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As filed with the Securities and Exchange Commission on
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August 14, 2002
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002 Commission File Number 0-17440
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
Federally chartered instrumentality
of the United States 52-1578738
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
1133 Twenty-First Street, N.W., Suite 600
Washington, D.C. 20036
(Address of principal executive offices) (Zip code)
(202) 872-7700
(Registrant's telephone number, including area code)
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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 12 months (or for 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 [ ]
As of August 13, 2002, there were 1,030,780 shares of Class A Voting Common
Stock, 500,301 shares of Class B Voting Common Stock and 10,099,385 shares of
Class C Non-Voting Common Stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
The following interim condensed consolidated financial statements of the
Federal Agricultural Mortgage Corporation ("Farmer Mac" or the "Corporation")
have been prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. These condensed consolidated financial
statements reflect all normal and recurring adjustments that are, in the opinion
of management, necessary to present a fair statement of the results for the
interim periods presented. Certain information and footnote disclosures normally
included in annual consolidated financial statements have been condensed or
omitted as permitted by such rules and regulations. Management believes that the
disclosures are adequate to present fairly the condensed consolidated financial
position, condensed consolidated results of operations and condensed
consolidated cash flows as of the dates and for the periods presented. These
condensed consolidated financial statements should be read in conjunction with
the audited 2001 consolidated financial statements of Farmer Mac included in the
Corporation's Form 10-K for the year ended December 31, 2001. Results for
interim periods are not necessarily indicative of those to be expected for the
fiscal year.
The following information concerning Farmer Mac's condensed consolidated
financial statements is included in this Form 10-Q beginning on the pages listed
below:
Condensed Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001.......................................... 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2002 and 2001.............. 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2002 and 2001............................ 5
Notes to Condensed Consolidated Financial Statements............. 6
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2002 2001
------------------ -------------------
(unaudited)
Assets:
Cash and cash equivalents $ 479,585 $ 437,831
Investment securities 977,474 1,007,954
Farmer Mac guaranteed securities 1,655,356 1,690,376
Loans 837,102 199,355
Real estate owned 2,489 2,457
Financial derivatives 721 15
Interest receivable 63,076 56,253
Guarantee fees receivable 5,051 6,004
Prepaid expenses and other assets 16,720 16,963
------------------ -------------------
Total Assets $ 4,037,574 $ 3,417,208
------------------ -------------------
Liabilities and Stockholders' Equity:
Liabilities:
Notes payable
Due within one year $ 2,661,792 $ 2,233,267
Due after one year 1,086,671 968,463
------------------ -------------------
Total notes payable 3,748,463 3,201,730
Financial derivatives 35,035 20,762
Accrued interest payable 30,744 26,358
Accounts payable and accrued expenses 19,997 18,037
Reserve for losses 18,327 15,884
------------------ -------------------
Total Liabilities 3,852,566 3,282,771
Stockholders' Equity:
Preferred Stock:
Series A, stated at redemption/liquidation value,
$50 per share, 700,000 shares authorized,
issued and outstanding as of June 30, 2002 35,000 -
Common Stock:
Class A Voting, $1 par value, no maximum authorization,
1,030,780 shares issued and outstanding as of
June 30, 2002 and December 31, 2001. 1,031 1,031
Class B Voting, $1 par value, no maximum authorization,
500,301 shares issued and outstanding as of
June 30, 2002 and December 31, 2001. 500 500
Class C Non-Voting, $1 par value, no maximum authorization,
10,098,487 and 10,033,037 shares issued and outstanding
as of June 30, 2002 and December 31, 2001. 10,098 10,033
Additional paid-in capital 82,380 80,960
Accumulated other comprehensive income 8,932 8,395
Retained earnings 47,067 33,518
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Total Stockholders' Equity 185,008 134,437
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Total Liabilities and Stockholders' Equity $ 4,037,574 $ 3,417,208
------------------ -------------------
See accompanying notes to condensed consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
---------------- ----------------- ---------------- ---------------
(unaudited) (unaudited)
Interest income:
Investments and cash equivalents $ 10,612 $ 17,148 $ 20,938 $ 38,236
Farmer Mac guaranteed securities 22,541 28,481 45,560 57,221
Loans 10,394 740 14,193 1,343
---------------- ----------------- ---------------- ---------------
Total interest income 43,547 46,369 80,691 96,800
Interest expense 34,641 39,947 64,315 84,925
---------------- ----------------- ---------------- ---------------
Net interest income 8,906 6,422 16,376 11,875
Gains/(Losses) on financial derivatives
and trading assets (230) (159) (6) (748)
Other income:
Guarantee fees 4,723 3,669 9,290 7,097
Miscellaneous 368 116 760 282
---------------- ----------------- ---------------- ---------------
Total other income 5,091 3,785 10,050 7,379
---------------- ----------------- ---------------- ---------------
Total revenues 13,767 10,048 26,420 18,506
Expenses:
Compensation and employee benefits 1,324 1,496 2,580 2,733
Regulatory fees 197 245 393 468
General and administrative 1,499 1,107 2,592 2,252
---------------- ----------------- ---------------- ---------------
Total operating expenses 3,020 2,848 5,565 5,453
Provision for losses 2,022 1,394 4,038 2,777
---------------- ----------------- ---------------- ---------------
Total expenses 5,042 4,242 9,603 8,230
---------------- ----------------- ---------------- ---------------
Income before income taxes 8,725 5,806 16,817 10,276
Income tax expense 2,630 2,091 5,135 3,679
---------------- ----------------- ---------------- ---------------
Net income before cumulative effect 6,095 3,715 11,682 6,597
of change in accounting principles and
extraordinary gain
Cumulative effect of change in accounting
principles, net of taxes of $400 - - - (726)
Extraordinary gain, net of taxes of
$314 and $1,186, respectively 583 - 2,203 -
---------------- ----------------- ---------------- ---------------
Net income 6,678 3,715 13,885 5,871
---------------- ----------------- ---------------- ---------------
Preferred stock dividends 336 - 336 -
---------------- ----------------- ---------------- ---------------
Net income available to common stockholders $ 6,342 $ 3,715 $ 13,549 $ 5,871
---------------- ----------------- ---------------- ---------------
Earnings per common share:
Basic earnings per common share $ 0.55 $ 0.33 $ 1.17 $ 0.52
Diluted earnings per common share $ 0.52 $ 0.32 $ 1.12 $ 0.50
Earnings per common share before cumulative
effect of change in accounting principles
and extraordinary gain:
Basic earnings per common share $ 0.50 $ 0.33 $ 0.98 $ 0.59
Diluted earnings per common share $ 0.48 $ 0.32 $ 0.94 $ 0.57
See accompanying notes to condensed consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
-------------------------------------
June 30, 2002 June 30, 2001
------------------ ------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 13,885 $ 5,871
Adjustments to reconcile net income to net cash provided by
operating activities:
Net amortization of investment premiums and discounts 285 (3,351)
(Increase) decrease in interest receivable (6,823) 6,830
Decrease in guarantee fees receivable 953 900
(Increase) decrease in other assets (1,971) 647
Amortization of debt premiums, discounts and issuance costs 22,042 55,283
Increase in accrued interest payable 4,386 1,269
Increase (decrease) in other liabilities 2,957 (1,203)
(Purchases of) proceeds from trading investment securities (6,530) 12,712
Mark to market on trading securities and derivatives 8 (180)
Amortization of settled financial derivatives contracts 467 -
Extraordinary gain on debt repurchase 2,203 -
Provision for losses 4,038 2,777
------------------ ------------------
Net cash provided by operating activities 35,900 81,555
Cash flows from investing activities:
Purchases of investment securities (158,035) (218,231)
Purchases of Farmer Mac guaranteed securities (122,616) (171,018)
Purchases of loans (683,648) (134,461)
Proceeds from repayment of investment securities 196,549 157,750
Proceeds from repayment of Farmer Mac guaranteed securities 174,896 150,081
Proceeds from repayment of loans 15,745 750
Proceeds from sale of Farmer Mac guaranteed securities 29,342 50,812
Settlement of financial derivatives (3,553) (545)
Purchases of office equipment (140) (32)
------------------ ------------------
Net cash used in investing activities (551,460) (164,894)
Cash flows from financing activities:
Proceeds from issuance of discount notes 43,742,164 47,407,008
Proceeds from issuance of medium-term notes 236,101 61,000
Payments to redeem discount notes (43,347,185) (47,332,368)
Payments to redeem medium-term notes (109,914) (120,170)
Net proceeds from preferred stock issuance 34,694 -
Proceeds from common stock issuance 1,790 3,544
Preferred stock dividends (336) -
------------------ ------------------
Net cash provided by financing activities 557,314 19,014
------------------ ------------------
Net increase (decrease) in cash and cash equivalents 41,754 (64,325)
Cash and cash equivalents at beginning of period 437,831 537,871
------------------ ------------------
Cash and cash equivalents at end of period $ 479,585 $ 473,546
------------------ ------------------
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Accounting Policies
(a) 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 Condensed Consolidated
Statements of Cash Flows. The following table sets forth information regarding
certain cash and non-cash transactions for the six months ended June 30, 2002
and 2001.
Six Months Ended
June 30,
--------------------------
2002 2001
------------ -----------
(in thousands)
Cash paid for:
Interest $29,697 $ 29,652
Income taxes 5,600 5,000
Non-cash activity:
Real estate owned acquired through foreclosure 3,289 -
Loans securitized as AMBS 29,342 84,745
(b) Loans
As of June 30, 2002, loans held by Farmer Mac included $24.3 million held
for sale and $812.8 million held for investment. As of December 31, 2001, loans
held by Farmer Mac included $25.8 million held for sale and $173.6 million held
for investment.
(c) Financial Derivatives
A financial derivative is a financial instrument that has one or more
underlyings and one or more notional amounts, requires no significant initial
net investment and has terms that require net settlement. Farmer Mac enters into
financial derivative contracts as an end-user for hedging purposes, not for
trading or speculative purposes. The Corporation enters into interest rate swap
contracts principally to adjust the characteristics of short-term debt to match
more closely the cash flow and duration characteristics of its longer-term
mortgage assets, thereby reducing interest rate risk, and also to derive an
overall lower effective fixed rate cost of borrowing than would otherwise be
available to the Corporation in the conventional debt market.
When financial derivatives meet the specific hedge criteria of Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), they are accounted for as either fair value
hedges or cash flow hedges. Financial derivatives that do not satisfy those
hedge criteria are not accounted for as hedges and changes in the fair values of
those financial derivatives are reported in income or expense.
Net after-tax charges against earnings under SFAS 133 during second quarter
2002 totaled $149,500, and the net after-tax decrease to other comprehensive
income totaled $14.6 million. Substantially all of this amount represents
changes in the fair values of forward sale contracts, interest-rate swap
contracts and settled forward sale contracts using fair values as of June 30,
2002. In accordance with SFAS 133, Farmer Mac estimates that $503,000 of the
amount currently reported in accumulated other comprehensive income will be
reclassified into earnings within the next twelve months. For the quarter ended
June 30, 2002, the ineffectiveness of designated hedges included in Farmer Mac's
net income was immaterial.
(d) Reserve for Losses
Farmer Mac maintains a reserve for losses to cover estimated probable
losses on loans held and its on- and off-balance sheet guarantees, including
loans underlying Post-1996 Act Farmer Mac I Securities and Long-Term Standby
Purchase Commitments ("LTSPCs"). (See Note 2 for a description of LTSPCs.) In
estimating probable losses on loans held and on- and off-balance sheet
guarantees, management considers economic conditions, geographic and
agricultural commodity concentrations, the credit profile of the portfolio,
delinquency trends and historical charge-off and recovery activity. The reserve
is increased through periodic provisions charged to expense and reduced by
charge-offs for actual loan losses, net of recoveries.
No reserve for losses 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. Guaranteed Portions
collateralizing Farmer Mac II Securities are guaranteed by the United States
Department of Agriculture ("USDA").
(e) Earnings Per Common Share
Basic earnings per common share are based on the weighted-average number of
common shares outstanding. Diluted earnings per common share are based on the
weighted-average number of common shares outstanding adjusted to include all
potentially dilutive common stock. The following schedule reconciles basic and
diluted earnings per common share for the three and six months ended June 30,
2002 and 2001:
June 30, 2002 June 30, 2001
------------------------------- ---------------------------------
Dilutive Dilutive
Basic stock Diluted Basic stock Diluted
EPS options EPS EPS options EPS
------------------------------- ---------------------------------
(in thousands, except per share amounts)
Three months ended:
Net income available to $ 6,342 $ 6,342 $ 3,715 $ 3,715
common stockholders
Weighted average shares 11,604 489 12,093 11,251 449 11,700
Earnings per common share $ 0.55 $ 0.52 $ 0.33 $ 0.32
Effects of:
Extraordinary gain $ 0.05 $ 0.05 - -
Cumulative effect of change in
accounting principle - - - -
Six months ended:
Net income available to $ 13,549 $ 13,549 $ 5,871 $ 5,871
common stockholders
Weighted average shares 11,592 504 12,096 11,231 454 11,685
Earnings per common share $ 1.17 $ 1.12 $ 0.52 $ 0.50
Effects of:
Extraordinary gains $ 0.19 $ 0.18 - -
Cumulative effect of change in
accounting principle - - $ (0.07) $ (0.06)
(f) Preferred Stock
On May 6, 2002 the Corporation issued 700,000 shares of 6.40% Cumulative
Preferred Stock, Series A, which has a redemption price and liquidation
preference of $50.00 per share, plus accrued and unpaid dividends ("Series A
Preferred Stock"). The Series A Preferred Stock does not have a maturity date.
Beginning on June 30, 2012, Farmer Mac has the option to redeem the Series A
Preferred Stock at any time, in whole or in part, at the redemption price of
$50.00 per share, plus accrued and unpaid dividends through and including the
redemption date. Farmer Mac will pay cumulative dividends on the Series A
Preferred Stock quarterly in arrears, when and if declared by the Board of
Directors. The costs of issuing the Series A Preferred Stock were charged to
Additional Paid-in Capital. On June 6, 2002, Farmer Mac's Board of Directors
declared a dividend of $0.48 per share on the Series A Preferred Stock for the
period from May 6, 2002 to June 30, 2002, which was paid on July 1, 2002.
(g) Reclassifications
Certain reclassifications of prior period information were made to conform
to the current period presentation.
(h) New Accounting Standards
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections ("SFAS 145"). Effective January 1, 2003, SFAS 145 requires gains and
losses from the extinguishment or repurchase of debt to be classified as
extraordinary items only if they meet the criteria for such classification in
Accounting Principles Board Opinion No. 30, Reporting the Results of Operations,
Reporting the Effects of Disposal of a Segment of a Business and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions ("APB 30"). Until
January 1, 2003, gains and losses from the extinguishment or repurchase of debt
must be classified as extraordinary items. After January 1, 2003, any gain or
loss resulting from the extinguishment or repurchase of debt classified as an
extraordinary item in a prior period that does not meet the criteria for such
classification under APB 30 must be reclassified.
Note 2. Off-Balance Sheet Guaranteed Securities
Farmer Mac issues off-balance sheet guarantees in the normal course of
business to fulfill its statutory mission of increasing liquidity for
agricultural and rural residential mortgage lenders. 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
LTSPCs. In a swap transaction, Farmer Mac acquires Qualified Loans from approved
lenders ("Sellers") in exchange for Farmer Mac Guaranteed Securities backed by
such Qualified Loans. In consideration for Farmer Mac's assumption of the credit
risk on loans underlying a swap, Farmer Mac receives an annual guarantee fee on
the outstanding balance of the Farmer Mac Guaranteed Securities. Unlike cash
window transactions, which generally involve loans with terms specified by
Farmer Mac in advance, swap transactions usually are negotiated with the Seller
and may 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 and appraisal standards to be eligible for swap
transactions.
Farmer Mac's variant of 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 nominate from its
portfolio a segregated pool of Qualified Loans in its portfolio to transfer the
credit risk on those loans to Farmer Mac. To be eligible and included in the
LTSPC pool, those Qualified Loans must conform to Farmer Mac's credit and
appraisal standards and be approved by Farmer Mac. Under an LTSPC, Farmer Mac
commits to purchase any Qualified Loan in that pool of loans if: (a) the
Qualified Loan becomes four months delinquent; or (b) the Qualified Loan meets
Farmer Mac's loan purchase requirements at the time the Seller requests that
Farmer Mac purchase the loan. In the case of a Qualified Loan that is four
months delinquent, 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), the price would be a market-based
value 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 annual 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 transaction or Farmer Mac Guaranteed Security.
The following table presents the balance of outstanding LTSPCs and
off-balance sheet Farmer Mac Guaranteed Securities as of June 30, 2002 and
December 31, 2001:
Farmer Mac LTSPCs and Off-Balance Sheet Guaranteed Securities
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June 30, December 31,
2002 2001
-------------- ---------------
(in thousands)
Farmer Mac I:
Post-1996 Act guarantees:
AMBS $ 338,385 $ 366,749
LTSPC 2,336,886 1,884,260
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Total Post-1996 Act guarantees 2,675,271 2,251,009
Pre-1996 Act guarantees 146 461
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Total Farmer Mac I 2,675,417 2,251,470
Farmer Mac II Securities 71,167 78,409
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Total Farmer Mac I and II $ 2,746,584 $ 2,329,879
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Note 3. Comprehensive Income
Comprehensive income (loss) is comprised of net income plus other changes
in stockholders' equity not resulting from investments by or distributions to
stockholders. The following table sets forth comprehensive income (loss) for the
three and six months ended June 30, 2002 and 2001. The changes in unrealized
gains on securities available-for-sale are net of the related deferred tax
expense of $10.7 million and $6.3 million for the three and six months ended
June 30, 2002, respectively, and $7.8 million and $12.4 million for the three
and six months ended June 30, 2001. The changes in the fair value of the
financial derivatives classified as cash flow hedges for the three and six
months ended June 30, 2002 are net of deferred tax benefit (expense) of $7.8
million and $6.1 million, respectively, and ($1.8 million) and $155,000 for the
three and six months ended June 30, 2001.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
------------ ------------ ----------- ------------
(in thousands)
Net income $ 6,678 $ 3,715 $ 13,885 $ 5,871
Change in unrealized gain on securitie
available-for-sale, net of taxes 20,141 (14,162) 11,816 (22,479)
Cumulative effect of change in accounting principles - - - (8,632)
Change in the fair value of financial derivatives
classified as cash flow hedges, net of taxes and
reclassification adjustments (14,600) 3,271 (11,279) (281)
------------ ------------ ----------- ------------
Comprehensive income (loss) $ 12,219 $ (7,176) $ 14,422 $(25,521)
------------ ------------ ----------- ------------
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Special Note Regarding Forward-Looking Statements
Certain statements made in this Form 10-Q 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 restrictions on Farmer Mac's investment
authority; substantial changes in interest rates, agricultural land values,
commodity prices, export demand for U.S. agricultural products 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; Farmer Mac's
continuing access to the debt markets at favorable rates and terms; the possible
effect of the risk-based capital requirement which could, under certain
circumstances, be in excess of the statutory minimum capital level; a
continuation of inaccurate and misleading publicity about Farmer Mac; the
outcome of the pending review of Farmer Mac by the General Accounting Office;
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; the effects on the
agricultural economy of the government payments that are provided for in the
Farm Bill signed into law May 13, 2002; 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 affect Farmer Mac's business and
its financial performance. Furthermore, new risk factors emerge from time to
time and it is not possible for management to predict all such risk factors, nor
assess the effects of such factors on Farmer Mac's business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from the expectations expressed or implied by the forward-looking
statements. In light of these potential risks and uncertainties, no undue
reliance should be placed on any forward-looking statements expressed in this
report. 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 except as otherwise mandated by the
Securities and Exchange Commission.
Critical Accounting Policies and Estimates
The preparation of our financial results of operations and financial
position require us to make estimates and assumptions that affect the amounts
reported in these condensed consolidated financial statements and related notes
for the periods presented, and actual results could differ from our estimates.
The critical accounting policy that is both important to the portrayal of our
financial condition and requires complex, subjective judgments is the accounting
policy for Farmer Mac's reserve for losses.
The purpose of the reserve for losses is to provide for losses that are
probable to have occurred as of the balance sheet date, and not to predict
future losses in the loan portfolio. The determination of the reserve for losses
requires management to make significant estimates based on information available
as of the balance sheet date, including the amounts and timing of losses and
current market and economic conditions. These estimates are subject to change in
future reporting periods if such conditions and information change. For example,
a continued decline in the national or agricultural economies could result in an
increase in delinquencies or foreclosures, resulting in the need for additional
reserves for losses in future periods.
Farmer Mac maintains a reserve for losses to cover estimated probable
losses on loans held and its on- and off-balance sheet guarantees, including
loans underlying Post-1996 Act Farmer Mac I Securities and LTSPCs. In estimating
probable losses on loans held and on- and off-balance sheet guarantees,
management considers economic conditions, geographic and agricultural commodity
concentrations, the credit profile of the portfolio, delinquency trends and
historical charge-off and recovery activity. The reserve is increased through
periodic provisions charged to expense and reduced by charge-offs for actual
loan losses, net of recoveries.
No reserve for losses has been made for Farmer Mac I Securities issued
prior to the 1996 Act or 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. Guaranteed Portions collateralizing Farmer Mac II Securities are
guaranteed by the USDA.
Further information regarding loss reserves is included in "- Risk
Management - Credit Risk."
Results of Operations
Operating Results. SFAS 133 requires the change in the fair values of
certain financial derivatives to be reflected in the Corporation's net income or
other comprehensive income. Management believes that reporting results by
reference to operating income and operating revenues, excluding the cumulative
effect of the change in accounting principles recognized on January 1, 2001
under SFAS 133 and its ongoing effects during the reporting periods, provides
meaningful operating measures of Farmer Mac's financial performance. Such
information is presented to supplement, not replace, net income, net income
available to common stockholders, revenues, cash from operations or any other
operating or liquidity performance measures prescribed by accounting principles
generally accepted in the United States.
Reconciliation of the effects of SFAS 133
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
------------ ------------- -------------- -------------
(in thousands)
Operating income $ 6,390 $ 3,717 $ 13,351 $ 6,881
Cumulative effect of change
in accounting principles, net of tax - - - (726)
Gains (Losses) on financial derivatives
and trading assets, net of tax (149) (103) (4) (486)
Benefit from non-amortization of
premium payments, net of tax 101 101 202 202
------------ ------------- -------------- -------------
Net income available to common stockholders $ 6,342 $ 3,715 $ 13,549 $ 5,871
------------ ------------- -------------- -------------
Overview. Net income available to common stockholders for second quarter
2002, including the cumulative and ongoing effects of SFAS 133 and the
extraordinary gain on debt extinguishment, was $6.3 million or $0.52 per diluted
common share. Net income for second quarter 2001 was $3.7 million or $0.32 per
diluted share. Operating income, excluding the extraordinary gain, totaled $5.8
million for second quarter 2002, or $0.48 per diluted common share, compared to
$3.7 million, or $0.32 per diluted share, for second quarter 2001.
Farmer Mac's revenue growth continued in second quarter 2002, reflecting
the effects of outstanding guarantee volume as of June 30, 2002 that was more
than $1.4 billion higher than at the close of second quarter 2001 and increased
net interest income due to a higher average net interest yield on
interest-earning assets. During second quarter 2002, Farmer Mac: (1) purchased
$57.8 million of Guaranteed Portions of loans guaranteed by the USDA; (2)
purchased $551.7 million of Farmer Mac I loans; and (3) added $280.9 million in
LTSPCs.
USDA is forecasting net cash income on farms for 2002 to be $51.1 billion,
which includes government payments of $21.7 billion. In 2001, $21.4 billion in
government payments were made to the agricultural sector and net cash income on
farms for 2001 was $59.0 billion. USDA currently expects farm real estate values
to rise during 2002 by about 3 percent. Regionally, farm real estate values may
vary with differing rates of increase, or even decrease, depending on
commodities grown and regional economic factors.
Set forth below is a more detailed discussion of Farmer Mac's results of
operations.
Net Interest Income.
Net interest income was $8.9 million for second quarter 2002 and $16.4
million year-to-date, compared to $6.4 million and $11.9 million for the same
periods in 2001. The net interest yield, which does not include guarantee fees
for loans purchased prior to April 1, 2001 (the effective date of Statement of
Financial Accounting Standards No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities ("SFAS 140")), was 91
basis points for year-to-date 2002, compared to 74 basis points for year-to-date
2001. The net interest yields for year-to-date 2002 and year-to-date 2001
included the benefits of yield maintenance payments of 7 basis points and zero
basis points, respectively. The income realized from yield maintenance payments
is, in effect, the accelerated present value of an expected future income
stream, which, in turn, leads to slightly reduced net interest income in future
reporting periods. The timing and size of these payments varies greatly and, as
such, variations should not be considered indicative of positive or negative
trends to gauge future financial results. The effect of the adoption of SFAS 140
was a reclassification of approximately $0.7 million (7 basis points) of
guarantee fee income as interest income for the year-to-date 2002. Adjusted for
the effects of yield maintenance and excluding the effects of SFAS 140, the net
interest yields for year-to-date 2002 and year-to-date 2001 were 77 basis points
and 74 basis points, respectively.
The following table provides information regarding the average balances and
rates of interest-earning assets and funding for the six months ended June 30,
2002 and 2001.
Six Months Ended June 30,
-----------------------------------------------------------------------------------
2002 2001
----------------------------------------- --------------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
------------ ----------- ---------- ------------ ----------- ----------
(dollars in thousands)
Interest-earning assets:
Cash and cash equivalents $ 499,018 $ 5,023 2.01% $ 564,856 $ 14,023 4.97%
Investments 944,140 16,354 3.46% 865,806 24,213 5.59%
Loans & Farmer Mac guaranteed securities 2,144,563 59,314 5.53% 1,768,200 58,564 6.62%
-------------- -------------- ------------- ------------- ----------- ----------
Total interest earning assets 3,587,721 80,691 4.50% 3,198,862 96,800 6.05%
-------------- -------------- ------------- -----------
Funding:
Discount notes 2,389,207 32,409 2.71% 2,156,086 56,371 5.23%
Medium-term notes 1,066,177 31,906 5.99% 905,023 28,554 6.31%
-------------- -------------- ------------- ------------- ----------- ----------
Total interest-bearing liabilities 3,455,384 64,315 3.72% 3,061,109 84,925 5.55%
Net non-interest bearing funding 132,337 - - 137,753 - -
-------------- -------------- ------------- ---------------------------- ---------
Total funding $ 3,587,721 64,315 3.59% $3,198,862 84,925 5.31%
-------------- -------------- ------------- ---------------------------- ---------
Net interest income/yield $ 16,376 0.91% $ 11,875 0.74%
-------------- ------------- -------------- ---------
The following table sets forth certain information regarding the changes in
the components of Farmer Mac's net interest income for the periods indicated.
For each category, information is provided on changes attributable to changes in
volume (change in volume multiplied by old rate) and changes in rate (change in
rate multiplied by old volume). Combined rate/volume variances, the third
element of the calculation, are allocated based on their relative size.
Six Months Ended June 30, 2002
Compared to Six Months Ended
June 30, 2001
-------------------------------------------
Increase/(Decrease) Due to
-------------------------------------------
Rate Volume Total
-------------- -------------- -------------
(in thousands)
Income from interest-earning assets
Cash and cash equivalents $ (7,525) $ (1,475) $ (9,000)
Investments (9,890) 2,031 (7,859)
Loans & Farmer Mac guaranteed securities (10,557) 11,307 750
-------------- ------------- ------------
Total (27,972) 11,863 (16,109)
Expense from interest-bearing liabilities (31,048) 10,438 (20,610)
-------------- ------------- ------------
Change in net interest income $ 3,076 $ 1,425 $ 4,501
-------------- ------------- ------------
Other Income. Other income, which is comprised of guarantee fee income and
miscellaneous income, totaled $5.1 million for second quarter 2002 compared to
$3.8 million for the same period in 2001. Guarantee fee income, the largest
component of other income, was $4.7 million for second quarter 2002, compared to
$3.7 million for second quarter 2001. The relative increase in guarantee fee
income reflects an increase in the average balance of outstanding guarantees.
Excluding the effects of the adoption of SFAS 140 that reclassified $0.7 million
of guarantee fee income as interest income, guarantee fees for second quarter
2002 would have been $5.4 million. The difference or "spread" between the cost
of Farmer Mac's debt funding for loans and AMBS held on its books and the yield
on those assets is composed of one component that compensates for credit risk,
which would continue to be received by Farmer Mac as a guarantee fee if the
assets were sold and another component that compensates for interest rate risk,
which would not typically continue to be received by Farmer Mac(except to the
extent attributable to a retained interest-only strip) if the asset were sold.
Miscellaneous income was $368,000 for second quarter 2002, compared to $116,000
for second quarter 2001.
Expenses. During second quarter 2002, operating expenses totaled $3.0
million, compared to $2.8 million for second quarter 2001. The increase in
operating expenses in second quarter 2002 primarily reflects an increase in
legal and consulting fees. Farmer Mac expects that legal and consulting fees
will continue at an increased level approximately $300,000 to $400,000 per
quarter above the prior level until the effects of certain inaccurate and
misleading publicity about Farmer Mac have dissipated, which we believe will not
occur until sometime after the GAO completes and releases its report of its
review of Farmer Mac. At this time, we are not certain when the GAO will
complete or release its report. Operating expenses as a percentage of operating
revenues were 22 percent for second quarter 2002, compared to 28 percent for
second quarter 2001.
Farmer Mac's provision for losses was $2.0 million for second quarter 2002,
compared to $1.4 million for the same period in 2001. As of June 30, 2002,
Farmer Mac's reserve for losses totaled $18.3 million, or 0.41 percent of
outstanding Post-1996 Act loans and AMBS, compared to $15.9 million (0.45
percent) and $13.2 million (0.43 percent) as of December 31, 2001 and June 30,
2001, respectively.
The provision for income taxes totaled $2.6 million for second quarter 2002
compared to $2.1 million for the same period in 2001. Farmer Mac's effective tax
rate for second quarter 2002 was 30.1 percent, compared to 35.5 percent for
2001. The reduction in the effective tax rate reflects the effects of certain
tax-advantaged investment securities.
Extraordinary Gain. During second quarter 2002, Farmer Mac recognized a net
after-tax extraordinary gain of $0.6 million resulting from the repurchase of
$18.9 million of outstanding Farmer Mac debt. Farmer Mac repurchases debt as
market opportunities arise as part of its interest rate risk management program.
Business Volume. The following table sets forth the amount of loans
purchased or guaranteed, and AMBS issued during the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -------------------------------
2002 2001 2002 2001
-------------- ------------ -------------- --------------
(in thousands)
Purchase and guarantee volume:
Farmer Mac I
Loans & AMBS $ 551,690 $ 85,439 $ 626,565 $ 134,039
LTSPC 280,904 499,508 619,725 549,203
Farmer Mac II 57,769 57,012 96,923 104,719
-------------- ------------ -------------- --------------
Total loans purchased or
guaranteed $ 890,363 $641,959 $ 1,343,213 $ 787,961
-------------- ------------ -------------- --------------
AMBS issuances:
Retained $ - $ - $ - $ 33,932
Sold 29,342 18,373 29,342 50,813
-------------- ------------ -------------- --------------
Total AMBS issuances $ 29,342 $ 18,373 $ 29,342 $ 84,745
-------------- ------------ -------------- --------------
See "Overview" above for a discussion regarding loans purchased and
guaranteed by Farmer Mac.
Indicators of future loan purchase and guarantee volume (but not of LTSPC,
swap or bulk purchase volume) in the immediately succeeding reporting period
include outstanding commitments to purchase loans and the total balance of loans
submitted for approval or approved but not yet purchased. Many 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 as
required thereunder, Farmer Mac requires the seller to pay a fee to modify,
extend or cancel the commitment. As of June 30, 2002, outstanding commitments to
purchase Farmer Mac I loans totaled $15.6 million, compared to $15.9 million as
of June 30, 2001. Of the total Farmer Mac I commitments outstanding as of June
30, 2002 and 2001, $10.6 million and $10.0 million, respectively, were mandatory
commitments. Loans submitted for approval or approved but not yet committed to
purchase totaled $86.1 million as of June 30, 2002, compared to $160.0 million
as of June 30, 2001. 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 market where none previously existed. The events of recent months
have begun to have a dampening effect on Farmer Mac's business prospects over
the near term, which the Corporation expects will be ameliorated by the issuance
of the GAO report and other actions Farmer Mac is taking to ensure that
Congress, agricultural lenders and other interested parties understand better
the integrity, safety and soundness of Farmer Mac.
Balance Sheet Review
During the six month period ended June 30, 2002, total assets increased by
$620.4 million, with increases in program assets (Farmer Mac guaranteed
securities and loans) of $602.7 million which are attributable to a bulk loan
purchase in April 2002 of $489.3 million and other Farmer Mac I and Farmer Mac
II purchases. For further information regarding both on- and off-balance sheet
guaranteed securities, see "Supplemental Information" below. Similar to the
increase in total assets during the period, total liabilities increased by
$569.8 million from December 31, 2001 to June 30, 2002.
Average return on common equity, excluding the effects of Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, SFAS 133 and the extraordinary gain, was 16.9
percent for second quarter 2002, compared to 13.8 percent for second quarter
2001.
As of June 30, 2002, Farmer Mac's core capital totaled $176.2 million,
compared to $126.0 million as of December 31, 2001. As of June 30, 2002, the
actual core capital balance exceeded Farmer Mac's statutory minimum capital
requirement by approximately $45.8 million.
The FCA issued its final risk-based capital regulation for Farmer Mac on
April 12, 2001 and the Corporation was required to meet the risk-based capital
standards beginning on May 23, 2002. We have maintained a dialogue with FCA
regarding the application of the regulation and the complex underlying economic
model. Farmer Mac is in compliance with the risk-based capital standards under
the regulation, and we are confident that Farmer Mac will continue to be in
compliance.
The first application after the effective compliance date of the definitive
risk-based capital stress test promulgated by the FCA ("RBC test") showed that
Farmer Mac's actual regulatory capital of $194.5 million was $114.4 million in
excess of the $80.1 million risk-based capital requirement as of June 30, 2002.
That RBC requirement was also $50.3 million below the minimum capital
requirement of $130.4 million. The relevant measure for the RBC test is
regulatory capital, which under the regulatory methodology is core capital plus
loss reserves. Although the RBC test results show capital requirements below the
statutory minimum, Farmer Mac is required to hold the higher of the statutory
minimum capital requirement or the amount required to pass the RBC test.
Risk Management
Interest-Rate Risk. 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 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.
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
for Farmer Mac's current portfolio of fixed rate and adjustable rate mortgage
assets, Farmer Mac uses a mix of short-term Discount Notes, callable and
non-callable fixed rate Medium-Term Notes and short-term Discount Notes swapped
to callable and non-callable fixed rates. 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.
Cash and cash equivalents mature within three months and are match-funded
with discount notes having similar maturities. Investment securities consist
predominantly of floating rate securities that reprice within one year. Floating
rate investments are funded using a series of discount note issuances. Each
successive Discount Note issuance matures on the corresponding repricing date of
the related investment.
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). Farmer
Mac manages the interest-rate risk related to such loans, and the AMBS to be
issued or 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. Farmer Mac uses GSE forward sale contracts to reduce
Farmer Mac's interest-rate exposure to changes in both Treasury rates and AMBS
and debt spreads.
One method Farmer Mac uses to monitor its exposure to interest-rate risk is
to measure the sensitivity of its market value of equity ("MVE") to shifts of
the U.S. Treasury yield curve. MVE reflects the present value of all future cash
flows from on- and off-balance sheet assets, liabilities and financial
derivatives marked to market at current interest rates. The following schedule
summarizes the results of Farmer Mac's MVE sensitivity analysis as of June 30,
2002 and December 31, 2001 to an immediate and instantaneous parallel shift of
the yield curve.
Percentage Change in MVE from Base Case
---------------------------------------
Interest Rate Scenario June 30, 2002 December 31, 2001
---------------------- ----------------- ---------------------
+ 300 bp 7.7% -1.3%
+ 200 bp 5.9% -0.1%
+ 100 bp 3.6% 0.6%
- 100 bp -5.4% -2.4%
- 200 bp -12.0% -6.4%
- 300 bp N/A* -16.2%
* As of June 30, 2002, a -300 bp parallel shift of the
U.S. Treasury yield curve produced negative interest
rates for maturies of 2 years and shorter.
MVE analyses demonstrate the effectiveness of Farmer Mac's asset-liability
match over the life of its assets and liabilities on a present value basis.
Net Interest Income ("NII") sensitivity, a shorter-term measure of interest
rate risk, demonstrates a similar lack of exposure to interest rate movements.
As of June 30, 2002, an upward parallel shift of the yield curve of 100 basis
points would increase twelve-month NII by 9.4 percent, while a downward parallel
shift of 100 basis points would decrease twelve-month NII by 8.6 percent. Farmer
Mac also measures the sensitivity of both MVE and NII to a variety of
non-parallel interest rate shocks, including steepening and flattening of the
yield curve. Farmer Mac's MVE and NII have been consistently less sensitive to
these non-parallel shocks than to the parallel shocks of the yield curve. Farmer
Mac's effective duration gap, a static measure of interest-rate risk, was minus
2.9 months as of June 30, 2002, indicating that Farmer Mac has less sensitivity
to increases in interest rates than to decreases in interest rates.
The economic effects of derivatives, including interest rate swaps, are
included in the MVE analyses. Farmer Mac enters into contracts in which the
Corporation pays fixed rates of interest and receives floating rates of interest
from counterparties. These "floating-to-fixed interest rate swaps" are used to
adjust the characteristics of short-term debt to match more closely the cash
flow and duration characteristics of longer-term reset and fixed rate mortgage
assets, thereby reducing interest rate risk, and also to derive an overall lower
effective fixed rate cost of borrowing than would otherwise be available in the
conventional debt market. As of June 30, 2002, Farmer Mac had $675.1 million
notional amount of floating-to-fixed interest rate swaps for terms ranging from
2 to 15 years.
Farmer Mac uses derivative instruments as an end-user for hedging purposes,
not for trading or speculative purposes. When financial derivatives meet the
specific hedge criteria of SFAS 133, they are accounted for as either fair value
hedges or cash flow hedges. Financial derivatives that do not satisfy those
hedge criteria are not accounted for as hedges and changes in the fair values of
those financial derivatives are reported in income or expense.
All of Farmer Mac's derivative transactions are conducted through standard,
collateralized agreements that limit Farmer Mac's potential credit exposure to
any counterparty. As of June 30, 2002, Farmer Mac had no uncollateralized net
exposure to any counterparty.
Credit Risk. The outstanding principal balance of loans held, LTSPCs and
loans underlying Farmer Mac Guaranteed Securities as of June 30, 2002 and
December 31, 2001 is summarized in the table below.
Farmer Mac On- and Off-Balance Sheet Farmer Mac Guarantees
-------------------------------------------------------------
June 30, 2002 December 31, 2001
--------------- -------------------
(in thousands)
Farmer Mac I:
Post-1996 Act $ 4,517,834 $ 3,542,976
Pre-1996 Act 37,873 48,979
Farmer Mac II 617,503 595,156
--------------- -------------------
Total $ 5,173,210 $ 4,187,111
--------------- -------------------
Farmer Mac maintains a reserve for losses to cover estimated probable
losses on loans held and its on- and off-balance sheet guarantees, including
loans underlying Post-1996 Act Farmer Mac I Securities and LTSPCs. In estimating
probable losses on loans held and on- and off-balance sheet guarantees,
management considers economic conditions, geographic and agricultural commodity
concentrations, the credit profile of the portfolio, delinquency trends and
historical charge-off and recovery activity. The reserve is increased through
periodic provisions charged to expense and reduced by charge-offs for actual
loan losses, net of recoveries.
Farmer Mac's provision for losses was $2.0 million for second quarter 2002,
compared to $2.0 million for first quarter 2002 and $1.4 million for second
quarter 2001. As of June 30, 2002, Farmer Mac's reserve for losses totaled $18.3
million, or 41 basis points of the outstanding Post-1996 Act loans and AMBS,
compared to $15.9 million (45 basis points) as of December 31, 2001 and $13.2
million (43 basis points) as of June 30, 2001.
The following schedule summarizes the changes in the reserve for losses for
the three months and six months ended June 30, 2002 and 2001:
Three Months Ended Six Months Ended
June 30 June 30,
----------------------------------------------
2002 2001 2002 2001
----------- ------------ ----------- ---------
(in thousands)
Beginning balance $ 17,017 $ 12,386 $ 15,884 $ 11,323
Provision for losses 2,022 1,394 4,038 2,777
Net charge-offs (712) (600) (1,595) (920)
------------ ----------- ---------- ----------
Ending balance $ 18,327 $ 13,180 $ 18,327 $ 13,180
------------ ----------- ---------- ----------
As of June 30, 2002, Farmer Mac I Post-1996 Act loans, both on- and
off-balance sheet, that were 90 days or more past due, in foreclosure, in
bankruptcy and REO (real estate owned as a result of foreclosure) totaled $65.2
million and represented 1.45 percent of the principal balance of all Post-1996
Act loans(1), compared to $87.1 million (2.32 percent) as of March 31, 2002,
$58.3 million (1.70 percent) as of December 31, 2001, and $53.1 million (1.72
percent) as of June 30, 2001. (Farmer Mac assumes 100 percent of the credit risk
on Post-1996 Act loans; pre-1996 Act loans are supported by mandatory 10 percent
subordinated interests that mitigate Farmer Mac's credit exposure.) From quarter
to quarter, Farmer Mac anticipates fluctuations in the delinquencies, both in
dollars and as a percentage of the outstanding portfolio, with higher levels
likely at the end of the first and third quarters of each year due to the
semi-annual payment characteristics of most Farmer Mac loans. The year-over-year
increase in dollars is reflective of the continued maturation of a significant
segment of Farmer Mac's portfolio of guarantees into its peak default years. The
year-over-year decline in the ratio of delinquencies to outstanding guarantees
is reflective of the growth of the portfolio.
_____________________________________
1 The delinquency rate as of June 30, 2002 was initially reported as 1.35
percent in the Corporation's Current Report on Form 8-K filed with the SEC July
19, 2002. Subsequent to that date, the Corporation identified an additional $4.8
million of loans that should have been reported as bankruptcies, which increases
the delinquency rate as of June 30, 2002 to 1.45 percent. All are sufficiently
collateralized and, as such, no change has been made to the Corporation's
specific reserves. These loans were correctly reported as bankruptcies in prior
reporting periods.
Post-1996 Act Loan Delinquencies
- ----------------------------------------------------------------------------------
---------------- ------------------------- ------------
As of: Delinquencies Outstanding Guarantees Percentage
---------------- ------------------------- ------------
(dollars in thousands)
June 30, 2002 $ 65,196 $ 4,489,735 1.45%
March 31, 2002 87,097 3,754,171 2.32%
December 31, 2001 58,279 3,428,176 1.70%
September 30, 2001 71,686 3,318,796 2.16%
June 30, 2001 53,139 3,089,460 1.72%
March 31, 2001 67,134 2,562,374 2.62%
On a monthly basis, Farmer Mac conducts a loan-by-loan analysis of its
delinquencies to assess the value of the collateral supporting each individual
loan relative to the total amount due on the loan, including principal, interest
and advances. In the event that the updated or discounted collateral value does
not support the total amount due, Farmer Mac specifically allocates reserves to
the loan. Farmer Mac charges off losses against the reserve for losses when
management believes a loss has occurred, but no later than the time at which the
Corporation takes possession of the property. As of June 30, 2002, Farmer Mac's
loan-by-loan analysis of its $65.2 million of delinquent loans and their updated
or discounted collateral values indicated that $14.4 million had insufficient
collateral to cover the loan balance, accrued interest and expenses. Farmer Mac
has specifically allocated $2.8 million of reserves to those
under-collateralized loans. Farmer Mac's loan-by-loan analyses indicated that
the remaining $50.8 million of delinquent loans were adequately collateralized,
based on updated or discounted collateral values, and that the allocation of
specific reserves to those loans was not necessary. As of June 30, 2002, after
the allocation of specific reserves to under-collateralized loans, Farmer Mac
had additional non-specific or general reserves of $15.5 million, bringing total
reserves to $18.3 million. The following table summarizes the Corporation's
delinquencies and reserve for losses:
Farmer Mac Post-1996 Act Delinquencies and Reserve for Losses
- ---------------------------------------------------------------------------------------------------------------
As of June 30, 2002 As of December 31, 2001
------------------------------------ -----------------------------------
(in thousands)
Specific Specific
Reserve Reserve
Delinquencies for Losses Delinquencies for Losses
-------------- ----------- --------------- -----------
Loans 90 days or more past due $ 18,790 $ 138 $ 24,701 $ 482
Loans in Foreclosure 16,107 2,078 16,701 1,940
Loans in Bankruptcy 26,860 615 12,505 1,028
REO 3,439 - 2,457 -
--------------- ------------ --------------- -----------
$ 65,196 $ 2,831 $ 58,279 $ 3,450
--------------- ---------------
Reserve Reserve
for Losses for Losses
------------- -----------
Specific Reserves $ 2,831 $ 3,450
General Reserves 15,496 12,434
------------- -----------
Total Reserves $18,327 $15,884
------------- -----------
Based on Farmer Mac's loan-by-loan analyses, loan collection experience,
and continuing provisions for the reserve for losses, Farmer Mac believes that
ongoing losses will be covered adequately by the reserve for losses. In certain
collateral liquidation scenarios, Farmer Mac may recover amounts previously
charged off or incur additional losses, if liquidation proceeds vary from
previous estimates. During second quarter 2002, Farmer Mac charged off $902,000
in losses against the reserve for losses and recovered $190,000 from previously
charged off losses, for net charge-offs of $712,000.
As of June 30, 2002, the weighted-average original loan-to-value ratio for
all Post-1996 Act loans was 49 percent, and the weighted-average original
loan-to-value ratio for delinquent loans was 57 percent. The following table
summarizes the Post-1996 Act delinquencies by original loan-to-value ratio
(calculated by dividing the original loan principal balance by the original
appraised value):
As of June 30, 2002
- ----------------------------------------------------
(dollars in thousands)
Original LTV Ratio Delinquencies Percentage
- --------------------- --------------- ------------
0.00% to 40.00% $ 5,657 9%
40.01% to 50.00% 9,301 14%
50.01% to 60.00% 25,873 40%
60.01% to 70.00% 23,082 35%
70.01% to 80.00% 1,283 2%
--------------- ------------
Total $ 65,196 100%
--------------- -----------
The following table segregates the Post-1996 Act loan portfolio,
delinquencies and specific reserve for losses as of June 30, 2002 by year of
origination, geographic region and commodity.
Farmer Mac Post-1996 Act Loan Delinquencies and Specific Reserve for Losses
- ------------------------------------------------------------------------------------------------------
Distribution of Specific
Outstanding Outstanding Delinquencies Delinquency Reserve
Guarantees Guarantees (1) Rate for Losses
---------------- ------------- --------------- ------------- ------------
(dollars in thousands)
By year of origination:
Before 1994 16% $ 722,068 $ 2,169 0.30% $ -
1994 4% 167,325 347 0.21% -
1995 3% 153,527 4,254 2.77% -
1996 8% 360,862 15,618 4.33% -
1997 9% 414,808 13,724 3.31% 910
1998 16% 696,792 13,485 1.94% 458
1999 17% 768,622 12,490 1.61% 1,300
2000 9% 423,335 3,022 0.71% 163
2001 13% 575,172 87 0.02% -
2002 5% 207,224 - 0.00% -
---------------- ------------- -------------- ------------ ------------
Total 100% $4,489,735 $ 65,196 1.45% $ 2,831
---------------- ------------- -------------- ------------
By geographic region (2):
Northwest 26% $1,185,786 $ 40,325 3.40% $ 2,015
Southwest 46% 2,064,759 19,381 0.94% 749
Mid-North 12% 518,319 3,287 0.63% -
Mid-South 5% 212,521 621 0.29% 26
Northeast 5% 225,843 1,350 0.60% 7
Southeast 6% 282,507 232 0.08% 34
---------------- ------------- - --------------------------- ------------
Total 100% $4,489,735 $ 65,196 1.45% $ 2,831
---------------- ------------- -------------- ------------
By commodity:
Crops 45% $2,041,385 $ 24,605 1.21% $ 399
Permanent plantings 29% 1,305,499 29,456 2.26% 2,178
Livestock 20% 901,681 9,746 1.08% 187
Part-time farm 4% 198,711 1,389 0.70% 67
Other 2% 42,459 - 0.00% -
---------------- ------------- - --------------------------- ------------
Total 100% $4,489,735 $ 65,196 1.45% $ 2,831
---------------- ------------- -------------- ------------
(1) Includes loans 90 days or more past due, in foreclosure, in bankruptcy, and
REO.
(2) Geographic regions - Northwest (ID, MT, ND, NE, OR, SD, WA, WY); Southwest
(AZ, CA, CO, HI, NM, NV, UT); 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); and Southeast (AL, AR, FL, GA, LA, MS, SC).
The following table presents Farmer Mac's current delinquencies, cumulative
charge-offs and current specific reserves relative to the cumulative original
guaranteed principal balance of all Post-1996 Act Loans. This information is
presented by cohort year (origination date of the loan), geographic region and
commodity. The purpose of this information is to present Farmer Mac's
delinquencies and cumulative charge-offs relative to the Corporation's original
guarantees--which include both newly originated and seasoned loans--and to
present information regarding loans underlying Farmer Mac's guarantee that have
generated losses or are collateral deficient relative to original guarantees.
Farmer Mac Post-1996 Act Loan Delinquencies, Chargeoffs and Specific Reserve for Losses
Relative to all Cumulative Original Guarantees
- ------------------------------------------------------------------------------------------------------------------------------
Combined
Cumulative Cumulative Current Charge-off
Net Original Charge-off Specific and Specific
Charge-offs Guarantees Rate Reserves Reserve Rate
------------- ------------ ---------------- ---------- --------------
(dollars in thousands)
By year of origination:
Before 1994 $ - $ 1,664,389 0.00% $ - 0.00%
1994 - 286,541 0.00% - 0.00%
1995 200 244,834 0.08% - 0.08%
1996 842 517,644 0.16% - 0.16%
1997 1,275 554,222 0.23% 910 0.39%
1998 1,762 895,426 0.20% 458 0.25%
1999 - 912,977 0.00% 1,300 0.14%
2000 - 509,003 0.00% 163 0.03%
2001 - 616,799 0.00% - 0.00%
2002 - 214,843 0.00% - 0.00%
------------- ------------ ---------------- ---------- --------------
Total $ 4,079 $ 6,416,678 0.06% $ 2,831 0.11%
------------- ------------ ---------------- ---------- --------------
By geographic region (2):
Northwest $ 2,460 $ 1,853,182 0.13% $ 2,015 0.24%
Southwest 1,619 2,780,625 0.06% 749 0.09%
Mid-North - 722,230 0.00% - 0.00%
Mid-South - 277,804 0.00% 26 0.01%
Northeast - 339,523 0.00% 7 0.00%
Southeast - 443,314 0.00% 34 0.01%
------------- ------------ ---------------- ---------- --------------
Total $ 4,079 $ 6,416,678 0.06% $ 2,831 0.11%
------------- ------------ ---------------- ---------- --------------
By commodity:
Crops $ 1,352 $ 2,879,625 0.05% $ 399 0.06%
Permanent plantings 2,544 1,802,039 0.14% 2,178 0.26%
Livestock 183 1,369,739 0.01% 187 0.03%
Part-time farm - 271,691 0.00% 67 0.02%
Other - 93,584 0.00% - 0.00%
------------- ------------ ---------------- ---------- --------------
Total $ 4,079 $ 6,416,678 0.06% $ 2,831 0.11%
------------- ------------ ---------------- ---------- --------------
(1) Includes loans 90 days or more past due, in foreclosure, in bankruptcy, and
REO.
(2) Geographic regions - Northwest (ID, MT, ND, NE, OR, SD, WA, WY); Southwest
(AZ, CA, CO, HI, NM, NV, UT); 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); and Southeast (AL, AR, FL, GA, LA, MS, SC).
An analysis of Farmer Mac's actual losses and identified specific
collateral deficiencies within the portfolio (by origination year) indicates
that Farmer Mac has experienced peak loss years as loans have aged between their
third and fifth years subsequent to origination, regardless of the year Farmer
Mac issued its guarantee. As a consequence of the combination of principal
amortization and collateral value appreciation, there are no known collateral
deficiencies for any individual loans in the portfolio that were originated
prior to 1997. While Farmer Mac expects certain loans that have aged past their
fifth year may become delinquent and possibly default, Farmer Mac does not
anticipate significant collateral shortfalls on any such loans.
Analysis of the portfolio by its geographic distribution indicates that
losses and collateral deficiencies have been and remain most prevalent in the
loans concentrated in the Northwest. This is consistent with the corresponding
commodity analysis which indicates that Farmer Mac has experienced higher loss
and collateral deficiency rates in its loans classified as permanent plantings
(many of which are located in the Northwest). Most of the loans classified as
permanent plantings do not receive significant government support and are
therefore more susceptible to adverse commodity-specific economic trends.
Further, as adverse economic conditions persist for a particular commodity that
is a long-term improvement on the land, such as permanent plantings, the
prospective sale value of the land is likely to decrease and the related loans
may become under-collateralized. Farmer Mac anticipates that one or more
particular commodity groups will be under economic pressure at any one time and
actively manages its portfolio to mitigate concentration risks while preserving
the ability to meet the financing needs of all commodity groups.
Farmer Mac's methodologies for pricing its guarantee fee, managing credit
risks and providing adequate loss reserves consider all of the foregoing factors
and information.
Liquidity and Capital Resources
Debt Issuances. Farmer Mac funds its program operations primarily through
the issuance of debt obligations of various maturities in the public capital
markets. Farmer Mac's debt obligations consist of Discount Notes and Medium-Term
Notes ("MTNs" and collectively, "Notes"), issued to obtain funds principally to
cover the costs of purchasing and holding Qualified Loans and securities
(including Farmer Mac Guaranteed Securities). Farmer Mac also issues Notes to
obtain funds for investments, transaction costs and, guarantee payments. The
Corporation's Notes are obligations of Farmer Mac only: are not rated by any
rating agency; and the interest and principal thereon are not guaranteed by and
do not constitute debts or obligations of the Farm Credit Administration or the
United States or any agency or instrumentality of the United States other than
Farmer Mac. Farmer Mac is an institution of the Farm Credit System (a "System
Institution"), but 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. Income on
Farmer Mac's Notes has no tax exemption under federal law from federal, state or
local taxation.
Farmer Mac's Board of Directors has authorized the issuance of up to $5.0
billion of Notes (of which $3.7 billion was outstanding as of June 30, 2002),
subject to periodic review of the adequacy of that level relative to Farmer
Mac's borrowing requirements. Farmer Mac invests the proceeds of such issuances
in program mortgage assets and non-program investment assets in accordance with
guidelines established by its Board of Directors.
Liquidity. 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 liquidity and pricing efficiency of
its Notes and AMBS securities transactions and so improve the mortgage rates
available to farmers, ranchers and rural homeowners. During second quarter 2002,
Farmer Mac continued its strategy of using its liquidity investment portfolio to
facilitate increasing its ongoing presence in the capital markets, because
Farmer Mac's mortgage purchase programs do not currently necessitate daily debt
issuance. To meet investor demand for daily presence in the capital markets,
Farmer Mac issues Discount Notes in maturities ranging from one day to
approximately 90 days and invests the proceeds not needed for program asset
purchases in highly rated securities. Investments are predominantly short-term
money market securities with maturities closely matched to the Discount Note
maturities and floating rate securities with reset terms closely matched to the
maturity of the Discount Notes. The positive spread earned from these
investments enhances the net interest income Farmer Mac earns, thereby improving
the net yields at which Farmer Mac will purchase mortgages from lenders who may
pass that benefit to farmers, ranchers and rural homeowners through the Farmer
Mac programs. The current Board guidelines 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 and municipal issuers; asset-backed securities; and corporate money
market funds.
The funding and liquidity needs of Farmer Mac's business programs are
driven by the purchase and retention of Qualified Loans, the maturities of Notes
and payment of principal and interest on Farmer Mac Guaranteed Securities.
Farmer Mac's primary sources of funds to meet these needs are issuances of new
Notes, principal and interest payments and ongoing guarantee fees received on
mortgages underlying Farmer Mac Guaranteed Securities and the Corporation's net
operating cash flows.
As a result of Farmer Mac's regular issuance of Notes and its status as a
federally chartered instrumentality of the United States, Farmer Mac has been
able to access the capital markets at favorable rates. Throughout the recent
period of inaccurate and misleading publicity, about the Corporation, Farmer Mac
has maintained regular daily access to the discount note market at rates
comparable to the trading levels of other GSE discount notes. Farmer Mac's
continued ability to access the discount note market at such favorable rates
could be affected by inaccurate and misleading publicity about Farmer Mac or
unusual trading in its securities. Farmer Mac believes such factors have caused
spread levels in secondary market trading of its outstanding MTNs to widen
somewhat, which could affect spread levels of new MTN issues. The foregoing
factors are likely to continue to affect MTN spreads in the near term and cause
Farmer Mac to emphasize floating-to-fixed interest rate swaps, combined with
Discount Note issuance, as a source of fixed-rate funding. While the swap market
provides favorable fixed rates, swap transactions expose Farmer Mac to basis
risk. If the spreads on the Farmer Mac Discount Notes were to increase relative
to LIBOR, Farmer Mac would be exposed to a commensurate reduction on its net
interest yield on the notional amount of its floating-to-fixed interest rate
swaps and other LIBOR-based floating rate assets. Farmer Mac compensates for
this risk by pricing the required net yield on program asset purchases to
reflect the higher cost of MTN issuance versus the savings achieved in the
interest rate swap market.
Farmer Mac's portfolio of cash and cash equivalent investments, comprised
of commercial paper and other short-term money market instruments and floating
rate securities can be drawn upon as necessary for liquidity. As of June 30,
2002, Farmer Mac's cash and cash equivalents and investment securities totaled
$479.6 million and $977.5 million, respectively, a combined 36% of total assets.
As a contingency plan to ensure that Farmer Mac can meet its funding needs
should unforeseen circumstances limit Farmer Mac's ability to issue Notes in the
public capital markets, Farmer Mac maintains arrangements to permit these
investment securities, as well as Farmer Mac's retained portfolio of Guaranteed
Securities, to be sold or pledged for liquidity under repurchase agreements. For
second quarter 2002, exclusive of daily overnight Discount Note issuances that
were invested overnight, the average Discount Note issuance term and re-funding
frequency was approximately 75 days.
Other Matters
On June 26, 2002, the Senate Committee on Agriculture, Nutrition, and
Forestry requested that the GAO conduct an independent analysis of a number of
issues relating to Farmer Mac. The Committee made this request of the GAO in
response to recent misleading reports and speculation about Farmer Mac produced
by certain stock traders, known as "short sellers," who are seeking to depress
the price of Farmer Mac securities for their own gain, and by corresponding
articles by a reporter for a major newspaper. Farmer Mac made it clear that
those reports were flawed and unfounded and welcomed this independent analysis
by the GAO as an opportunity to confirm that Farmer Mac's mission continues to
be met in a financially sound manner.
Farmer Mac is confident that the GAO's analysis will confirm the integrity
and financial stability of the Corporation, as presented in its public financial
disclosures. Farmer Mac expects the GAO report will show that the Corporation is
appropriately and effectively fulfilling its mission to increase the
availability of borrower credit at stable rates, lender liquidity and capital
markets funding in the agricultural sector of the U.S. economy for the benefit
of farmers, ranchers and rural homeowners, lenders participating in Farmer Mac
programs and the investing public.
The GAO report was requested by the Committee specifically to address
Farmer Mac's financial stability; corporate governance; compensation policies;
investment practices; the non-voting status of Farmer Mac's Class C Common
Stock; and the fulfillment of Farmer Mac's Congressionally-established mission.
Farmer Mac looks forward to the GAO report as an opportunity to remove the
confusion that has been cast over the Corporation, so that it may continue its
Congressional mission in a safe and sound manner.
Supplemental Information
The following tables present quarterly and annual information regarding
loan purchases and guarantees and outstanding guarantees.
Farmer Mac Purchases and Guarantees
- -------------------------------------------------------------------------------------------
Farmer Mac I
---------------------------------
Loans & AMBS LTSPC Farmer Mac II Total
------------------ -------------- ----------------- ------------
(in thousands)
For the quarter ended:
June 30, 2002 $ 551,690 $ 280,904 $ 57,769 $ 890,363
March 31, 2002 74,875 338,821 39,154 452,850
December 31, 2001 62,953 237,292 51,056 351,301
September 30, 2001 69,561 246,472 42,396 358,429
June 30, 2001 85,439 499,508 57,012 641,959
March 31, 2001 48,600 49,695 47,707 146,002
For the year ended:
December 31, 2001 266,553 1,032,967 198,171 1,497,691
December 31, 2000 442,246 373,202 193,505 1,008,953
Farmer Mac On- and Off-Balance Sheet Guarantees (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Farmer Mac I
---------------------------------------------
Post-1996 Act
------------------------------
Loans & AMBS (2) LTSPC Pre-1996 Act Farmer Mac II Total Held in Portfolio (3)
---------------- ------------ -------------- --------------- ----------- ----------------------
(in thousands)
As of:
June 30, 2002 $2,180,948 $2,336,886 $ 37,873 $ 617,503 $5,173,210 $2,426,626
March 31, 2002 1,655,485 2,126,485 41,414 592,836 4,416,220 1,899,484
December 31, 2001 1,658,716 1,884,260 48,979 595,156 4,187,111 1,857,232
September 30, 2001 1,605,160 1,731,861 58,813 608,944 4,004,778 1,804,391
June 30, 2001 1,572,800 1,537,061 65,709 579,251 3,754,821 1,763,676
March 31, 2001 1,466,443 1,083,528 72,646 549,003 3,171,620 1,648,896
December 31, 2000 1,615,914 862,804 83,513 517,703 3,079,934 1,581,905
September 30, 2000 1,621,516 707,850 92,536 491,820 2,913,722 1,571,315
June 30, 2000 1,354,623 575,143 100,414 467,352 2,497,532 1,292,359
March 31, 2000 1,310,710 551,423 107,403 387,992 2,357,528 1,268,889
(1) Farmer Mac assumes 100 percent of the credit risk on Post-1996 Act loans.
Pre-1996 Act loans back securities that are supported by unguaranteed
subordinated interests representing approximately 10 percent of the balance
of the loans. Farmer Mac II loans are guaranteed by the USDA.
(2) Periods prior to June 30, 2001 include only AMBS.
(3) Included in total Farmer Mac On- and Off-Balance Sheet guarantees.
Farmer Mac Loans and AMBS Held in Portfolio
- -----------------------------------------------------------------------------------------------------------------
Total
5-to-10-Year 1-Month-to-3-Year Held in
Fixed Rate ARMs & Resets ARMs Portfolio
------------------- ------------------ ---------------------- --------------------
(in thousands)
As of:
June 30, 2002 $ 1,016,997 $ 892,737 $ 516,892 $ 2,426,626
March 31, 2002 751,222 797,780 350,482 1,899,484
December 31, 2001 764,115 790,948 302,169 1,857,232
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Farmer Mac is exposed to market risk attributable to changes in interest
rates. Farmer Mac manages this market risk by entering into various financial
transactions, including 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" for further information regarding Farmer Mac's exposure to
interest-rate risk and strategies to manage such risk. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- -Liquidity and Capital Resources" for further information regarding Farmer Mac's
debt issuance and liquidity risks.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Farmer Mac is not a party to any material pending legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Farmer Mac's 6.40% Cumulative Preferred Stock, Series A issued on
May 6, 2002 and referenced in paragraph below has a preference
over Farmer Mac's Common Stock as to payment of dividends and
upon liquidation.
(c) Farmer Mac is a federally chartered instrumentality of the United
States and its Common Stock is exempt from registration pursuant
to Section 3(a)(2) of the Securities Act of 1933.
Pursuant to Farmer Mac's policy that permits Directors of Farmer
Mac to elect to receive shares of Class C Non-Voting Common Stock
in lieu of their annual cash retainers, on April 25, 2002, Farmer
Mac issued an aggregate of 530 shares of its Class C Non-Voting
Common Stock, at an issue price of $44.50 per share, to the
eleven Directors who elected to receive such stock in lieu of
their cash retainers.
On June 6, 2002, Farmer Mac issued an aggregate of 25,788 shares
of its Class C Non-Voting Common Stock, at an issue price of
$29.10 per share, to the officers of Farmer Mac as incentive
compensation.
During the second quarter of 2002, Farmer Mac granted options
under its 1997 Stock Option Plan to purchase an aggregate of
254,421 shares of Class C Non-Voting Common Stock to employees,
officers and directors. Five hundred of the options granted have
an exercise price of $45.06 per share and 253,921 of the options
granted have an exercise price of $29.10 per share.
On May 6, 2002, Farmer Mac sold 700,000 shares of its 6.40%
Cumulative Preferred Stock, Series A in a public offering
underwritten by Bear, Stearns & Co., Inc. The aggregate offering
price was $35,000,000, with Bear, Stearns & Co., Inc. receiving
$306,250 in underwriting discounts and commissions and Farmer Mac
receiving $34,693,750 in total net proceeds. Like Farmer Mac's
Common Stock, the 6.40% Cumulative Preferred Stock, Series A is
exempt from registration under Section 3(a)(2) of the Securities
Act of 1933 by virtue of Farmer Mac's status as an
instrumentality of the United States.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Farmer Mac's Annual Meeting of Stockholders was held on June 6,
2002.
(b) See paragraph (c)(1) below. In addition to the Directors elected
at the Annual Meeting of Stockholders on June 6, 2002, the
following Directors appointed by the President of the United
States continue to serve as Directors of Farmer Mac:
Charles Eugene Branstool (Chairman)
Lowell L. Junkins
Marilyn Peters
Gordon Clyde Southern
Clyde A. Wheeler, Jr.
President Bush's nominations of Frederick L. Dailey and Grace
Trujillo Daniel to serve on the Board of Directors of Farmer Mac
were confirmed by the United States Senate on August 1, 2002.
These appointments to Farmer Mac's Board will become effective
when Mr. Dailey and Ms. Daniel take their oaths of office to
become Directors of Farmer Mac. President Bush has previously
announced that Mr. Dailey and Ms. Daniel would replace Mr.
Southern and Mr. Wheeler on the Board and that Mr. Dailey would
be designated as Farmer Mac's new Chairman. Farmer Mac is
uncertain when Mr. Dailey and Ms. Daniel will take their oaths of
office and begin to serve as Directors.
(c) (1) Election of Directors:
Class A Nominees
Number of Shares
For Withheld
Dennis L. Brack 692,460 2,200
W. David Hemingway 692,460 2,200
Mitchell A. Johnson 692,460
Charles E. Kruse 692,260 2,400
Peter T. Paul 692,260
Class B Nominees
Number of Shares
For Withheld
Paul A. DeBriyn 415,592 75,759
Kenneth E. Graff 460,615 30,736
James A. McCarthy 415,592 75,759
John G. Nelson III 415,592 75,759
John Dan Raines 415,692 75,659
(2) Selection of Independent Auditors (Deloitte & Touche LLP):
Class A Stockholders
Number of Shares
----------------
For 690,260
Against 800
Abstain 3,600
Class B Stockholders
Number of Shares
----------------
For 491,101
Against 250
Abstain 0
(d) Not applicable.
Item 5. Other Information
None.
Item 6. 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 By-Laws 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 August 14, 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 August 14, 1996).
+* 10.1.3- Amended and Restated 1997 Incentive Plan (Form 10-Q filed August
14, 1997).
+* 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).
+* 10.2.2 - Amendment to Employment Contract dated as of June 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 June 1, 1994 to Employment Contract
between Henry D. Edelman and the Registrant (Previously filed as Exhibit
10.6 to Form 10-Q filed August 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 June 13, 1996 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed August 14,
1996).
* Incorporated by reference to the indicated prior filing.
** Filed herewith
+ Management contract or compensatory plan.
+* 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 June 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).
+* 10.2.10- Amendment No. 10 dated as of June 7, 2001 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed August 14,
2001).
+** 10.2.11- Amendment No. 11 Dated as of June 6, 2002 to Employment Contract
between Henry D. Edelman and the Registrant.
+* 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).
+* 10.3.3 - Amendment to Employment Contract dated as of June 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 June 1, 1993 to Employment Contract between
Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.10 to
Form 10-K filed March 31, 1994).
* Incorporated by reference to the indicated prior filing.
** Filed herewith
+ Management contract or compensatory plan.
+* 10.3.5 - Amendment No. 5 dated as of June 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 June 1, 1995 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14,
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 June 13, 1996 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14,
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 June 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).
+* 10.3.13- Amendment No. 13 dated as of June 7, 2001 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14,
2001).
+** 10.3.14- Amendment No.14 dated as of June 6, 2002 to Employment Contract
between Nancy E. Corsiglia and the Registrant.
+* 10.4 - 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).
* Incorporated by reference to the indicated prior filing.
** Filed herewith
+ Management contract or compensatory plan.
+* 10.4.1 - Amendment No. 1 dated as of June 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).
+* 10.4.2 - Amendment No. 2 dated as of June 3, 1999 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed August 12,
1999).
+* 10.4.3 - Amendment No. 3 dated as of June 1, 2000 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed August 14,
2000).
+* 10.4.4 - Amendment No. 4 dated as of June 7, 2001 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed August 14,
2001).
+** 10.4.5- Amendment No. 5 dated as of June 6, 2002 to Employment Contract
between Tom D. Stenson and the Registrant.
+* 10.5 - Employment Contract dated February 1, 2000 between Jerome G. Oslick
and the Registrant (Previously filed as Exhibit 10.6 to Form 10-Q filed May
11, 2000).
+* 10.5.1- Amendment No. 1 dated as of June 1, 2000 to Employment Contract
between Jerome G. Oslick and the Registrant (Previously filed as Exhibit
10.6.1 to Form 10-Q filed August 14, 2000).
+* 10.5.2- Amendment No. 2 dated as of June 7, 2001 to Employment Contract
between Jerome G. Oslick and the Registrant (Previously filed as Exhibit
10.6.2 to Form 10-Q filed August 14, 2001).
+** 10.5.3- Amendment No. 3 dated as of June 6, 2002 to Employment Contract
between Jerome G. Oslick and the Registrant.
* 10.6 - Lease Agreement, dated June 28, 2001 between EOP - Two Lafayette,
L.L.C. and the Registrant (Previously filed as Exhibit 10.10 to Form 10-K
filed March 27, 2002).
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).
* Incorporated by reference to the indicated prior filing.
** Filed herewith
+ Management contract or compensatory plan.
(b) Reports on Form 8-K.
On April 3, 2002, the Registrant filed a Current Report on Form 8-K to
report a change in the Registrant's certifying accountant.
On April 4, 2002, the Registrant filed an amended Current Report on Form
8-K/A to clarify the period during which there had been no disagreements between
the Registrant and its former certifying accountant.
On April 19, 2002, the Registrant filed a Current Report on Form 8-K that
attached a press release announcing the Registrant's financial results for first
quarter 2002.
On April 29, 2002, the Registrant filed a Current Report on Form 8-K that
attached a press release clarifying inaccurate information contained in a news
article about the Registrant.
On May 7, 2002, the Registrant filed a Current Report on Form 8-K that
attached a press release announcing the Registrant's issuance of $35 million of
Preferred Stock.
On May 24, 2002, the Registrant filed a Current Report on Form 8-K that
attached a press release announcing that the Registrant had asked the New York
Stock Exchange to investigate unusual trading activity in its stock.
On May 30, 2002, the Registrant filed a Current Report on Form 8-K that
attached a press release announcing a conference call on May 31, 2002 for
investors in its stock.
On June 3, 2002, the Registrant filed a Current Report on Form 8-K that
attached a press release announcing that the recording of the May 31, 2002
investor conference call would be available on the Registrant's website through
the close of business on Friday, June 7, 2002.
On June 13, 2002, the Registrant filed a Current Report on Form 8-K that
reported the declaration of a dividend on the Registrant's Preferred Stock.
On June 25, 2002, the Registrant filed a Current Report on Form 8-K that
reported the Registrant's statement in response to inquiries from the press
regarding a news article about the Registrant.
On June 26, 2002, the Registrant filed a Current Report on Form 8-K that
attached a letter from the United States Senate Committee on Agriculture,
Nutrition, and Forestry requesting that the U. S. General Accounting Office
conduct an independent analysis of the Registrant.
On June 26, 2002, the Registrant filed a Current Report on Form 8-K that
attached a press release issued in response to a Senate Agriculture Committee
request that the U.S. General Accounting Office conduct an independent analysis
of the Registrant.
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
August 14, 2002
By: /s/ Henry D. Edelman
--------------------------------------------------
Henry D. Edelman
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Nancy E. Corsiglia
--------------------------------------------------
Nancy E. Corsiglia
Vice President - Finance
(Principal Financial Officer)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
EXHIBITS
TO
FORM 10-Q
FOR THE PERIOD ENDING JUNE 30, 2002
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
10.2.11 - Amendment No. 11 dated as of June 6, 2002 to 43
Employment Contract between Henry D. Edelman
and the Registrant.
10.3.14 - Amendment No. 14 dated as of June 6, 2002 to 44
Employment Contract between Nancy E. Corsiglia
and the Registrant.
10.4.5 - Amendment No. 4 dated as of June 6, 2002 to 45
Employment Contract between Tom D. Stenson
and the Registrant.
10.5.3 - Amendment No. 3 dated as of June 6, 2002 to 46
Employment Contract between Jerome G. Oslick
and the Registrant.
Exhibit 10.2.11
AMENDMENT NO. 11 TO EMPLOYMENT CONTRACT
agreed, as of the 6th day of June 2002, between the Federal Agricultural
Mortgage Corporation (FAMC) and Henry D. Edelman (you), that the existing
employment contract between the parties hereto, dated May 5, 1989, as amended by
Employment Agreement Amendment No. 1 dated January 10, 1991, Amendment to
Employment Agreement dated as of June 1, 1993, Amendment No. 3 to Employment
Contract dated as of June 1, 1994, Amendment No. 4 to Employment Contract dated
as of February 8, 1996, Amendment No. 5 to Employment Contract dated as of June
13, 1996, Amendment No. 6 to Employment Contract dated as of August 7, 1997,
Amendment No. 7 to Employment Contract dated as of June 4, 1998, Amendment No. 8
to Employment Contract dated as of June 3, 1999, Amendment No. 9 to Employment
Contract dated as of June 1, 2000 and Amendment No. 10 to Employment Contract
dated as of June 7, 2001 (collectively, the Agreement), be and hereby is amended
as follows:
Sections 1, 4 (a) and 9 (a) (iii) of the Agreement are replaced in their
entirety with the following new sections:
1. Term. The Term of this Agreement shall continue until June 1, 2008 or
any earlier effective date of termination pursuant to Paragraph 9 hereof (the
"Term").
4 (a). Base Salary. You will be paid a base salary (the Base Salary) during
the Term of Four Hundred Fifty-Six Thousand Six Hundred and Twenty-Nine Dollars
($456,629) per year, payable in arrears on a bi-weekly basis; and
9 (a) (iii). Farmer Mac may terminate the employment of the Employee
without "cause" at any time. Such termination shall become effective on the
earlier of June 1, 2008 or two years from the date of notice of such
termination.
As amended hereby, the Agreement remains in full force and effect.
Federal Agricultural Mortgage Corporation Employee
By: /s/ C. Eugene Branstool /s/ Henry D. Edelman
----------------------------- -------------------------------
Chairman of the Board
Exhibit 10.3.14
AMENDMENT NO. 14 TO EMPLOYMENT CONTRACT
agreed, as of the 6th day of June 2002, between the Federal Agricultural
Mortgage Corporation (FAMC) and Nancy E. Corsiglia (you) that the existing
employment contract between the parties hereto, dated May 11, 1989, as amended
by letter dated December 14, 1989, Employment Agreement Amendment No. 2 dated
February 14, 1991, Amendment to Employment Agreement dated as of June 1, 1993,
Amendment No. 4 to Employment Contract dated as of June 1, 1993, Amendment No. 5
to Employment Contract dated as of June 1, 1994, Amendment No. 6 to Employment
Contract dated as of June 1, 1995, Amendment No. 7 to Employment Contract dated
as of February 8, 1996, Amendment No. 8 to Employment Contract dated as of June
13, 1996, Amendment No. 9 to Employment Contract dated as of August 7, 1997,
Amendment No. 10 to Employment Contract dated as of June 4, 1998, Amendment No.
11 to Employment Contract dated as of June 3, 1999, Amendment No. 12 to
Employment Contract dated as of June 1, 2000 and Amendment No. 13 to Employment
Contract dated as of June 7, 2001 (collectively, the Agreement), be and hereby
is amended as follows:
Sections 1, 3 (a) and 8 (a) (iii) of the Agreement are replaced in
their entirety with the following new sections:
1. Term. The Term of this Agreement shall continue until June 1, 2007 or
any earlier effective date of termination pursuant to Paragraph 8 hereof (the
"Term").
3 (a). Base Salary. You will be paid a base salary (the Base Salary) during
the Term of Two Hundred Ninety-Two Thousand Nine Hundred Thirty-One Dollars
($292,931) per year, payable in arrears on a bi-weekly basis; and
8 (a) (iii). Farmer Mac may terminate your employment without "cause"
at any time. Such termination shall become effective on the earlier of June
1, 2007, or two years from the date of notice of such termination.
As amended hereby, the Agreement remains in full force and effect.
Federal Agricultural Mortgage Corporation Employee
By: /s/ Henry D. Edelman /s/ Nancy E. Corsiglia
----------------------------- ----------------------
President
---------------
Exhibit 10.4.5
AMENDMENT NO. 5 TO EMPLOYMENT CONTRACT
agreed, as of the 6th day of June 2002, between the Federal Agricultural
Mortgage Corporation (FAMC) and Tom D. Stenson (the employee), that the existing
employment contract between the parties hereto, dated as of September 1, 1997,
as amended by Amendment No. 1 to Employment Contract dated as of June 4, 1998,
Amendment No. 2 to Employment Contract dated as of June 3, 1999. Amendment No. 3
to Employment Contract dated as of June 1, 2000 and Amendment No. 4 to
Employment Contract dated as of June 7, 2001 (collectively, the Agreement), be
and hereby is amended as follows:
Sections 1, 3 (a) and 7 (a) (3) of the Agreement are replaced in their
entirety with the following new sections:
1. Term. The Term of this Agreement shall continue until June 1, 2007 or
any earlier effective date of termination pursuant to Paragraph 7 hereof (the
"Term").
3 (a). Base Salary. You will be paid a base salary (the Base Salary) during
the Term of Two Hundred Thirty-Nine Thousand Eight Hundred Twenty-Four Dollars
($239,824) per year, payable in arrears on a bi-weekly basis.
7 (a) (3). Farmer Mac may terminate your employment without "cause" at any
time. Such termination shall become effective on the earlier of June 1, 2007, or
two years from the date of notice of such termination.
As amended hereby, the Agreement remains in full force and effect.
Federal Agricultural Mortgage Corporation Employee
By: /s/ Henry D. Edelman /s/ Tom D. Stenson
----------------------------- --------------------------
President
Exhibit 10.5.3
AMENDMENT NO. 3 TO EMPLOYMENT CONTRACT
agreed, as of the 6th day of June 2002, between the Federal Agricultural
Mortgage Corporation (FAMC) and Jerome G. Oslick (the employee), that the
existing employment contract between the parties hereto, dated as of February 1,
2000, Amendment No. 1 to Employment Contract dated as of June 1, 2000 and
Amendment No. 2 dated as of June 7, 2001 (collectively, the Agreement), be and
hereby is amended as follows:
Sections 1, 3 (a) and 7 (a) (3) of the Agreement are replaced in their
entirety with the following new sections:
1. Term. The Term of this Agreement shall continue until June 1, 2007 or
any earlier effective date of termination pursuant to Paragraph 7 hereof (the
"Term").
3 (a). Base Salary. You will be paid a base salary (the Base Salary) during
the Term of Two Hundred Thirty-Seven Thousand Two Hundred Forty-Nine Dollars
($237,249) per year, payable in arrears on a bi-weekly basis.
7 (a) (3). Farmer Mac may terminate your employment without "cause" at any
time. Such termination shall become effective on the earlier of June 1, 2007 or
two years from the date of notice of such termination.
As amended hereby, the Agreement remains in full force and effect.
Federal Agricultural Mortgage Corporation Employee
By: /s/ Henry D. Edelman /s/ Jerome G. Oslick
------------------------------ --------------------------------
President