounts payable and accrued expenses 26,880 5,736
Reserve for losses 11,323 6,584
-------------- --------------
Total Liabilities 3,028,238 2,503,267
-------------- --------------
Stockholders' Equity:
Common stock:
Class A Voting, $1 par value, no maximum authorization,
1,030,780 and 1,030,780 shares issued and outstanding at
December 31, 2000 and 1999, respectively 1,031 1,031
Class B Voting, $1 par value, no maximum authorization,
500,301 and 500,301 shares issued and outstanding at
December 31, 2000 and 1999, respectively 500 500
Class C Non-Voting, $1 par value, no maximum authorization,
9,620,112 and 9,370,961 shares issued and outstanding at
December 31, 2000 and 1999, respectively 9,621 9,371
Additional paid-in capital 72,773 71,097
Accumulated other comprehensive income/(deficit) 31,498 (1,657)
Retained earnings 17,238 6,801
-------------- --------------
Total Stockholders' Equity 132,661 87,143
-------------- --------------
Total Liabilities and Stockholders' Equity $3,160,899 $2,590,410
-------------- --------------
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For Year Ended December 31,
---------------------------------------
2000 1999 1998
------------ ------------ -----------
(in thousands, except per share amounts)
Interest income:
Investments and cash equivalents $ 91,905 $ 70,554 $ 63,221
Farmer Mac guaranteed securities 100,649 63,054 32,922
Loans 2,866 6,769 7,418
------------ ------------ -----------
Total interest income 195,420 140,377 103,561
Interest expense 177,722 125,419 92,992
------------ ------------ -----------
Net interest income 17,698 14,958 10,569
Other income:
Guarantee fees 11,677 7,396 3,727
Gain on sale of AMBS - - 1,400
Miscellaneous 399 220 142
------------ ------------ -----------
Total other income 12,076 7,616 5,269
------------ ------------ -----------
Total revenues 29,774 22,574 15,838
------------ ------------ -----------
Expenses:
Compensation and employee benefits 4,521 4,577 3,872
Regulatory fees 584 502 602
General and administrative 3,744 3,232 3,235
------------ ------------ -----------
Total operating expenses 8,849 8,311 7,709
Provision for losses 4,739 3,672 1,614
------------ ------------ -----------
Total expenses 13,588 11,983 9,323
------------ ------------ -----------
Income before income taxes 16,186 10,591 6,515
Income tax expense 5,749 3,670 772
------------ ------------ -----------
Net income $ 10,437 $ 6,921 $ 5,743
------------ ------------ -----------
Earnings per share:
Basic net earnings $ 0.94 $ 0.64 $ 0.53
Diluted net earnings $ 0.92 $ 0.62 $ 0.52
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Other
Comprehensive Retained
Additional Paid- (Deficit)/ Earnings/
Common Stock in Capital Income (Deficit) Total
------------ ----------------- ------------- ---------- ----------
(in thousands)
Balance, December 31, 1997 $ 10,734 $ 68,992 $ 1,198 $ (5,863) $ 75,061
Issuance of Common Stock
Class A 25 444 469
Class C 42 548 590
Change in unrealized gain
on securities available-for-sale,
net of taxes of $279,000 (949) (949)
Net income 5,743 5,743
----------
Comprehensive income 4,794
------------ ----------------- ------------ ----------- ----------
Balance, December 31, 1998 10,801 69,984 249 (120) 80,914
Issuance of Common Stock
Class A 6 96 102
Class C 95 1,017 1,112
Change in unrealized gain
on securities available-for-sale,
net of taxes of $982,000 (1,906) (1,906)
Net income 6,921 6,921
----------
Comprehensive income 5,015
------------ ----------------- ------------ ------------ ----------
Balance, December 31, 1999 10,902 71,097 (1,657) 6,801 87,143
Issuance of Common Stock
Class C 250 1,676 1,926
Change in unrealized gain
on securities available-for-sale,
net of taxes of $18.2 million 33,155 33,155
Net income 10,437 10,437
----------
Comprehensive income 43,592
------------ ----------------- ------------ ------------ ----------
Balance, December 31, 2000 $ 11,152 $ 72,773 $ 31,498 $ 17,238 $ 132,661
------------ ----------------- ------------ ------------- ----------
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------------------------------
2000 1999 1998
--------------- -------------- --------------
(in thousands)
Cash flows from operating activities:
Net income $ 10,437 $ 6,921 $ 5,743
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of investment premiums and discounts 1,269 3,857 3,701
Increase in interest receivable (12,781) (18,374) (4,558)
Increase in guarantee fees receivable (1,136) (2,223) (661)
Increase in prepaid expenses and other assets (166) (8,867) (1,771)
Amortization of debt premiums, discounts and issuance costs 126,653 88,337 68,140
Increase (decrease) in accrued interest payable 2,303 9,436 (670)
Increase in accounts payable and accrued expenses 2,960 2,861 60
Provision for losses 4,739 3,325 1,614
--------------- -------------- --------------
Net cash provided by operating activities 134,278 85,273 71,598
--------------- -------------- --------------
Cash flows from investing activities:
Purchases of investment securities (254,937) (509,741) (389,901)
Purchases of Farmer Mac guaranteed securities (464,917) (979,967) (169,710)
Purchases of loans (446,251) (395,845) (340,820)
Proceeds from repayment of investment securities 264,403 304,235 401,784
Proceeds from repayment of Farmer Mac guaranteed securities 435,602 739,830 132,972
Proceeds from repayment of loans 1,183 6,080 2,612
Proceeds from sale of AMBS 159,910 - 140,807
--------------- -------------- --------------
Net cash used by investing activities (305,007) (835,408) (222,256)
--------------- -------------- --------------
Cash flows from financing activities:
Proceeds from issuance of discount notes 64,284,888 74,159,998 42,476,008
Proceeds from issuance of medium-term notes 215,027 450,454 180,000
Payments to redeem discount notes (64,072,223) (74,004,635) (41,928,370)
Payments to redeem medium-term notes (57,300) (61,240) (215,030)
Proceeds from common stock issuance 1,926 1,214 1,059
--------------- -------------- --------------
Net cash provided by financing activities 372,318 545,791 513,667
--------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 201,589 (204,344) 363,009
Cash and cash equivalents at beginning of period 336,282 540,626 177,617
--------------- -------------- --------------
Cash and cash equivalents at end of period $ 537,871 $ 336,282 $ 540,626
--------------- -------------- --------------
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 and 1998
1. ORGANIZATION
The Federal Agricultural Mortgage Corporation ("Farmer Mac" or the
"Corporation") is a federally chartered instrumentality of the United States
that was created to establish a secondary market for agricultural real estate
and rural housing mortgage loans ("Qualified Loans"). Farmer Mac was created
with the enactment of the Agricultural Credit Act of 1987 (12 U.S.C. ss.ss.
2279aa et seq.), which amended the Farm Credit Act of 1971 (collectively, as
amended, the "Act") to provide for the existence of an agricultural secondary
mortgage market. Farmer Mac provides liquidity to the agricultural mortgage
market by: (1) purchasing newly originated Qualified Loans directly from lenders
through its "cash window" and existing, or "seasoned," Qualified Loans from
lenders and other third parties in negotiated transactions; (2) exchanging
securities issued and guaranteed by Farmer Mac for Qualified Loans that back
those securities (the "swap" program); (3) issuing long-term standby purchase
commitments for newly originated and seasoned Qualified Loans; and (4)
purchasing mortgage-backed bonds secured by Qualified Loans through its
"AgVantage" program.
Farmer Mac conducts its business through two programs, "Farmer Mac I" and
"Farmer Mac II." Under the Farmer Mac I Program, Farmer Mac purchases, or
commits to purchase, Qualified Loans that are not guaranteed by any
instrumentality or agency of the United States, or obligations backed by
Qualified Loans. Under the Farmer Mac II Program, Farmer Mac purchases the
guaranteed portions (the "Guaranteed Portions") of loans guaranteed by the
United States Department of Agriculture (the "USDA") pursuant to the
Consolidated Farm and Rural Development Act (7 U.S.C. ss.ss. 1921 et seq.; the
"ConAct").
Pursuant to its statutory authority, Farmer Mac securitizes Qualified Loans or
Guaranteed Portions ("Farmer Mac Guaranteed Securities") and guarantees timely
payments of principal and interest on those securities. Farmer Mac either
retains the securities in its portfolio or sells them in the capital markets.
Farmer Mac's principal sources of revenue are: (1) fees it receives in
connection with its guarantees and commitments to purchase Qualified Loans; (2)
net interest income earned on its retained portfolio of Farmer Mac Guaranteed
Securities, its investments, Qualified Loans and AgVantage bonds; and (3) gains
on the sales of Farmer Mac Guaranteed Securities backed by Qualified Loans.
During 2000, Farmer Mac purchased Qualified Loans through its Farmer Mac I cash
window program from 54 Sellers operating throughout the United States. During
the year, the top 10 Sellers generated 89.3 percent of the Farmer Mac I cash
window loan volume. This included Qualified Loans purchased from Zions First
National Bank ("Zions"), Farmer Mac's largest Class A and Class C stockholder,
and the purchase of Zions' "proprietary" products sold to Farmer Mac by other
Sellers, which together represented 20.6 percent of Farmer Mac's total Farmer
Mac I cash window volume for the year. Zions-related loans represented 11.2
percent of the total Farmer Mac I Qualified Loans purchased or guaranteed during
2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Farmer Mac conform with generally
accepted accounting principles in the United States. The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities (including, but not limited to,
the reserve for losses) as of the date of the consolidated financial statements
and the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates. The following represents the
significant accounting policies that Farmer Mac follows in preparing and
presenting its consolidated financial statements:
(a) Principles of Consolidation
Prior to 1999, Farmer Mac maintained two wholly owned subsidiaries. During 1999,
these subsidiaries and their principal activities, which were to facilitate the
purchase and issuance of Farmer Mac Guaranteed Securities and to act as a
registrant under registration statements filed with the Securities and Exchange
Commission, were merged into one subsidiary. The consolidated financial
statements include the accounts of Farmer Mac and its wholly owned subsidiary.
All intercompany balances and transactions have been eliminated in
consolidation.
(b) Cash and Cash Equivalents
Farmer Mac considers highly liquid investment securities with original
maturities of three months or less to be cash equivalents. Changes in the
balance of cash and cash equivalents are reported in the Consolidated Statements
of Cash Flows. The following table sets forth information regarding certain cash
and non-cash transactions for the years ended December 31, 2000, 1999 and 1998.
2000 1999 1998
------------ ------------- -------------
(in thousands)
Cash paid during the year for:
Interest $ 50,493 $ 29,810 $ 29,674
Income taxes 6,825 4,987 1,471
Non-cash activity:
Real estate owned acquired through foreclosure - 2,102 -
Loans acquired and securitized as AMBS 452,124 517,801 75,567
(c) Investments and Farmer Mac Guaranteed Securities
Farmer Mac classifies investments and Farmer Mac Guaranteed Securities that
Farmer Mac has the positive intent and ability to hold to maturity as
held-to-maturity. Such securities are carried at cost, adjusted for unamortized
premiums and unearned discounts. Securities for which Farmer Mac does not have
the positive intent to hold to maturity are classified as available-for-sale and
are carried at estimated fair value. Unrealized gains and losses on
available-for-sale securities are reported as a separate component of
stockholders' equity. Premiums, discounts and other deferred costs are amortized
to interest income over the estimated life of the security using the effective
interest method. Interest income on investments and Farmer Mac Guaranteed
Securities is recorded on an accrual basis unless the collection of interest is
considered doubtful.
Farmer Mac receives yield maintenance payments when Qualified Loans underlying
certain Farmer Mac Guaranteed Securities prepay. These payments mitigate Farmer
Mac's exposure to reinvestment risk and are calculated such that, when
reinvested with the prepaid principal, they should generate substantially the
same cash flows that would have been generated had the Qualified Loans not
prepaid. Income from yield maintenance payments is recognized when the Qualified
Loans prepay and is classified as interest income in the Consolidated Statements
of Operations.
(d) Loans
Loans for which Farmer Mac has the positive intent and ability to hold for the
foreseeable future are classified as held for investment and reported at
amortized cost. Loans that Farmer Mac does not intend to hold to maturity are
classified as held for sale and reported at the lower of cost or market. Of the
loans held by Farmer Mac at December 31, 2000, $11.6 million were held for sale
and $18.6 million were held for investment. Of the loans held by Farmer Mac at
December 31, 1999, $21.4 million were held for sale and $17.1 million were held
for investment.
(e) Securitization of Qualified Loans
Farmer Mac issues guaranteed securities backed by Qualified Loans. Farmer Mac
generates guarantee fees for the Corporation as compensation for assuming the
credit risk on the Qualified Loans underlying the securities. Farmer Mac issued
$519.9 million, $694.6 million and $301.6 million of Farmer Mac Guaranteed
Securities during the year ended December 31, 2000, 1999 and 1998, respectively.
The fees are recognized as earned over the lives of the underlying loans. Farmer
Mac recognizes the portion of guarantee fees generated by Farmer Mac Guaranteed
Securities held in its portfolio as guarantee fee income in its Consolidated
Statements of Operations. Approximately $3.1 million, $2.6 million and $1.1
million of guarantee fees in 2000, 1999 and 1998, respectively, relate to Farmer
Mac Guaranteed Securities held in portfolio. Periodically, Farmer Mac sells its
guaranteed securities to capital market investors. When sold, a gain is
recognized to the extent sale proceeds exceed the cost basis of the security.
(f) Non-Performing Loans
Non-performing (or "impaired") loans are loans for which it is probable that
Farmer Mac will not receive all amounts contractually due and include all loans
90 days or more past due unless the loan is in the process of collection. When a
loan collateralizing a guaranteed security is placed on non-accrual, the
interest income due to the security holder is accrued as part of the provision
for losses until Farmer Mac purchases the loan from the pool and the principal
amount is passed through to the investor. Interest previously accrued on loans
held by Farmer Mac or interest advanced to security holders is reversed or
expensed when deemed uncollectible. After a loan held by Farmer Mac is
determined to be impaired, interest due on the loan is not recognized as
interest income until the payment is received from the borrower.
(g) Notes and Bonds Payable
Notes and bonds payable are classified as due within one year or due after one
year based on their contractual maturities. Debt issuance costs, including gains
and losses related to hedging activity, are deferred and amortized to interest
expense using the effective interest method over the estimated life of the
related debt.
(h) Reserve for Losses
Farmer Mac maintains a reserve for losses at levels it deems adequate to cover
potential losses on loans underlying Farmer Mac I Securities and Long-Term
Standby Purchase Commitments ("LTSPCs") issued after the passage in 1996 of
changes to Farmer Mac's statutory authorities by the Farm Credit System Reform
Act of 1996 (the "1996 Act"). The reserve covers potential principal losses and
interest related to loans that are 90 days or more delinquent (unless the loan
is well collateralized and in the process of collection). The reserve is
increased through periodic provisions charged to expense and reduced by
charge-offs, net of recoveries. In estimating potential losses on outstanding
Farmer Mac guarantees, management considers economic conditions, geographic and
agricultural commodity concentrations, the credit profile of the Qualified
Loans, delinquency trends and historical charge-off and recovery activity. No
reserve has been made for Farmer Mac I Securities issued prior to the 1996 Act
or securities issued under the Farmer Mac II Program ("Farmer Mac II
Securities"). Farmer Mac I Securities issued prior to the 1996 Act are supported
by unguaranteed subordinated interests, which are expected to exceed the
estimated credit losses on those securities. Loans collateralizing Farmer Mac II
Securities are guaranteed by the Secretary of Agriculture.
(i) Earnings Per Share
The following schedule reconciles basic and diluted earnings per share for the
years ended December 31, 2000, 1999 and 1998. Basic earnings per share is based
on the weighted average common shares outstanding. Diluted earnings per share is
based on the weighted average number of common shares outstanding adjusted to
include all potentially dilutive common stock.
2000 1999 1998
------------------------------- ------------------------------ ---------------------------------
Dilutive Dilutive Dilutive
Basic stock Diluted Basic stock Diluted Basic stock Diluted
EPS options EPS EPS options EPS EPS options EPS
------------------------------- ------------------------------ ---------------------------------
(in thousands, except per share amounts)
Net income $ 10,437 $ - $ 10,437 $ 6,921 $ - $ 6,921 $ 5,743 $ - $ 5,743
Weighted average 11,064 293 11,357 10,839 397 11,236 10,774 390 11,164
shares
Earnings per share $ 0.94 $ 0.92 $ 0.64 $ 0.62 $ 0.53 $ 0.52
(j) Income Taxes
Deferred tax assets and liabilities are recognized based on the expected future
tax effect of existing differences between the financial reporting and tax
reporting bases of assets and liabilities using enacted statutory tax rates.
Income tax expense is equal to the income taxes payable in the current year plus
the net change in the deferred tax asset or liability balance.
(k) Interest-Rate Contracts and Hedge Instruments
Farmer Mac enters into derivative contracts as an end-user, not for trading or
speculative purposes. Farmer Mac uses interest-rate contracts, including
interest-rate swaps and caps to synthetically create interest-earning assets and
debt instruments. These instruments adjust the characteristics of Farmer Mac's
debt to match the characteristics of the Corporation's mortgage assets. The net
differential received or paid is accrued as an adjustment to interest income or
expense of the associated assets or liabilities.
Hedge instruments, currently consisting of forward sale contracts involving GSE
debt and mortgage-backed securities and futures contracts involving U.S.
Treasury securities, are used by Farmer Mac to manage interest-rate risk
exposure related to loan purchases and anticipated debt issuances. Farmer Mac
monitors the change in value of the hedge instrument and the change in value of
the hedged item. When these changes meet certain specified criteria, the hedge
instruments qualify for hedge accounting. Under hedge accounting, gains and
losses on terminated or matured hedge instruments are deferred as an adjustment
to the cost basis of the hedged item and amortized to interest expense using the
effective interest method. When the criteria are not met, gains and losses on
hedge instruments are recognized directly to income.
(l) Comprehensive Income
Comprehensive income, which is presented in the Consolidated Statements of
Changes in Stockholders' Equity, represents all changes in stockholders' equity
except those resulting from investments by or distributions to stockholders, and
is comprised of net income and unrealized gain/(loss) on securities
available-for-sale.
(m) New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the fair value of a derivative be recognized
currently in earnings unless specific hedge accounting criteria are met.
SFAS 133 is effective for fiscal years beginning after June 15, 2000 and cannot
be applied retroactively. SFAS 133 must be applied to (a) free-standing
derivative instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired or substantively modified after December
31, 1998. The cumulative net effect of this change in accounting principle,
which requires the acceleration of certain expenses associated with derivative
instruments to January 1, 2001 and had no effect on 2000 results, is expected to
be a negative one-time adjustment to earnings of approximately $1 million as of
January 1, 2001. The Corporation anticipates that this adjustment will be offset
over time (predominantly over the next two years) as the Corporation recognizes
income that is hedged by the derivative instruments. The adoption of SFAS 133 is
also expected to produce a charge to stockholders' equity as of January 1, 2001
in the form of an approximately $8.5 million reduction in accumulated other
comprehensive income. The Corporation expects that the adoption of SFAS 133 will
increase volatility in earnings and accumulated other comprehensive income for
future reporting periods.
In September 2000, FASB issued Statement of Financial Accounting Standards No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("SFAS 140"). Notes 2(e) and 6 include the
disclosure provisions of SFAS 140. The remaining provisions of SFAS 140 will be
applied prospectively beginning April 1, 2001 as required by the standard.
Management does not expect the implementation of this standard to materially
affect the Corporation's reported results of operations and financial position.
(n) Reclassifications
Certain reclassifications of prior year information were made to conform to the
2000 presentation.
3. INVESTMENTS
The amortized cost and estimated fair values of investments at December 31, 2000
and 1999 were as follows. Fair value was estimated based on quoted market
prices.
2000 1999
-------------------------------------------------- ----------------------------------------------------
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gain Loss Fair Value Cost Gain Loss Fair Value
----------- ----------- ------------ ----------- ------------ ------------- ------------ ----------
(dollars in thousands)
Held-to-maturity:
Mortgage-backed
securities $ 57,291 $ 1,209 $ - $ 58,500 $ 79,576 $ 1,919 $ - $ 81,495
------------ ----------- ------------ --------------------------- ------------- ------------ -----------
Total held-to-maturity 57,291 1,209 - 58,500 79,576 1,919 - 81,495
Available-for-sale:
Asset-backed
securities 84,680 56 - 84,736 103,293 - (214) 103,079
Corporate debt
securities 247,967 40 - 248,007 179,870 - (263) 179,607
Certificates of deposit 35,992 14 - 36,006 10,000 - (2) 9,998
Mortgage-backed
securities 413,599 - (3,528) 410,071 474,739 - (1,890) 472,849
------------ ----------- ------------ --------------------------- ------------- ------------- -----------
Total available-for-sale 782,238 110 (3,528) 778,820 767,902 - (2,369) 765,533
Cash investment in
guaranteed investment
contract 646 - (26) 620 2,111 - (60) 2,051
------------ ----------- ------------ --------------------------- ------------- ------------- -----------
Total $ 840,175 $ 1,319 $ (3,554) $ 837,940 $ 849,589 $ 1,919 $ (2,429) $ 849,079
------------ ----------- ------------ --------------------------- ------------- ------------- -----------
The amortized cost, estimated fair value and yield of investments by remaining
contractual maturity at December 31, 2000 are set forth below. Asset- and
mortgage-backed securities are included based on their final maturities,
although the actual maturities may differ because of prepayments of the
underlying assets or mortgages.
Held-to-Maturity Available-for-Sale Total
------------------------------- -------------------------------- -------------------------------
Amortized Amortized Amortized
Cost Fair Value Yield Cost Fair Value Yield Cost Fair Value Yield
--------- ------------ -------- ----------- ------------ ------- ----------- ----------- -------
(in thousands)
Due within one year $ - $ - - $ 96,300 $ 97,041 6.78% $ 96,300 $ 97,041 6.78%
Due after one year
through five years - - - 241,778 243,376 6.88% 241,778 243,376 6.88%
Due after five years
through ten years - - - 14,000 13,913 7.02% 14,000 13,913 7.02%
Due after ten years 57,291 58,500 7.17% 430,806 425,110 7.08% 488,097 483,610 7.09%
------------ ----------- ------- ----------- ----------- ------- ----------- ----------- --------
Total $ 57,291 $58,500 7.17% $ 782,884 $ 779,440 6.98% $ 840,175 $ 837,940 6.99%
------------ ----------- ------- ----------- ----------- ------- ----------- ----------- --------
4. FARMER MAC GUARANTEED SECURITIES
As of December 31, 2000 and 1999, Farmer Mac Guaranteed Securities included the
following:
As of December 31,
--------------------------------------------------------------------------------
2000 1999
----------------------------------------- -----------------------------------
Premiums, Premiums,
Discounts Discounts
and Other and Other
Principal Deferred Amortized Principal Deferred Amortized
Balance Costs Cost Balance Costs Cost
------------- ----------- ----------- ------------ ---------- -----------
(in thousands)
Farmer Mac I
AMBS $ 1,093,898 $ (3,480) $ 1,090,418 $ 768,626 $ 458 $ 769,084
Other 109,278 490 109,768 178,768 1,885 180,653
Farmer Mac II 427,502 45 427,547 356,629 - 356,629
------------- ----------- ------------ ------------ ---------- ------------
Total $ 1,630,678 $ (2,945) $ 1,627,733 $ 1,304,023 $ 2,343 $ 1,306,366
------------- ----------- ------------ ------------ ---------- -------------
The following table sets forth the amortized costs, unrealized gains and losses
and estimated fair values of the Farmer Mac Guaranteed Securities at December
31, 2000 and 1999. The method used to estimate fair value is described in Note
11.
As of December 31,
-----------------------------------------------------------------------------------
2000 1999
------------------------------------------ ---------------------------------------
Held-to- Available- Held-to- Available
Maturity for-Sale Total Maturity for-Sale Total
------------ --------------- ------------ ------------ ------------ ------------
(in thousands)
Amortized cost $ 537,315 $1,090,418 $1,627,733 $ 537,282 $ 769,084 $1,306,366
Unrealized gain 19,572 52,260 71,832 9,130 - 9,130
Unrealized loss - - - - (143) (143)
------------ --------------- ------------ ------------ ------------ ------------
Fair value $ 556,887 $1,142,678 $1,699,565 $ 546,412 $ 768,941 $1,315,353
------------ --------------- ------------ ------------ ------------ ------------
Of the total Farmer Mac Guaranteed Securities held by Farmer Mac at December 31,
2000, $728.0 million are fixed-rate or reprice after one year. During 2000,
Farmer Mac sold $159.9 million of AMBS from its available-for-sale portfolio,
but did not recognize a gain on those sales. Farmer Mac did not sell any AMBS
during 1999. During 1998, Farmer Mac sold $140.1 million of AMBS and recognized
a gain of $1.4 million on those sales.
5. NOTES AND BONDS PAYABLE
Farmer Mac borrowings are comprised of discount notes and medium-term notes,
both of which are unsecured general obligations of the Corporation. Discount
notes generally have maturities of less than one year, whereas medium-term notes
have maturities of one to 15 years. The following table sets forth information
related to Farmer Mac's borrowings for 2000 and 1999.
2000 1999
--------------------------------------------------------- ------------------------------------------------------
Outstanding at Average Outstanding Maximum Outstanding at Average Outstanding Maximum
December 31, During Year Outstanding at December 31, During Year Outstanding at
------------------ ------------------ Any ------------------ ---------------------- Any
Amount Rate Amount Rate Month End Amount Rate Amount Rate Month End
----------- ------ ---------- ------- ---------------- ----------- ------ ---------- --------- -------------
(dollars in thousands)
Due within on
year: $2,013,508 6.37% $1,945,276 6.47% $2,205,885 $1,675,861 5.56% $1,725,647 5.10% $ 1,991,202
Discount notes
Current position
of medium-
term notes 188,183 6.20% 46,200 7.50%
---------- ------ ------------ ------
2,201,691 6.35% 1,722,061 5.61%
Due after one
year:
Medium-term
notes due in:
2001 - - 138,051 6.10%
2002 37,919 6.17% 35,805 6.12%
2003 109,517 5.71% 73,439 5.71%
2004 44,511 6.63% 46,426 6.66%
2005 143,213 6.58% 18,840 7.35%
2006 37,066 6.96% 36,926 6.92%
Thereafter 395,266 6.50% 400,850 6.60%
---------- ------ ------------ ------
767,492 6.09% 750,337 6.44%
---------- ------ ------------ ------
$2,969,183 6.28% $2,472,398 5.86%
---------- ------ ------------ ------
A portion of Farmer Mac's long-term debt is callable. Callable debt gives Farmer
Mac the option to redeem the debt at par value at a specified call date or at
any time on or after a specified call date. The following table summarizes the
maturities, amounts and costs for callable debt by call period as of December
31, 2000.
Callable Debt at
December 31, 2000
---------------------------------------
Maturity Amount Rate
------------ ------------- ------------
(dollars in thousands)
Callable in:
2001 2002-2009 $ 42,750 6.69%
2002 2005-2008 17,000 6.48%
2003 2006 10,000 6.74%
------------- ------------
$ 69,750 6.65%
------------- ------------
The following schedule summarizes the earliest repricing date of total
borrowings outstanding at December 31, 2000, including callable and non-callable
debt, assuming callable debt is redeemed at the initial call date.
Earliest Repricing Date of
Borrowings Outstanding
----------------------------
Amount Rate
-------------- -----------
(in thousands)
Debt repricing in:
2001 $2,244,583 6.36%
2002 49,429 6.46%
2003 106,696 5.32%
2004 34,511 6.74%
2005 141,712 6.58%
2006 27,051 6.78%
Thereafter 365,201 6.41%
-------------- -----------
Total $2,969,183 6.34%
-------------- -----------
During 2000 and 1999, Farmer Mac called $40.1 million and $20.0 million of
callable debt, respectively.
Authority to Borrow from the Treasury of the United States
Farmer Mac's statutory charter authorizes Farmer Mac to borrow, in extreme
circumstances, up to $1.5 billion from the Secretary of the Treasury, if
necessary, to fulfill its obligations under any guarantee. The debt would bear
interest at a rate determined by the Secretary of the Treasury based on the then
current cost of funds to the United States. The charter requires the debt to be
repaid within a reasonable time. As of December 31, 2000, Farmer Mac had not
utilized this borrowing authority.
6. RESERVE FOR LOSSES
Farmer Mac maintains a reserve to cover potential losses incurred on loans
underlying Farmer Mac I Securities ("AMBS") and LTSPCs issued since enactment of
the 1996 Act. No loss reserve has been made for Farmer Mac I Securities issued
prior to the 1996 Act or for Farmer Mac II Securities. See Note 2(h) and Note 10
for more information about Farmer Mac Guaranteed Securities. The reserve covers
interest due on loans that are 90 days or more delinquent and, in cases in which
the loan is not adequately collateralized, the undercollateralized principal
balance. During 2000, Farmer Mac purchased two defaulted loans having a
principal balance of $2.6 million from pools underlying Farmer Mac Guaranteed
Securities held by third parties.
The following is a summary of the changes in the reserve for losses for the
years ended December 31, 2000, 1999 and 1998:
2000 1999 1998
------------ ------------- ------------
(in thousands)
Balance, beginning of year $ 6,584 $ 3,259 $ 1,645
Provision for losses 4,739 3,672 1,614
Charge-offs - (347) -
------------ ------------- ------------
Balance, end of year $ 11,323 $ 6,584 $ 3,259
------------ ------------- ------------
A portion of the reserve is specifically allocated to impaired loans when the
fair value of the collateral, less the estimated selling cost, is less than the
cost basis in the loan. The balance of impaired loans, both on- and off-balance
sheet, and the related reserve amount at December 31, 2000 and 1999 are
summarized in the following table:
2000 1999
-------------------------------------- --------------------------------------
Balance Reserve Net Balance Balance Reserve Net Balance
------------ ------------ ------------ ----------- --------- -------------
(in thousands)
Impaired loans with:
Specific reserve $ 2,710 $ (373) $ 2,336 $ 1,048 $ (49) $ 999
No specific reserve 25,677 - 25,677 16,582 - 16,582
------------ ------------ ------------ ------------ ----------- -----------
Total $ 28,387 $ (373) $ 28,014 $ 17,630 $ (49) $ 17,581
------------ ------------ ------------ ------------ ----------- -----------
For the years ended December 31, 2000 and 1999, the average balance of impaired
loans purchased from pools by Farmer Mac or underlying Farmer Mac Guaranteed
Securities was $22.0 million and $10.5 million, respectively. Farmer Mac
recognized interest income on impaired loans of approximately $853,000 and
$325,000 during the years ended December 31, 2000 and 1999, respectively.
7. STOCKHOLDERS' EQUITY
Common Stock
Farmer Mac has three classes of common stock outstanding. Class A Voting Common
Stock may be held only by banks, insurance companies and other financial
institutions that are not institutions of the Farm Credit System. By statute, no
holder of Class A Voting Common Stock may directly or indirectly be a beneficial
owner of more than 33 percent of the outstanding shares of Class A Voting Common
Stock. Class B Voting Common Stock may be held only by institutions of the Farm
Credit System. There are no restrictions on the maximum holdings of Class B
Voting Common Stock. There are no ownership restrictions on the Class C
Non-Voting Common Stock.
Dividends have not been paid to any common stockholders nor does Farmer Mac
expect to pay dividends in the near future. Prior to August 1999, the ratio of
any dividends paid and liquidation proceeds distributed on each share of Class C
Non-Voting Common Stock to each share of Voting Common Stock was three-to-one.
Effective August 2, 1999, the three-to-one dividend and liquidation preferences
were eliminated in conjunction with the three-to-one Class C stock split. Farmer
Mac's ability to declare and pay a dividend could be restricted if it failed to
comply with regulatory capital requirements.
At December 31, 2000, Farmer Mac's regulatory required minimum capital was $96.9
million, compared with actual regulatory capital of $101.2 million, resulting in
a capital surplus of $4.3 million. At December 31, 1999, Farmer Mac's regulatory
required minimum capital was $79.6 million, compared with actual regulatory
capital of $88.8 million, resulting in a capital surplus of $9.2 million.
Stock Option Plan
In 1992 and 1996, Farmer Mac adopted stock option plans for officers to acquire
shares of Class C Non-Voting Common Stock. Under the 1992 plan, stock options
granted are exercisable immediately, and, if not exercised, will expire 10 years
from the date of grant. The exercise price of options granted under the 1992
plan, which were granted in 1992 and 1993, is $2.19 per share. The maximum
number of options that could be issued under the 1992 plan was 345,000, 315,000
of which were issued, net of cancellations. Under the 1996 plan, stock options
awarded under the plan vested in thirds over a three-year period with the last
installment having vested in June 1998; if not exercised, any options granted
under the 1996 plan will expire 10 years from the date of grant. The exercise
price of options granted under the 1996 plan, which were issued in 1996, is
$2.625. The maximum number of options that could be issued under the 1996 plan
was 338,490, all of which were issued. In 1997, Farmer Mac adopted a new stock
option plan for all employees and directors, the terms of which are generally
the same as for the 1996 plan, except that options issued to directors since
June 1, 1998, if not exercised, will expire five years from the date of grant.
Of the 3,750,000 shares authorized to be issued under the 1997 plan, 1,176,229
have been issued, net of cancellations. Options granted during 2000 have
exercise prices ranging from $15.125 to $22.375 per share. At December 31, 2000,
1,107,976 options were outstanding under the 1997 plan. For all stock options
granted under all three of the Corporation's plans, the exercise price was equal
to the fair market value of the Class C Stock on, or immediately preceding, the
grant date.
The following table summarizes stock option activity for 2000 and 1999:
2000 1999
------------------------- ------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ------------- ----------- -----------
Outstanding, beginning of year 1,354,975 $ 11.81 1,058,547 $ 7.99
Granted 472,071 15.33 375,857 21.73
Excercised (196,991) 3.88 (59,597) 4.51
Canceled (100,255) 19.86 (19,832) 16.37
---------- ------------- ----------- ------------
Outstanding, end of year 1,529,800 $ 13.39 1,354,975 $ 11.81
----------- ------------- ----------- ------------
Options excercisable at year end 1,110,484 1,029,167
----------- -----------
The following table summarizes information regarding options outstanding at
December 31, 2000:
Options
Options Outstanding Exercisable
------------------------------ --------------
Weighted-
Average
Remaining
Exercise Number of Contractual Number of
Price Shares Life Shares
- ------------- -------------- --------------- --------------
$ 2.19 210,000 2.0 years 210,000
2.63 211,824 5.5 years 211,824
11.83 123,126 6.5 years 123,126
12.67 6,900 7.7 years 6,900
12.92 4,050 6.6 years 4,050
15.13 405,619 9.4 years 133,917
15.63 2,000 9.6 years -
16.38 47,846 9.7 years 15,613
17.67 1,200 7.3 years 1,200
18.13 5,000 9.8 years -
18.25 6,000 6.8 years 6,000
19.38 30,268 8.7 years 20,787
20.00 190,506 7.4 years 190,506
20.81 3,000 8.6 years 3,000
21.19 3,000 9.9 years -
22.08 275,661 8.4 years 181,761
22.38 2,000 9.9 years -
22.94 1,500 8.6 years 1,500
23.06 300 8.5 years 300
-------------- --------------
1,529,800 1,110,484
-------------- --------------
Farmer Mac uses the intrinsic value method of accounting for employee stock
options pursuant to Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation expense was recognized in 2000, 1999
and 1998 for employee stock option plans. Had Farmer Mac elected to use the fair
value method of accounting for employee stock options, net income and earnings
per share for the years ended December 31, 2000, 1999 and 1998 would have been
reduced to the pro forma amounts indicated in the following table:
2000 1999 1998
------------------------ ------------------------ ------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
------------ ------------ ------------- ---------- ------------- ------------
(in thousands, except per share amounts)
Net income $10,437 $ 8,570 $ 6,921 $ 4,132 $ 5,743 $ 3,263
Earnings per share:
Basic net earnings $ 0.94 $ 0.77 $ 0.64 $ 0.38 $ 0.53 $ 0.30
Diluted net earnings $ 0.92 $ 0.76 $ 0.62 $ 0.37 $ 0.52 $ 0.29
The weighted average fair values of options granted in 2000, 1999 and 1998 were
$6.13, $11.24, and $15.18, respectively. The fair values were estimated using
the Black-Scholes option pricing model based on the following assumptions:
2000 1999 1998
----------- ---------- -----------
Risk-free interest rate 6.3% 5.7% 5.5%
Expected years until exercise 5 years 5 years 5 years
Expected stock volatility 42.7% 48.1% 66.2%
Dividend yield 0.0% 0.0% 0.0%
Restricted Stock
In addition to stock options, the Corporation may issue restricted stock to
employees. Restricted stock entitles participants to all the rights of a
stockholder, except that some of the shares awarded are subject to forfeiture if
the participant is not employed by Farmer Mac at the end of the restriction
period and other shares may not be disposed of by the participant during the
restriction period. The vesting or restriction period is usually one to two
years. The value of restricted stock granted to employees is amortized over the
vesting period. During 2000 and 1999, 49,374 and 32,924 shares of restricted
stock were granted, resulting in compensation expense of $750,000 and $618,000
being recognized during the respective years.
8. INCOME TAXES
The components of the provision for federal income taxes for the years ended
December 31, 2000, 1999 and 1998 were as follows:
2000 1999 1998
---------- ----------- ----------
(in thousands)
Current $7,602 $4,860 $1,716
Deferred (1,853) (1,190) 547
---------- ----------- ----------
5,749 3,670 2,263
Change in net deferred tax
asset valuation allowance - - (1,491)
---------- ----------- ----------
Income Tax Expense $5,749 $3,670 $ 772
---------- ----------- ----------
A reconciliation of tax at the statutory federal tax rate to the income tax
provision for the years ended December 31, 2000, 1999 and 1998 is as follows:
2000 1999 1998
----------- ----------- ------------
(in thousands)
Tax expense at statutory rate $ 5,665 $ 3,601 $ 2,215
Change in net deferred tax
asset valuation allowance - - (1,491)
Other 84 69 48
----------- ----------- ------------
Income tax expense $ 5,749 $ 3,670 $ 772
----------- ----------- ------------
Statutory tax rate 35.0% 34.0% 34.0%
Effective tax rate 35.5% 34.7% 11.8%
Components of the deferred tax assets and liabilities as of December 31, 2000
and 1999 were as follows:
2000 1999
------------ -----------
(in thousands)
Deferred tax asset:
Reserve for losses on guaranteed securities $ 4,020 $ 2,239
Unrealized loss on available-for-sale securities - 855
Other 217 145
------------ -----------
Total deferred tax asset 4,237 3,239
Deferred tax liability:
Unrealized gain on available-for-sale securities 17,329 -
Other - -
------------ -----------
Total deferred tax liability 17,329 -
------------ -----------
Net deferred tax (liability)/asset $(13,092) $ 3,239
------------ -----------
A valuation allowance is required to reduce the net deferred tax asset to an
amount that is more likely than not to be realized. No valuation allowance was
considered necessary at December 31, 2000 and 1999.
9. EMPLOYEE BENEFITS
On December 28, 1989, Farmer Mac adopted a defined contribution plan for all of
its employees. Farmer Mac contributes 13.2 percent of the lesser of an
individual's gross salary or $170,000, plus 5.7 percent of the difference
between (1) the lesser of the gross salary or $170,000 and (2) the Social
Security Taxable Wage Base. Employees in service prior to December 7, 2000 are
fully vested in contributions made to the plan after they have been employed by
Farmer Mac for two years. Employees beginning service after December 7, 2000 are
fully vested after they have been employed for three years. Pension expense for
the years ended December 31, 2000, 1999 and 1998 was $327,000, $358,000 and
$338,000, respectively.
10. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS, CONCENTRATIONS OF CREDIT RISK AND
CONTINGENCIES
Off-Balance Sheet Financial Instruments
Farmer Mac is a party to transactions involving financial instruments with
off-balance sheet risk. These financial instruments include Farmer Mac
guarantees, commitments to purchase and sell loans, interest-rate contracts and
hedge instruments. Farmer Mac uses these financial instruments in the normal
course of business to fulfill its statutory purpose of increasing liquidity for
agricultural and rural residential mortgage lenders.
Farmer Mac Guarantees. As of December 31, 2000 and 1999, the balance of
outstanding guarantees, excluding Farmer Mac Guaranteed Securities held in the
Corporation's portfolio, was as follows:
2000 1999
------------- --------------
(in thousands)
Farmer Mac I:
Post-1996 Act guarantees:
AMBS $ 542,697 $ 497,896
LTSPC 862,804 575,097
------------- --------------
Total Post-1996 Act guarantees 1,405,501 1,072,993
Pre-1996 Act guarantees 2,324 5,846
------------- --------------
Total Farmer Mac I 1,407,825 1,078,839
Farmer Mac II Securities 90,204 26,637
------------- --------------
Total Farmer Mac I and II $1,498,029 $1,105,476
------------- --------------
AMBS represent guaranteed securities issued after the 1996 Act and for which
Farmer Mac assumes 100 percent of the credit risk. An LTSPC is a long-term
guarantee arrangement (similar to a swap transaction) in which the recipient of
the standby commitment segregates a pool of loans in its portfolio and pays
Farmer Mac an annual fee approximating the usual guarantee fee on the
outstanding balance of the loans, in return for Farmer Mac's assumption of the
credit risk on those loans. The credit risk related to LTSPCs is the same as
that of a swap or AMBS. Pre-1996 Act guarantees include securities issued prior
to the 1996 Act. These securities are supported by an unguaranteed subordinated
interest that was equal to 10 percent of the initial balance of the loans
underlying the securities at issuance. Farmer Mac's guarantee on Farmer Mac II
Securities is covered by the "full faith and credit" of the United States by
virtue of the USDA guarantee of the principal and interest on all Guaranteed
Portions. For more information about Farmer Mac's credit risk related to
off-balance sheet guaranteed securities, see Notes 2(h) and 6.
Commitments. Farmer Mac enters into mandatory and optional delivery commitments
to purchase loans. Most purchase commitments entered into by Farmer Mac are
mandatory commitments, which means the Seller must pay a fee to extend or cancel
the commitment. All the loans purchased by Farmer Mac under optional purchase
commitments are sold forward under optional sale commitments that allow Farmer
Mac to cancel the sale commitment without penalty should the Seller fail to
deliver under the purchase commitment. At December 31, 2000, commitments to
purchase Farmer Mac I and II loans totaled $13.5 million, of which $5.4 million
were optional commitments. Outstanding purchase commitments at December 31,
1999, totaled $12.6 million, of which $2.4 million were optional commitments.
Farmer Mac is exposed to interest-rate risk from the time it commits to purchase
a loan to the time it either: (a) sells AMBS backed by the loan or (b) issues
debt to retain the loan in its portfolio. Commitments to sell AMBS totaled $5.7
and $23.8 million, respectively, at December 31, 2000 and 1999. Farmer Mac
manages the interest-rate risk related to loans not yet sold or funded as a
retained investment through the use of off-balance sheet financial
instruments--currently, forward sale contracts involving GSE debt and
mortgage-backed securities and futures contracts involving U.S. Treasury
securities. See "Interest-rate contracts and hedge instruments."
Interest-rate contracts and hedge instruments. Farmer Mac uses interest-rate
swaps and caps to reduce interest-rate risk related to specific assets
(asset-linked) or liabilities (debt-linked). Interest-rate swaps are contractual
agreements between two entities for the exchange of periodic payments based on a
notional amount and agreed-upon fixed and variable rates. Interest-rate swaps
are entered into in conjunction with the purchase of loans and investments or
the issuance of debt to synthetically create LIBOR-based variable rate
instruments. Interest-rate caps are agreements in which one entity makes a
one-time, up-front premium payment to another party in exchange for the right to
receive payments based on a notional amount and the amount, if any, by which the
agreed-upon index rate exceeds the specified "cap" rate. Interest-rate caps are
purchased to effectively "uncap" certain variable-rate investments or loans. The
following schedule summarizes, by contractual maturity date, the notional
amounts and weighted average interest rates of outstanding interest-rate
contracts and hedge instruments at December 31, 2000 and 1999.
As of December 31, 2000
----------------------------------------------------------------------------------- ------------
2001 2002 2003 2004 2005 2006 - 10 Thereafter Total
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
(in thousands)
Amortizing swaps $ - $ - $ - $ - $ - $534,913 - $534,913
Pay fixed swaps - 6,344 20,514 - 21,209 32,808 - 80,875
Weighted-average
pay rate - 7.26% 6.80% - 7.91% 7.18% - 7.28%
Pay floating swaps $50,000 - - - - - - 50,000
Purchased caps - 100,000 135,000 210,000 - - 445,000
Weighted-average
strike rate - 8.50% 8.50% 8.50% - - 8.50%
------------
Total notional amount $1,110,788
------------
As of December 31, 1999
----------------------------------------------------------------------------------- ------------
2000 2001 2002 2003 2004 2005 - 09 Thereafter Total
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
(in thousands)
Amortizing swaps $ - $ - $ - $ - $ - $79,576 $225,909 $305,485
Pay fixed swaps - - - 19,000 - - - 19,000
Weighted-average
pay rate - - - 6.78% - - - 6.78%
Purchased caps - - 100,000 135,000 210,000 - - 445,000
Weighted-average
strike rate - - 8.50% 8.50% 8.50% - - 8.50%
-----------
Total notional amount $769,485
-----------
Although interest-rate contracts reduce Farmer Mac's exposure to interest-rate
risk, they may increase credit risk exposure. Credit risk arises from the
possibility that a counterparty will be unable to perform according to the terms
of the contract. Farmer Mac mitigates credit risk by dealing with counterparties
with high credit ratings (no less than BBB+ at December 31, 2000), establishing
and maintaining collateral requirements and entering into netting agreements.
Netting agreements provide for netting all amounts receivable and payable under
all transactions covered by the netting agreement between Farmer Mac and a
single counterparty. Farmer Mac's exposure to credit risk related to
interest-rate contracts is based on the cost to replace all outstanding
interest-rate contracts for each counterparty with which Farmer Mac was in a net
gain position ("net replacement value"), including the effect of netting
agreements. At December 31, 2000 and 1999, the net replacement value of interest
rate contracts was $200,000 and $4.6 million, respectively. Of the net
replacement value exposure outstanding at December 31, 1999, $3.7 million was
collateralized by $8.6 million of marketable securities and $900,000 was
uncollateralized. None of the net replacement value exposure as of December 31,
2000 was collateralized.
Hedge instruments, currently consisting of forward sale contracts involving GSE
debt and mortgage-backed securities and futures contracts involving U.S.
Treasury securities, are used by Farmer Mac to reduce its interest-rate risk
exposure related to the purchase of loans and the anticipated issuance of debt.
There were no open futures contracts at December 31, 2000, compared to futures
contracts having a total notional balance of $4.1 million at December 31, 1999.
The outstanding balance of forward sale contracts involving GSE debt and
mortgage-backed securities totaled $8.6 million and $12.6 million at December
31, 2000 and 1999, respectively.
Concentrations of Credit Risk
The following table sets forth the geographic and commodity diversification, as
well as the range of loan-to-value ratios, of Farmer Mac I Securities and loans
held for securitization as of December 31, 2000 and 1999:
2000 1999
------------------------------------------- -------------------------------------------
Post-1996 Pre-1996 Post-1996 Pre-1996
Act Act Act Act
Guarantees Guarantees Total Guarantees Guarantees Total
--------------- --------------- ---------- -------------- ---------------- ----------
(in thousands)
By geographic region (1):
Mid-North $ 398,402 $ 13,954 $ 412,356 $ 351,809 $ 16,425 $ 368,234
Mid-South 115,337 12,668 128,005 66,293 13,544 79,837
Northeast 89,583 4,005 93,588 50,833 4,057 54,890
Northwest 827,456 16,939 844,395 785,547 20,804 806,351
Southeast 84,164 11,291 95,455 21,604 17,291 38,895
Southwest 1,017,615 35,877 1,053,492 603,892 46,093 649,985
-------------- ------------- -------------- ------------- ------------- --------------
Total $2,532,557 $ 94,734 $2,627,291 $1,879,978 $ 118,214 $1,998,192
-------------- ------------- -------------- ------------- ------------- --------------
By commodity:
Crops $1,262,009 $ 58,743 $1,320,752 $ 974,102 $ 71,591 $1,045,693
Livestock 466,226 12,809 479,035 378,818 17,501 396,319
Permanent plantings 692,863 23,182 716,045 450,973 29,122 480,095
Part-time farms 111,459 - 111,459 76,085 - 76,085
-------------- ------------- -------------- ------------- ------------- --------------
Total $2,532,557 $ 94,734 $2,627,291 $1,879,978 $ 118,214 $1,998,192
-------------- ------------- -------------- ------------- ------------- --------------
By loan-to-value:
0.00% to 40.00% $ 586,299 $ 11,518 $ 597,817 $ 509,485 $ 15,124 $ 524,609
40.01% to 50.00% 544,429 16,211 560,640 421,478 21,723 443,201
50.01% to 60.00% 625,057 30,802 655,859 460,195 41,308 501,503
60.01% to 70.00% 669,737 31,429 701,166 447,720 35,314 483,034
70.01% to 80.00% 95,065 4,774 99,839 33,656 4,745 38,401
80.01% to 90.00% 11,970 11,970 7,444 - 7,444
-------------- ------------- -------------- ------------- ------------- --------------
Total $2,532,557 $ 94,734 $2,627,291 $1,879,978 $ 118,214 $1,998,192
-------------- ------------- -------------- ------------- ------------- --------------
(1) Geographic regions: Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South (KS, OK, TX); Northeast (CT,
DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA, RI, TN, VA, VT, WV); Northwest (ID, MT, ND, NE, OR,
SD, WA, WY); Southeast (AL, AR, FL, GA, LA, MS, SC); Southwest (AZ, CA, CO, HI, NM, NV, UT).
Loan-to-value ratios are based on collateral values at origination of the loan.
Current loan-to-value ratios may be higher or lower than the original
loan-to-value ratios.
11. FAIR VALUE DISCLOSURES
The following table sets forth the estimated fair values and carrying values of
financial assets and liabilities at December 31, 2000 and 1999. Significant
estimates, assumptions and present value calculations are used for the
following disclosure, resulting in a high degree of subjectivity in the
indicated fair values. Accordingly, these estimated fair values are not
necessarily indicative of what Farmer Mac would realize in an actual sale or
purchase.
2000 1999
--------------------------- ---------------------------
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
------------- ------------- -------------- ------------
(in thousands)
Financial assets:
Cash and cash equivalents $ 537,871 $ 537,871 $ 336,282 $ 336,282
Investment securities 837,940 836,757 849,079 847,220
Farmer Mac guaranteed securities 1,699,565 1,679,993 1,315,353 1,306,223
Loans 30,555 30,279 39,945 38,509
Off-balance sheet items in a gain position:
Commitments to purchase loans 388 - 213 -
Futures contracts - - 13 -
Interest-rate contracts 554 - 5,063 -
Commitments to sell GSE debt securities - - 81 -
Financial liabilities:
Notes and bonds payable:
Due within one year 2,204,846 2,141,548 1,723,103 1,722,061
Due after one year 797,983 827,635 756,569 750,337
Off-balance sheet items in a loss position:
Commitments to sell GSE debt securities 253 - - -
Interest-rate contracts 18,416 - 1,736 -
The estimated fair values for Farmer Mac's financial instruments are calculated
by generating multiple paths for future interest rates. The estimated fair value
calculations for Farmer Mac's guaranteed securities, loans, interest-rate
contracts and notes payable use a Monte Carlo simulation model to forecast the
expected interest rates for each respective instrument. These forecasted
interest rates are then used to discount the projected cash flows of each
instrument to derive the estimated fair value. For cash and cash equivalents,
the carrying amount approximates fair value. For investments, futures contracts
and commitments to purchase and sell GSE debt and mortgage-backed securities,
fair value is based on quoted market prices.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2000 Quarter Ended 1999 Quarter Ended
-------------------------------------------------- -------------------------------------------------
Dec 31 Sept 30 June 30 Mar 31 Dec 31 Sept 30 June 30 Mar 31
------------ ------------ ------------ ----------- ----------- ------------ ------------- ----------
(dollars in thousands, except per share amounts)
Interest income $ 52,567 $ 51,017 $46,944 $44,892 $41,688 $ 39,123 $31,531 $ 28,035
Interest expense 48,061 46,685 42,700 40,276 38,070 35,310 27,584 24,455
------------ ------------ ------------ ----------- ----------- ------------ ------------------------
Net interest income 4,506 4,332 4,244 4,616 3,618 3,813 3,947 3,580
Guarantee fee income 3,368 2,972 2,755 2,582 2,388 1,899 1,644 1,465
Gain on sale of AMBS - - - - - - - -
Miscellaneous 149 78 (10) 182 110 (88) 132 66
------------ ------------------------------------- ----------- -------------------------------------
Total revenues 8,023 7,382 6,989 7,380 6,116 5,624 5,723 5,111
Expenses 3,564 3,143 3,834 3,725 3,142 2,967 3,158 2,716
------------ ------------------------------------- ----------- -------------------------------------
Income before income taxes 4,459 4,239 3,155 3,655 2,974 2,657 2,565 2,395
Income tax expense/(benefit) 1,586 1,505 1,362 1,297 1,082 901 873 814
------------ ------------------------------------- ----------- -------------------------------------
Net income $ 2,873 $ 2,734 $ 1,793 $ 2,358 $ 1,892 $ 1,756 $ 1,692 $ 1,581
------------ ------------------------------------- ----------- -------------------------------------
Earnings Per Share:
Basic net earnings $ 0.26 $ 0.25 $ 0.22 $ 0.22 $ 0.17 $ 0.16 $ 0.16 $ 0.15
Diluted net earnings $ 0.25 $ 0.24 $ 0.22 $ 0.21 $ 0.17 $ 0.16 $ 0.15 $ 0.14
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference to
the Corporation's Proxy Statement to be filed on or about April 20, 2001.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to
the Corporation's Proxy Statement to be filed on or about April 20, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to
the Corporation's Proxy Statement to be filed on or about April 20, 2001.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to
the Corporation's Proxy Statement to be filed on or about April 20, 2001.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements.
Refer to Item 8, above.
(2) Financial Statement Schedules.
All schedules are omitted since they are not applicable, not
required or the information required to be set forth therein is included in
the consolidated financial statements or in notes thereto.
(3) Exhibits and Reports on Form 8-K.
(a) Exhibits.
* 3.1 - Title VIII of the Farm Credit Act of 1971, as most recently amended
by the Farm Credit System Reform Act of 1996, P.L. 104-105 (Form
10-K filed March 29, 1996).
* 3.2 - Amended and restated Bylaws of the Registrant (Form 10-Q filed
August 12, 1999).
+* 10.1 - Stock Option Plan (Previously filed as Exhibit 19.1 to Form 10-Q
filed November 10, 1992).
+* 10.1.1 - Amendment No. 1 to Stock Option Plan (Previously filed as Exhibit
10.2 to Form 10-Q filed August 16, 1993).
+* 10.1.2 - 1996 Stock Option Plan (Form 10-Q filed November 10, 1996).
+* 10.1.3 - Amended and Restated 1997 Stock Option Plan.
+* 10.2 - Employment Agreement dated May 5, 1989 between Henry D. Edelman and
the Registrant (Previously filed as Exhibit 10.4 to Form 10-K filed
February 14, 1990).
+* 10.2.1 - Amendment No. 1 dated as of January 10, 1991 to Employment
Contract between Henry D. Edelman and the Registrant (Previously
filed as Exhibit 10.4 to Form 10-K filed April 1, 1991).
_______________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith
+ Management contract or compensatory plan.
+* 10.2.2 - Amendment to Employment Contract dated as of September 1, 1993
between Henry D. Edelman and the Registrant (Previously filed as
Exhibit 10.5 to Form 10-Q filed November 15, 1993).
+* 10.2.3 - Amendment No. 3 dated as of September 1, 1994 to Employment
Contract between Henry D. Edelman and the Registrant (Previously
filed as Exhibit 10.5 to Form 10-Q filed November 15, 1994).
+* 10.2.4 - Amendment No. 4 dated as of February 8, 1996 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-K filed March
29, 1996).
+* 10.2.5 - Amendment No. 5 dated as of September 13, 1996 to Employment
Contract between Henry D. Edelman and the Registrant (Form 10-Q
filed November 10, 1996).
+* 10.2.6 - Amendment No. 6 dated as of August 7, 1997 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
November 14, 1997).
+* 10.2.7 - Amendment No. 7 dated as of September 4, 1998 to Employment
Contract between Henry D. Edelman and the Registrant (Form 10-Q
filed August 14, 1998).
+* 10.2.8 - Amendment No. 8 dated as of June 3, 1999 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed August
12, 1999).
+* 10.2.9 - Amendment No. 9 dated as of June 1, 2000 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed August
14, 2000).
+* 10.3 - Employment Agreement dated May 11, 1989 between Nancy E. Corsiglia
and the Registrant (Previously filed as Exhibit 10.5 to Form 10-K
filed February 14, 1990).
+* 10.3.1 - Amendment dated December 14, 1989 to Employment Agreement between
Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit
10.5 to Form 10-K filed February 14, 1990).
+* 10.3.2 - Amendment No. 2 dated February 14, 1991 to Employment Agreement
between Nancy E. Corsiglia and the Registrant (Previously filed as
Exhibit 10.7 to Form 10-K filed April 1, 1991).
_______________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith
+ Management contract or compensatory plan.
+* 10.3.3 - Amendment to Employment Contract dated as of September 1, 1993
between Nancy E. Corsiglia and the Registrant (Previously filed as
Exhibit 10.9 to Form 10-Q filed November 15, 1993).
+* 10.3.4 - Amendment No. 4 dated September 1, 1993 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Previously filed as
Exhibit 10.11 to Form 10-K filed March 30, 1994).
+* 10.3.5 - Amendment No.5 dated as of September 1, 1994 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Previously filed as
Exhibit 10.12 to Form 10-Q filed August 15, 1994).
+* 10.3.6 - Amendment No.6 dated as of September 1, 1995 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
November 10, 1995).
+* 10.3.7 - Amendment No. 7 dated as of February 8, 1996 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-K filed
March 29, 1996).
+* 10.3.8 - Amendment No. 8 dated as of September 13, 1996 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q
filed November 10, 1996).
+* 10.3.9 - Amendment No. 9 dated as of August 7, 1997 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
November 14, 1997).
+* 10.3.10 - Amendment No. 10 dated as of September 4, 1998 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q
filed August 14, 1998).
+* 10.3.11 - Amendment No. 11 dated as of June 3, 1999 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 12, 1999).
+* 10.3.12 - Amendment No. 12 dated as of June 1, 2000 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 2000).
+* 10.4 - Employment Agreement dated September 13, 1989 between Thomas R.
Clark and the Registrant (Previously filed as Exhibit 10.6 to Form
10-K filed April 1, 1990).
_______________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith
+ Management contract or compensatory plan.
+* 10.4.1 - Amendment No. 1 dated February 14, 1991 to Employment Agreement
between Thomas R. Clark and the Registrant (Previously filed as
Exhibit 10.9 to Form 10-K filed April 1, 1991).
+* 10.4.2 - Amendment to Employment Contract dated as of September 1, 1993
between Thomas R. Clark and the Registrant (Previously filed as
Exhibit 10.12 to Form 10-Q filed November 15, 1993).
+* 10.4.3 - Amendment No. 3 dated September 1, 1993 to Employment Contract
between Thomas R. Clark and the Registrant (Previously filed as
Exhibit 10.16 to Form 10-K filed March 30, 1994).
+* 10.4.4 - Amendment No. 4 dated as of September 1, 1994 to Employment
Contract between Thomas R. Clark and the Registrant (Previously
filed as Exhibit 10.17 to Form 10-Q filed August 15, 1994).
+* 10.4.5 - Amendment No.5 dated as of September 1, 1995 to Employment Contract
between Thomas R. Clark and the Registrant (Form 10-Q filed
November 10, 1995).
+* 10.4.6 - Amendment No. 6 dated as of February 8, 1996 to Employment Contract
between Thomas R. Clark and the Registrant (Form 10-K filed March
29, 1996).
+* 10.4.7 - Amendment No. 7 dated as of September 13, 1996 to Employment
Contract between Thomas R. Clark and the Registrant (Form 10-Q
filed November 10, 1996).
+* 10.4.8 - Amendment No. 8 dated as of August 7, 1997 to Employment Contract
between Thomas R. Clark and the Registrant(Form 10-Q filed November
14, 1997).
+* 10.4.9 - Amendment No.9 dated as of September 4, 1998 to Employment Contract
between Thomas R. Clark and the Registrant (Form 10-Q filed August
14, 1998).
+* 10.4.10 - Amendment No. 10 dated as of September 3, 1999 to Employment
Contract between Thomas R. Clark and the Registrant(Form 10-Q filed
August 12, 1999).
+* 10.4.11 - Amendment No. 11 dated as of June 1, 2000 to Employment Contract
between Thomas R. Clark and the Registrant (Form 10-Q filed August
14, 2000).
_______________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith
+ Management contract or compensatory plan.
+**10.4.12 - Employment Contract Novation dated as of January 1, 2001 between
Thomas R. Clark and the Registrant.
+* 10.5 - Employment Contract dated as of September 1, 1997 between Tom D.
Stenson and the Registrant(Previously filed as Exhibit 10.8 to Form
10-Q filed November 14, 1997).
+* 10.5.1 - Amendment No.1 dated as of September 4, 1998 to Employment Contract
between Tom D. Stenson and the Registrant (Previously filed as
Exhibit 10.8.1 to Form 10-Q filed August 14, 1998).
+* 10.5.2 - Amendment No.2 dated as of September 3, 1999 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed August
12, 1999).
+* 10.5.3 - Amendment No.3 dated as of September 1, 2000 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed August
14, 2000).
+* 10.6 - Employment Agreement dated February 1, 2000 between Jerome G.
Oslick and the Registrant (Form 10-Q filed May 11, 2000).
+* 10.6.1 - Amendment No. 1 dated as of June 1, 2000 to Employment Contract
between Jerome G. Oslick and the Registrant (Form 10-Q filed August
14, 2000).
* 10.9 - Lease Agreement, dated September 30, 1991 between 919 Eighteenth
Street, N. W. Associates Limited Partnership and the Registrant
(Previously filed as Exhibit 10.20 to Form 10-K filed March 30,
1992).
* 21 - Farmer Mac Mortgage Securities Corporation, a Delaware Corporation.
* 99.1 - Map of U.S. Department of Agriculture (Secretary of Agriculture's)
Regions (Previously filed as Exhibit 1.1 to Form 10-K filed April
1, 1991).
(b) Reports on Form 8-K.
The Registrant did not file any reports on Form 8-K during the
quarter ended September 30, 2000.
_______________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith
+ Management contract or compensatory plan.
Exhibit Index
10.4.12 - Employment Contract Novation dated as of January 1, 2001 between
Thomas R. Clark and the Registrant.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM 10-K
FILED BY
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
Exhibit 10.4.12
Exhibit 10.4.12
EMPLOYMENT CONTRACT NOVATION
AGREED, as of the 1st day of January 2001, between the Federal
Agricultural Mortgage Corporation ("Farmer Mac") and Thomas R. Clark ("Employee"
or "you"), that the following terms and conditions shall apply to the employment
relationship between the parties
1. Effect on Prior Contract. The Contract of Employment, dated as of June
13, 1989, between Farmer Mac and the Employee, as amended by Employment
Contract Amendments Nos. 1-11, the last of which was dated as of June 1,
2000 (the "Initial Contract"), is hereby terminated as of December 31,
2000, by mutual agreement between the parties. None of the provisions of
the Initial Contract, nor rights and obligations set forth thereunder,
shall survive its termination.
2. Term. The term of your employment hereunder shall commence on January 1,
2001 and continue until December 31, 2001 or any earlier effective date
of termination pursuant to Paragraph 8 hereof (the "Term").
3. Scope of Authority and Employment. You will report directly to the
President of Farmer Mac. You will have responsibility for the public
relations and government affairs activities of the Corporation,
including maintaining adequate communications with borrowers,
commodities groups and other members of the agricultural community;
Farmer Mac stockholders; government regulators; and Congress. This
activity is to be carried out under business plans submitted by
management to the Board of Directors for their approval. You shall be an
officer of Farmer Mac, with the title of Vice President - Corporate
Relations.
You will devote your best efforts and three days (of at least 10 hours
each) per week (the scheduling of which shall be in the discretion of the
President of Farmer Mac) to your duties hereunder, and you will not engage in
any other gainful occupation without the prior written consent of Farmer Mac,
which shall not be unreasonably withheld; provided, however, that this provision
will not be construed to prevent you from personally, and for your own account
or that of members of your immediate family, investing or trading in real
estate, stocks, bonds, securities, commodities, or other forms of investment, so
long as such investing or trading is not in conflict with the best interests of
Farmer Mac. You will be employed to perform your duties at the principal office
of Farmer Mac. Notwithstanding this, you may be required infrequently to travel
in the performance of your duties under this Agreement.
4. Compensation. Farmer Mac will pay to you the following aggregate
compensation for all services rendered by you under this Agreement:
(a) Base Salary. You will be paid a base salary (the Base Salary)
during the Term of One Hundred Thirty-Two Thousand One Hundred and Forty
Dollars ($132,140) per year, payable in arrears on a bi-weekly basis;
(b) Incentive Compensation. In addition to your Base Salary, you will be
paid additional payments during the Term of this Agreement in respect of the
work performed by you during the Term of this Agreement or portion thereof as
follows: on December 31, 2001 or any earlier effective date of termination,
an additional payment in an amount at the sole discretion of the Board of
Directors if it determines that you have performed in an extraordinary manner
your duties, pursuant to business plans proposed by management and approved
by the Board of Directors, during the Term of this Agreement.
5. Expenses. Farmer Mac will reimburse you for your reasonable and
necessary expenses incurred in carrying out your duties under this
Agreement, including, without limitation, expenses for: travel;
attending approved business meetings,conventions and similar gatherings;
automobile parking in or near Farmer Mac's principal office building;
and business entertainment. Reimbursement will be made to you within
ten (10) days after presentation to Farmer Mac of an itemized accounting
and documentation of such expenses. You will notify the President of
Farmer Mac prior to incurring any such expenses of an extraordinary or
unusual nature.
6. Vacation and Sick Leave. You initially will be entitled to eight (8)
days of paid vacation during the Term of this Agreement. Commencing June
1, 2001, vacation days shall accrue at the rate of one day (1) per
calendar month. You will be entitled to reasonable and customary amounts
of sick leave.
7. Employee Benefits. Farmer Mac will provide you with all employee
benefits regularly provided to employees of Farmer Mac and the following
other (or upgraded) benefits: the best level of personal and family
health insurance obtainable by Farmer Mac on reasonable terms; an annual
medical examination; business travel and personal accident insurance;
life insurance in the amount of Two Hundred Fifty Thousand Dollars
($250,000); disability benefits at least equal to statutory benefits in
the District of Columbia; participation in the Farmer Mac Pension Plan;
and participation in a savings plan established under Paragraph 401(k)
of the Internal Revenue Code. The providers of any insurance will be
listed in Best's Insurance
Guide.
8. Termination.
(a) Events of Termination. This Agreement will be terminated and the
employment relationship between you and Farmer Mac will be severed as set
forth below:
(1) Farmer Mac may terminate your employment effective upon notice
to you (or your legal representative) if you die or are incapacitated
or disabled by accident, sickness or otherwise so as to render you (in
the opinion of an independent medical consultant on the full-time
faculty of Georgetown University School of Medicine) mentally or
physically incapable of performing the services required to be
performed by you under the terms of this Agreement for a period of at
least sixty (60) consecutive days, or for sixty (60) days (whether
consecutive or not) during any six-month period.
(2) Farmer Mac may terminate your employment effective upon notice
to you at any time for "cause." For the purposes of this subsection,
"cause" will mean only: (A) your willful failure to perform
substantially your duties hereunder, other than any such failure
resulting from your incapacity due to physical or mental illness; or
(B) your willful engagement in activities contrary to the best
interests of Farmer Mac. For purposes of this subsection, no act, or
failure to act on your part, shall be considered "willful" unless done,
or omitted to be done, by you not in good faith and without reasonable
belief that your action or omission was in the best interests of Farmer
Mac.
(3) Farmer Mac may terminate your employment without "cause" at
any time. Such termination shall become effective on December 31, 2001.
(b) Payment of Accrued Compensation.
(1) Upon termination of this Agreement pursuant to preceding
subsection (a), you (or your estate or heirs, as the case may be) will
be entitled to receive all Base Salary, Incentive Compensation, expense
reimbursements, vacation pay, and similar amounts accrued and unpaid as
of the date of such termination. The obligations of Farmer Mac under
this subsection (b) will survive any termination of this Agreement.
(2) In the event of your voluntary termination of employment
hereunder, Farmer Mac will not be obligated to make any further
compensation payments to you beyond those accrued prior to the
effective date of such termination.
(c) Disability Pay. Upon termination of this Agreement pursuant to the
preceding subsection (a)(1), Farmer Mac, in its discretion, will either:
(1) continue to pay you (or your estate or heirs, as the case may
be) for the balance of the Term the difference between your current
Base Salary and the amount, if any, of disability insurance payments
received by you under insurance policies provided by Farmer Mac in
accordance with this Agreement; or
(2) pay you (or your estate or heirs, as the case may be) the
present value of the payments described in preceding subsection (c)(1),
discounted at a rate equal to the yield then available for one-year
U.S. Treasury Notes, plus 50 basis points (0.50%).
(d) Severance Pay. Upon termination of this Agreement pursuant to
preceding subsection 8(a)(3), Farmer Mac will pay you within thirty (30) days
after such termination an aggregate amount in cash equal to one hundred
percent (100%) of all Base Salary scheduled to be paid and not yet paid to
you under this Agreement for the balance of the Term.
In the event of Farmer Mac's severance of your employment pursuant to
preceding subsection 8(a)(1), or (3), the amount to be paid by Farmer Mac to
you hereunder will not be mitigated by any subsequent earnings by you from
any source.
(e) Constructive Termination. You may, at your option, deem this
Agreement to have been terminated by Farmer Mac in the event of its breach,
including prospective breach, of any term hereof unremedied for thirty (30)
days after notice thereof to Farmer Mac. Upon notice to Farmer Mac of your
exercise of this option, you will have the same rights under such a
constructive termination as if Farmer Mac had terminated your employment
pursuant to preceding subsection (a)(3).
9. Agreement Not to Compete with Farmer Mac. Notwithstanding anything in this
Agreement to the contrary, in the event of the termination of your
employment, for a period of two years thereafter, you shall not, without
the prior written consent of Farmer Mac, directly or indirectly, engage in
any business or activity, whether as principal, agent, officer, director,
partner, employee, independent contractor, consultant, stockholder or
otherwise, alone or in association with any other person, firm, corporation
or other business organization, that directly or indirectly competes with
any of the businesses of Farmer Mac in any manner, including without
limitation, the acquisition and securitization (for capital market sale) of
agricultural mortgage loans or USDA "guaranteed portions" (hereinafter
referred to as "Farmer Mac Qualified Loans"); provided, however, that such
prohibited activity shall not include the ownership of up to 20% of the
common stock in a public company or employment by an agency of the United
States or any political subdivision thereof.
10. Agreement Not to Use Confidential or Proprietary Information. Farmer Mac
and you both recognize that you have access to and acquire, and may assist
in developing, confidential and proprietary information relating to the
business and operations of Farmer Mac as a result of your employment or
association with Farmer Mac. You hereby covenant and agree that you will
retain all "Confidential Information" (as defined below) in trust for the
sole benefit of Farmer Mac and its successors and assigns. You hereby
covenant further that, in addition to your fiduciary responsibilities as an
officer not to disclose certain information of or relating to Farmer Mac,
you will not, at any time during or after the Term of this Agreement,
without the prior written consent of Farmer Mac, directly or indirectly
communicate or divulge any such Confidential Information to any person,
firm, corporation or other business organization, or use any such
Confidential Information for your own account or for the account of any
other person, except as required in connection with the performance of your
services hereunder. The term "Confidential Information" shall mean any
trade secret, data or other confidential or proprietary information related
to the business and activities of Farmer Mac. Notwithstanding the
foregoing, Confidential Information shall not include any information that
is or becomes a part of the public domain or generally available to the
public (unless such availability occurs as a result of any breach by you of
this Section 11), or becomes available to you on a non-confidential basis
from a source (other than Farmer Mac) that is not bound by a
confidentiality agreement and does not breach his or her fiduciary
responsibilities. The provisions of this Section 9 shall survive the
termination of this Agreement and the termination of
your employment hereunder.
11. Agreement Not to Solicit Farmer Mac Employees. For a period of two years
after the termination of your employment hereunder, you shall not, directly
or indirectly, induce any employee of Farmer Mac who is a "member of
management" (as defined below) or is directly involved in the acquisition
and securitization (for capital market sale) of Farmer Mac Qualified Loans
to engage in any activity in which you are prohibited from engaging in
under this Agreement, or to terminate such person's employment with Farmer
Mac. You shall not directly or indirectly, either individually or as owner,
agent, employee, consultant or otherwise, employ, offer employment to,
lure, entice away or assist others in recruiting or hiring any person who
is or was employed by Farmer Mac unless such person shall have ceased to be
employed by Farmer Mac for a period of at least six months and is not
subject to any non-compete covenants substantially similar in nature to
those contained in Section 8 hereof. "Member of management" means the
President, any Vice President, the Controller of Farmer Mac or attorney or
paralegal in the employ of Farmer Mac.
12. Notices. Any notice given under this Agreement will be sufficient if in
writing and either: (a) mailed postage prepaid by registered or certified
mail, return receipt requested; or (b) delivered by hand to, in the case of
Farmer Mac, 919 18th Street, N.W., Washington, D.C. 20006, attention
President; or, in the case of the Employee, 3903 Lake Boulevard, Annandale,
Virginia 22003 (or to such other addresses as may be from time to time
designated by notice from the recipient party to the other). Any such
notice will be effective upon actual receipt or refusal thereof.
13. Miscellaneous.
(a) Governing Law. This Agreement will be governed by, and interpreted
and enforced in accordance with, the laws of the District of Columbia.
(b) Waiver. The waiver by any party of a breach of any provision of this
Agreement will not operate as a waiver of any other breach of any provision
of this Agreement by any party.
(c) Entire Agreement. This Agreement sets forth the entire understanding
of the parties concerning the subject matter hereof, and may not be changed
or modified except by a written instrument duly executed by or on behalf of
the parties hereto.
(d) Successors and Assigns. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors,
heirs, personal representatives and assigns. This subsection is not to be
construed to permit you to assign your obligation to perform the duties of
your employment hereunder. This subsection permits Farmer Mac the right to
assign this Agreement to a successor entity.
(e) Severability. If any term, condition, or provision of this Agreement
or the application thereof to any party or circumstances will, at any time or
to any extent be invalid or unenforceable, the remainder of this Agreement,
or the application of such term, condition or provision to parties or
circumstances other than those to which it is held invalid or unenforceable,
will not be affected thereby, and each term, condition and provision of this
Agreement will be valid and enforceable to the fullest extent permitted by
law.
(f) Action by Farmer Mac. Except as expressly provided otherwise in this
Agreement, reference to actions, decisions, determinations or similar
occurrences by Farmer Mac (other than the execution of this Agreement and any
modifications hereto or notices given hereunder) will mean the action,
decision or determination of the Board of Directors or the President of
Farmer Mac.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
/s/ Henry D. Edelman
---------------------------------------------------
By: Henry D. Edelman
President and Chief Executive Officer
EMPLOYEE
/s/ Thomas R. Clark
---------------------------------------------------
Thomas R. Clark
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the 1934 Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
March 15, 2001
- ---------------------------------------- -------------------------------------
By: Henry D. Edelman Date
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
Chairman of the Board and March 15, 2001
- --------------------------------- Director
Charles Eugene Branstool
President and Chief March 15, 2001
Executive
- ---------------------------------
Henry D. Edelman Officer (Principal
Executive Officer)
Vice President - Finance March 15, 2001
- --------------------------------- and Treasurer
Nancy E. Corsiglia (Principal Financial and
Accounting Officer)
Name Title Date
Director March 15, 2001
- ---------------------------------------
Paul A. DeBriyn
Director March 15, 2001
- ---------------------------------------
Kenneth E. Graff
Director March 15, 2001
- ---------------------------------------
W. David Hemingway
Director March 15, 2001
- ---------------------------------------
Mitchell A. Johnson
Director March 15, 2001
- ---------------------------------------
Lowell Junkins
Director March 15, 2001
- ---------------------------------------
James A. McCarthy
Director March 15, 2001
- ---------------------------------------
Robert J. Mulder
Director March 15, 2001
- ---------------------------------------
John G. Nelson
Director March 15, 2001
- ---------------------------------------
David J. Nolan
Director March 15, 2001
- ---------------------------------------
Peter T. Paul
Director March 15, 2001
- ---------------------------------------
Marilyn Peters
Director March 15, 2001
- ---------------------------------------
John Dan Raines, Jr.
Vice Chairman March 15, 2001
- ---------------------------------------
Gordon Clyde Southern
Director March 15, 2001
- ---------------------------------------
Clyde A. Wheeler
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
/s/ Henry D. Edelman March 15, 2001
- ---------------------------------------- -------------------------------------
By: Henry D. Edelman Date
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ Charles Eugene Branstool Chairman of the Board and March 15, 2001
- -------------------------------- Director
Charles Eugene Branstool
/s/ Henry D. Edelman President and Chief Executive March 15, 2001
- -------------------------------- Officer (Principal Executive
Henry D. Edelman
Officer)
/s/ Nancy E. Corsiglia Vice President - Finance March 15, 2001
- -------------------------------- and Treasurer
Nancy E. Corsiglia (Principal Financial and
Accounting Officer)
Name Title Date
/s/ Paul A. DeBriyn Director March 15, 2001
- ---------------------------------------
Paul A. DeBriyn
/s/ Kenneth E. Graff Director March 15, 2001
- ---------------------------------------
Kenneth E. Graff
/s/ W. David Hemingway Director March 15, 2001
- ---------------------------------------
W. David Hemingway
/s/ Mitchell A. Johnson Director March 15, 2001
- ---------------------------------------
Mitchell A. Johnson
/s/ Lowell Junkins Director March 15, 2001
- ---------------------------------------
Lowell Junkins
/s/ James A. McCarthy Director March 15, 2001
- ---------------------------------------
James A. McCarthy
/s/ Robert J. Mulder Director March 15, 2001
- ---------------------------------------
Robert J. Mulder
/s/ John G. Nelson Director March 15, 2001
- ---------------------------------------
John G. Nelson
/s/ David J. Nolan Director March 15, 2001
- ---------------------------------------
David J. Nolan
/s/ Peter T. Paul Director March 15, 2001
- ---------------------------------------
Peter T. Paul
/s/ Marilyn Peters Director March 15, 2001
- ---------------------------------------
Marilyn Peters
/s/ John Dan Raines, Jr. Director March 15, 2001
- ---------------------------------------
John Dan Raines, Jr.
/s/ Gordon Clyde Southern Vice Chairman March 15, 2001
- ---------------------------------------
Gordon Clyde Southern
/s/ Clyde A. Wheeler Director March 15, 2001
- ---------------------------------------
Clyde A. Wheeler