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As filed with the Securities and Exchange Commission
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on August 14, 2003
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, 2003 Commission File Number 0-17440
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in itscharter)
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 20036
Washington, D.C. (Zip code)
(Address of principal executive offices)
(202) 872-7700
(Registrant's telephone number, including area code)
-----------------------------------------------
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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of August 1, 2003, there were 1,030,780 shares of Class A Voting Common
Stock, 500,301 shares of Class B Voting Common Stock and 10,259,732 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 interim 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
financial condition and the results of operations and cash flows of Farmer Mac
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 2002 consolidated financial statements of Farmer
Mac included in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2002. Results for interim periods are not necessarily indicative of
those that may be expected for the fiscal year.
The following information concerning Farmer Mac's interim condensed
consolidated financial statements is included in this report beginning on the
pages listed below:
Condensed Consolidated Balance Sheets as of June 30, 2003 and
December 31, 2002.............................................. 3
Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 2003 and 2002............................ 4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2003 and 2002......................................... 5
Notes to Condensed Consolidated Financial Statements............. 6
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2003 2002
------------------ ------------------
(unaudited) (audited)
Assets:
Cash and cash equivalents $ 620,581 $ 723,800
Investment securities 976,330 830,409
Farmer Mac Guaranteed Securities 1,543,039 1,608,507
Loans 1,005,403 966,123
Allowance for loan losses (3,102) (2,662)
----------------- ------------------
Loans, net 1,002,301 963,461
Real estate owned, net of valuation allowance of
$0.6 million and $0.6 million 17,241 5,031
Financial derivatives 4,751 317
Interest receivable 56,171 65,276
Guarantee and commitment fees receivable 4,648 5,938
Deferred tax asset 10,106 9,666
Prepaid expenses and other assets 32,679 10,510
----------------- ------------------
Total Assets $ 4,267,847 $ 4,222,915
----------------- ------------------
Liabilities and Stockholders' Equity:
Liabilities:
Notes payable:
Due within one year $ 2,863,112 $ 2,895,746
Due after one year 1,026,864 985,318
----------------- ------------------
Total notes payable 3,889,976 3,881,064
Financial derivatives 98,433 94,314
Accrued interest payable 29,349 29,756
Accounts payable and accrued expenses 29,227 17,453
Reserve for losses 18,169 16,757
----------------- ------------------
Total Liabilities 4,065,154 4,039,344
Stockholders' Equity:
Preferred Stock:
Series A, stated at redemption/liquidation value,
$50 per share, 700,000 shares authorized,
issued and outstanding 35,000 35,000
Common Stock:
Class A Voting, $1 par value, no maximum authorization,
1,030,780 shares issued and outstanding 1,031 1,031
Class B Voting, $1 par value, no maximum authorization,
500,301 shares issued and outstanding 500 500
Class C Non-Voting, $1 par value, no maximum authorization,
10,258,938 and 10,106,903 shares issued and outstanding
as of June 30, 2003 and December 31, 2002 10,259 10,107
Additional paid-in capital 84,504 82,527
Accumulated other comprehensive income (loss) (203) (407)
Retained earnings 71,602 54,813
----------------- ------------------
Total Stockholders' Equity 202,693 183,571
----------------- ------------------
Total Liabilities and Stockholders' Equity $ 4,267,847 $ 4,222,915
----------------- ------------------
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, 2003 June 30, 2002 June 30, 2003 June 30, 2002
----------------- ----------------- ----------------- -----------------
(unaudited) (unaudited)
Interest income:
Investments and cash equivalents $ 8,574 $ 10,556 $ 17,751 $ 20,882
Farmer Mac Guaranteed Securities 18,688 22,541 38,200 45,560
Loans 13,288 10,394 26,137 14,193
----------------- ----------------- ----------------- -----------------
Total interest income 40,550 43,491 82,088 80,635
Interest expense 31,395 34,641 63,481 64,315
----------------- ----------------- ----------------- -----------------
Net interest income 9,155 8,850 18,607 16,320
Provision for loan losses (1,416) - (2,624) -
----------------- ----------------- ----------------- -----------------
Net interest income after provision
for loan losses 7,739 8,850 15,983 16,320
Guarantee and commitment fees 5,111 4,723 10,205 9,290
Gains/(Losses) on financial derivatives
and trading assets 3,879 (230) 7,635 (6)
Gain on the repurchase of debt - 897 - 3,389
Miscellaneous income 138 368 389 760
----------------- ----------------- ----------------- -----------------
Total revenues 16,867 14,608 34,212 29,753
----------------- ----------------- ----------------- -----------------
Expenses:
Compensation and employee benefits 1,465 1,324 2,905 2,580
General and administrative 1,213 1,499 2,404 2,592
Regulatory fees 382 197 765 393
Provision for losses 697 2,022 1,592 4,038
----------------- ----------------- ----------------- -----------------
Total operating expenses 3,757 5,042 7,666 9,603
Income before income taxes 13,110 9,566 26,546 20,150
Income tax expense 4,184 2,944 8,636 6,321
----------------- ----------------- ----------------- -----------------
Net income 8,926 6,622 17,910 13,829
----------------- ----------------- ----------------- -----------------
Preferred stock dividends (560) (336) (1,120) (336)
----------------- ----------------- ----------------- -----------------
Net income available to common stockholders $ 8,366 $ 6,286 $ 16,790 $ 13,493
----------------- ----------------- ----------------- -----------------
Earnings per common share:
Basic earnings per common share $ 0.72 $ 0.54 $ 1.44 $ 1.16
Diluted earnings per common share $ 0.70 $ 0.52 $ 1.40 $ 1.12
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, 2003 June 30, 2002
------------------ ------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 17,910 $ 13,829
Adjustments to reconcile net income to net cash provided by
operating activities:
Net amortization of investment premiums and discounts 281 285
Amortization of debt premiums, discounts and issuance costs 18,615 22,042
Proceeds from repayment of trading investment securities (5,207) (6,530)
Mark to market on trading securities and derivatives (7,635) 8
Amortization of settled financial derivatives contracts 823 467
Gain on the repurchase of debt - 3,389
Total provision for losses 4,216 4,038
Decrease (increase) in interest receivable 9,105 (6,823)
Decrease in guarantee and commitment fees receivable 1,290 953
Increase in other assets (37,143) (1,971)
Increase (decrease) in accrued interest payable (407) 4,386
Increase in accounts payable and accrued expenses 11,774 1,771
------------------ ------------------
Net cash provided by operating activities 13,622 35,844
Cash flows from investing activities:
Purchases of available for sale investment securities (400,675) (158,035)
Purchases of Farmer Mac II Guaranteed Securities and
AgVantage bonds (130,410) (122,616)
Purchases of loans (174,181) (655,078)
Proceeds from repayment of investment securities 268,099 196,549
Proceeds from repayment of Farmer Mac Guaranteed Securities 195,586 146,326
Proceeds from repayment of loans 101,105 15,745
Proceeds from sale of loans and
Farmer Mac Guaranteed Securities 35,171 29,342
Settlement of financial derivatives (2,695) (3,553)
Purchases of office equipment (87) (140)
------------------ ------------------
Net cash used in investing activities (108,087) (551,460)
Cash flows from financing activities:
Proceeds from issuance of discount notes 32,047,218 43,742,164
Proceeds from issuance of medium-term notes 155,027 236,101
Payments to redeem discount notes (32,126,608) (43,347,185)
Payments to redeem medium-term notes (85,400) (109,914)
Net proceeds from preferred stock issuance - 34,667
Proceeds from common stock issuance 2,129 1,817
Preferred stock dividends (1,120) (336)
------------------ ------------------
Net cash provided by (used in) financing activities (8,754) 557,314
------------------ ------------------
Net increase (decrease) in cash and cash equivalents (103,219) 41,698
Cash and cash equivalents at beginning of period 723,800 437,831
------------------ ------------------
Cash and cash equivalents at end of period $ 620,581 $ 479,529
------------------ ------------------
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 remaining
maturities of three months or less at the time of purchase 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, 2003 and 2002.
Six Months Ended
June 30,
-------------------------
2003 2002
------------ -----------
(in thousands)
Cash paid for:
Interest $30,652 $ 29,697
Income taxes 6,750 5,600
Non-cash activity:
Real estate owned acquired through foreclosure 18,310 3,289
Loans acquired and securitized as Farmer Mac
Guaranteed Securities 35,171 29,342
Loans acquired from on-balance sheet Farmer Mac
Guaranteed Securities 22,413 6,997
(b) Loans
As of June 30, 2003, loans held by Farmer Mac included $51.8 million held
for sale and $953.6 million held for investment. As of December 31, 2002, loans
held by Farmer Mac included $37.0 million held for sale and $929.1 million held
for investment. Detailed information regarding the allowance for loan losses is
presented in Note 1(c).
(c) Allowance for Losses
As of June 30, 2003, Farmer Mac maintained a $21.9 million allowance for
losses to cover estimated probable losses on loans held, real estate owned, and
loans underlying Long-Term Standby Purchase Commitments ("LTSPCs") and
securities guaranteed by Farmer Mac under the Farmer Mac I program after the
1996 revision to its charter ("Post-1996 Act Farmer Mac I Guaranteed
Securities"). (See Note 2 for a description of LTSPCs.) The allowance is
increased through periodic provisions for loan losses that are charged against
net interest income and provisions for losses that are charged to operating
expense and is reduced by charge-offs for actual losses, net of recoveries.
Farmer Mac's allowance for losses is estimated using a systematic process
that begins with management's evaluation of the results of its proprietary loan
pool simulation and guarantee fee model (the "Model"); those results may be
modified by the application of management's judgment that takes into account
factors including:
o economic conditions;
o geographic and agricultural commodity concentrations in Farmer
Mac's portfolio;
o the credit profile of Farmer Mac's portfolio;
o delinquency trends of Farmer Mac's portfolio;
o Farmer Mac's experience in the management and sale of real estate
owned; and
o historical charge-off and recovery activities of Farmer Mac's
portfolio.
The Model offers historical loss experience on agricultural mortgage loans
similar to those on which Farmer Mac has assumed credit risk, but over a longer
period of time than Farmer Mac's own experience to date. Farmer Mac's systematic
methodology for determining its allowance for losses is expected to migrate over
time, away from the Model and toward the increased use of Farmer Mac's own
historical portfolio loss experience, as that experience continues to develop.
During this migration, Farmer Mac will continue to use the results from the
Model, augmented by the application of management's judgment (as described
above), to determine its loan loss allowance.
Management believes that its use of this methodology produces a reliable
estimate of total probable losses, as of the balance sheet date, for all loans
included in Farmer Mac's portfolio, including loans held, real estate owned and
loans underlying Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs.
The table below summarizes the three components of Farmer Mac's allowance
for losses as of June 30, 2003 and December 31, 2002.
June 30, December 31,
2003 2002
---------------- -----------------
(in thousands)
Allowance for loan losses $ 3,102 $ 2,662
Real estate owned valuation allowance 592 592
Reserve for losses:
On-balance sheet Farmer Mac I Guaranteed Securities 3,809 4,036
Off-balance sheet Farmer Mac I Guaranteed Securities 1,322 1,280
LTSPCs 13,038 11,441
---------------- -----------------
Total allowance for losses $ 21,863 $ 20,011
---------------- -----------------
Farmer Mac's total provision for losses was $2.1 million for second quarter
2003, compared to $2.0 million for second quarter 2002. During second quarter
2003, Farmer Mac charged off $1.3 million in losses against the allowance for
losses and had no recoveries. During second quarter 2002, Farmer Mac charged off
$0.9 million in losses against the allowance for losses and recovered $0.2
million from previously charged off losses, for net charge-offs of $0.7 million.
The net charge-offs for second quarter 2003 and 2002 included $17,000 and
$225,000, respectively, related to previously accrued or advanced interest on
loans and Farmer Mac I Guaranteed Securities.
No allowance for losses has been made for loans underlying Farmer Mac I
Guaranteed Securities issued prior to the Farm Credit System Reform Act of 1996
(the "1996 Act") or securities issued under the Farmer Mac II program ("Farmer
Mac II Guaranteed Securities"). Farmer Mac I Guaranteed Securities issued prior
to the 1996 Act are supported by unguaranteed first loss subordinated interests,
which are expected to exceed the estimated credit losses on those loans. The
guaranteed portions of loans collateralizing Farmer Mac II Guaranteed Securities
are guaranteed by the United States Department of Agriculture ("USDA"). Each
USDA guarantee is an obligation backed by the full faith and credit of the
United States. To date, Farmer Mac has experienced no losses on any pre-1996 Act
Farmer Mac I Guaranteed Securities or on any Farmer Mac II Guaranteed Securities
and does not expect to incur any such losses in the future.
(d) Financial Derivatives
Farmer Mac enters into financial derivative transactions principally to
protect against risk from the effects of market price or interest rate movements
on the value of certain assets and future cash flows or debt issuance, not for
trading or speculative purposes. Farmer Mac enters into interest rate swap
contracts principally to adjust the characteristics of its short-term debt to
match more closely the cash flow and duration characteristics of its longer-term
mortgage and other assets, and also to adjust the characteristics of its
long-term debt to match more closely the cash flow and duration characteristics
of its short-term assets, thereby reducing interest rate risk. These
transactions also may provide an overall lower effective cost of borrowing than
would otherwise be available in the conventional debt market.
All financial derivatives are recorded on the balance sheet at fair value
as a freestanding asset or liability. Financial derivatives in hedging
relationships that mitigate exposure to changes in the fair value of assets are
considered fair value hedges. Financial derivatives in hedging relationships
that mitigate the exposure to the variability in expected future cash flows or
other forecasted transactions are considered cash flow hedges. Financial
derivatives that do not satisfy the hedging criteria of Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities as amended ("SFAS 133") are not accounted for as hedges and changes
in the fair values of those financial derivatives are reported in income or
expense.
The net after-tax increase to earnings under SFAS 133 during second quarter
2003 totaled $2.6 million, and the net after-tax decrease to other comprehensive
income totaled $6.5 million. Substantially all of the increase in earnings under
SFAS 133 resulted from increases in the fair values of callable interest rate
contracts. Substantially all of the decrease to other comprehensive income
represented changes in the fair values of forward sale contracts, interest rate
swap contracts and settled forward sale contracts. As of June 30, 2003, Farmer
Mac had approximately $68.1 million of net after-tax unrealized losses on cash
flow hedges included in accumulated other comprehensive income. These amounts
will be reclassified into earnings in the same period or periods during which
the hedged forecasted transactions (either the payment of interest or the
issuance of discount notes) affect earnings or immediately when it becomes
probable that the original hedged forecasted transaction will not occur within
two months of the originally specified date. Over the next twelve months, Farmer
Mac estimates that $1.2 million of the amount currently reported in accumulated
other comprehensive income (loss) will be reclassified into earnings. For the
quarter ended June 30, 2003, any ineffectiveness related to Farmer Mac's
designated hedges was insignificant.
SFAS 133 also required, as the change in the fair value of a hedged item, a
$0.1 million decrease in the line item "loans" on the condensed consolidated
balance sheet for second quarter 2003. For second quarter 2002, the recorded
change in the fair value of a hedged item was a $0.2 million decrease in
"loans."
(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 options. The following schedule reconciles
basic and diluted earnings per common share for the three months ended June 30,
2003 and 2002:
June 30, 2003 June 30, 2002
------------------------------- ---------------------------------
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 $ 8,366 $ 8,366 $ 6,286 $ 6,286
common stockholders
Weighted average shares 11,697 262 11,959 11,604 489 12,093
Earnings per common share $ 0.72 $ 0.70 $ 0.54 $ 0.52
Six Months Ended:
Net income available to $ 16,790 $ 16,790 $ 13,493 $ 13,493
common stockholders
Weighted average shares 11,668 294 11,962 11,592 504 12,096
Earnings per common share $ 1.44 $ 1.40 $ 1.16 $ 1.12
(f) Preferred Stock
On May 6, 2002, the Corporation issued 700,000 shares of 6.40% Cumulative
Preferred Stock, Series A ("Series A Preferred Stock"), which has a redemption
price and liquidation preference of $50.00 per share, plus accrued and unpaid
dividends, if any. 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, if any. Farmer Mac will pay cumulative dividends on the Series
A Preferred Stock quarterly in arrears, when and if declared by its Board of
Directors. The costs of issuing the Series A Preferred Stock were charged to
additional paid-in capital.
On June 5, 2003, Farmer Mac's Board of Directors declared a dividend of
$0.80 per share on the Series A Preferred Stock for the period from April 1,
2003 to June 30, 2003. The aggregate amount of dividend of $560,000 was paid on
June 30, 2003.
(g) Stock-Based Compensation
Farmer Mac accounts for its stock-based employee compensation plans using
the intrinsic value method of accounting for employee stock options pursuant to
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123"), as amended by Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation--Transition and Disclosure ("SFAS 148").
Accordingly, no compensation expense was recognized in second quarter 2003 or
second quarter 2002 for employee stock options. Had Farmer Mac elected to use
the fair value method of accounting for employee stock options, net income
available to common stockholders and earnings per share for the three and six
months ended June 30, 2003 and 2002 would have been reduced to the pro forma
amounts indicated in the following table:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -----------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(in thousands, except per share amounts)
Net income available to common
stockholders, as reported $ 8,366 $ 6,286 $16,790 $13,493
Add back: Restricted stock
compensation expense included in
reported net income, net of taxes 164 154 330 298
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method
for all awards, net of tax (2,519) (2,294) (2,685) (2,438)
----------- ----------- ----------- -----------
Pro forma net income available to
common stockholders $ 6,011 $ 4,146 $14,435 $11,353
----------- ----------- ----------- -----------
Earnings per common share:
Basic - as reported $ 0.72 $ 0.54 $ 1.44 $ 1.16
Basic - pro forma $ 0.51 $ 0.36 $ 1.24 $ 0.98
Diluted - as reported $ 0.70 $ 0.52 $ 1.40 $ 1.12
Diluted - pro forma $ 0.50 $ 0.34 $ 1.21 $ 0.94
The following table summarizes stock option activity for the three and six
months ended June 30, 2003 and 2002:
June 30, 2003 June 30, 2002
--------------------------------- -----------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
--------------- ---------------- -------------- --------------
Three Months Ended:
Outstanding, beginning of period 1,637,111 $ 19.45 1,389,885 $ 17.62
Granted 343,104 22.40 244,423 29.13
Exercised (159,834) 9.49 (12,000) 13.87
Canceled (3,332) 29.10 (2,979) 31.24
--------------- ---------------- -------------- --------------
Outstanding, end of period 1,817,049 $ 20.86 1,619,329 $ 19.36
--------------- ---------------- -------------- --------------
Six Months Ended:
Outstanding, beginning of period 1,637,111 $ 19.45 1,416,426 $ 17.61
Granted 343,104 22.40 244,423 29.13
Exercised (159,834) 9.49 (38,541) 16.30
Canceled (3,332) 29.10 (2,979) 31.24
--------------- ---------------- -------------- --------------
Outstanding, end of period 1,817,049 $ 20.86 1,619,329 $ 19.36
--------------- ---------------- -------------- --------------
Options exercisable at end of period 1,492,572 1,348,829
--------------- --------------
(h) Reclassifications
Certain reclassifications of prior period information were made to conform
to the current period presentation.
(i) New Accounting Standards
On January 1, 2003, Farmer Mac adopted 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"), which 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"). Prior to
the adoption of this standard, gains and losses from the extinguishment or
repurchase of debt were classified as extraordinary items. This standard
effectively eliminates the classification of most debt extinguishments or
repurchases as extraordinary items, as reflected in Farmer Mac's condensed
consolidated financial statements as of and for the three and six months ended
June 30, 2003. Farmer Mac's condensed consolidated financial statements as of
and for the three and six months ended June 30, 2002 reflected debt
extinguishments or repurchases as extraordinary items.
On January 1, 2003, Farmer Mac adopted the liability recognition provisions
of the Financial Accounting Standards Board Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). These provisions require Farmer
Mac to recognize, at the inception of a guarantee, a liability for the fair
value of its obligation to stand ready to perform under the terms of each
guarantee agreement and an asset that is equal to the fair value of the fees
that will be received over the life of each guarantee. Subsequently, both the
asset and the liability are measured and recorded at their fair value. These
provisions have been applied on a prospective basis to guarantees and
commitments that were issued or modified on or after January 1, 2003. See Note 2
for additional information on Farmer Mac's guarantee obligations and LTSPCs and
the manner in which the obligations to "stand ready" have been reflected in
Farmer Mac's condensed consolidated financial statements.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities ("SFAS 149"), which will
require Farmer Mac to account for commitments to purchase or sell mortgages and
Farmer Mac Guaranteed Securities entered into after June 30, 2003 as financial
derivatives. Farmer Mac expects these financial derivatives to qualify as cash
flow hedges of forecasted transactions. Therefore, Farmer Mac will record
commitments to purchase or sell mortgages or Farmer Mac Guaranteed Securities at
fair value as assets or liabilities and the change in the fair values will be
recorded as a corresponding increase or decrease in accumulated other
comprehensive income. Farmer Mac does note anticipate that SFAS 149 will have a
material effect on its net income.
Note 2. Off-Balance Sheet Guarantees and Long-Term Standby Purchase Commitments
Overview
Farmer Mac offers approved agricultural and rural residential mortgage
lenders two off-balance sheet alternatives to increase their liquidity or
lending capacity while retaining the cash flow benefits of their loans: (1)
Farmer Mac Guaranteed Securities, which are available through either the Farmer
Mac I program or the Farmer Mac II program, and (2) LTSPCs, which are available
only through the Farmer Mac I program.
To be eligible for the Farmer Mac I program, a loan must meet Farmer Mac's
credit underwriting, appraisal and documentation standards. Accordingly, Farmer
Mac believes the credit risk it assumes for Farmer Mac Guaranteed Securities
backed by loans that are eligible for the Farmer Mac I program and for LTSPCs is
the same.
For all guarantees and commitments that were executed on or before December
31, 2002, Farmer Mac's policy for the recognition of guarantee fees on Farmer
Mac Guaranteed Securities and commitment fees on LTSPCs is to recognize them on
an accrual basis over the life of the underlying loans. Because these fees are
paid in arrears, no guarantee fees or commitment fees are unearned at the end of
any reporting period. If Farmer Mac purchases a delinquent loan underlying a
Farmer Mac Guaranteed Security or an LTSPC, Farmer Mac stops accruing the
guarantee or commitment fee upon the purchase of the loan. If the loan becomes
current and is repurchased by the seller under the terms of the LTSPC, Farmer
Mac resumes accrual of the fee.
Pursuant to FIN 45, for all guarantees and commitments issued or modified
on or after January 1, 2003, Farmer Mac recognizes an asset that is equal to the
fair value of the fees that will be received over the life of each guarantee or
commitment and a liability for the fair value of its obligation to stand ready
to perform under the guarantee or commitment. Both the asset and the liability
are subsequently measured and recorded at their fair value in Farmer Mac's
condensed consolidated financial statements.
Off-Balance Sheet Farmer Mac Guaranteed Securities
The process for creating off-balance sheet Farmer Mac Guaranteed Securities
involves the transfer of agricultural mortgage loans into trusts that are used
as vehicles for the securitization of the transferred assets and the beneficial
interests in the trusts are sold to third party investors as Farmer Mac
Guaranteed Securities. Farmer Mac guarantees the timely payment of principal and
interest on the certificates issued by the trusts, regardless of whether the
trusts actually receive scheduled payments on the related underlying loans. As
consideration for Farmer Mac's assumption of the credit risk on these mortgage
pass-through certificates, Farmer Mac receives a guarantee fee. These fees are
collected as installment payments are made on the underlying loans, until those
loans have been repaid, repurchased from the related trusts, or otherwise
liquidated (generally as a result of default). The aggregate amount of guarantee
fees received on Farmer Mac Guaranteed Securities depends upon the amount of
such securities outstanding and on the guarantee fee rate.
Farmer Mac is required to make the timely payment of principal and interest
on Farmer Mac Guaranteed Securities if the borrowers on the underlying loans or
USDA-guaranteed portions do not make their scheduled installment payments.
o Farmer Mac I Guaranteed Securities. When a loan underlying a Farmer
Mac I Guaranteed Security becomes 90 days or more past due, Farmer Mac
has the option to repurchase the loan from the trust and generally
does repurchase such loans, thereby reducing the principal balance of
the outstanding Farmer Mac Guaranteed Security. If Farmer Mac
exercises its option to purchase a loan that is collateral for a
Farmer Mac I Guaranteed Security, Farmer Mac would have the right to
enforce the terms of the loan and, in the event of a default, would
have the right to foreclose upon the collateral underlying the loan.
Farmer Mac typically recovers a significant portion of the value of
defaulted loans purchased either through borrower payments, loan
payoffs, payments by third parties or foreclosure and sale of the
collateral.
o Farmer Mac II Guaranteed Securities. Farmer Mac has recourse to the
USDA for amounts advanced for the timely payment of principal and
interest on Farmer Mac II Guaranteed Securities. That recourse is the
USDA guarantee, a full faith and credit obligation of the United
States that becomes enforceable if a lender fails to repurchase the
USDA-guaranteed portion from its owner within 30 days after written
demand from the owner when (a) the borrower under the guaranteed loan
is in default not less than 60 days in the payment of any principal or
interest due on the USDA-guaranteed portion, or (b) the lender has
failed to remit to the owner the payment made by the borrower on the
USDA-guaranteed portion or any related loan subsidy within 30 days
after the lender's receipt of the payment.
The following table presents the maximum principal amount of potential
undiscounted future payments that Farmer Mac could be required to make under
off-balance sheet Farmer Mac Guaranteed Securities as of June 30, 2003 and
December 31, 2002, not including offsets provided by any recourse provisions,
recoveries from third parties or collateral for the underlying loans.
Outstanding Balance of Off-Balance Sheet
Farmer Mac Guaranteed Securities
- -------------------------------------------------------------------------
June 30, December 31,
2003 2002
--------------- ---------------
(in thousands)
Farmer Mac I Guaranteed Securities $ 274,274 $ 299,940
Farmer Mac II Guaranteed Securities 64,480 67,109
--------------- ---------------
Total Farmer Mac I and II $ 338,754 $ 367,049
--------------- ---------------
As of June 30, 2003, the weighted-average remaining maturity of all loans
underlying off-balance sheet Farmer Mac Guaranteed Securities was 15.3 years.
For the off-balance sheet Farmer Mac I Guaranteed Securities that were executed
on or before December 31, 2002, Farmer Mac has recorded an allowance for
probable losses that was $1.3 million as of June 30, 2003 and $1.3 million as of
December 31, 2002. For those securities that were issued or modified on or after
January 1, 2003, Farmer Mac has recorded the fair value of its obligation to
stand ready under the guarantee as a liability. As of June 30, 2003, this
liability approximated $0.3 million and was included in other liabilities on the
condensed consolidated balance sheet.
Long-Term Standby Purchase Commitments (LTSPCs)
An LTSPC is a commitment by Farmer Mac to purchase eligible loans on one or
more undetermined future dates. In consideration for Farmer Mac's assumption of
the credit risk on loans underlying an LTSPC, Farmer Mac receives an annual
commitment fee on the outstanding balance of those loans in monthly installments
based on the outstanding balance of those loans.
An LTSPC permits a seller to nominate from its portfolio a segregated pool
of loans, which are retained in the seller's portfolio and serviced by the
seller. Upon nomination, Farmer Mac reviews the loan pool to confirm that it
conforms to Farmer Mac's underwriting standards. Upon Farmer Mac's acceptance of
the conforming loans, the seller effectively transfers the credit risk on those
loans to Farmer Mac, thereby reducing the seller's credit and concentration
exposures and, consequently, its regulatory capital requirements and loan loss
reserve requirements. Credit risk is transferred through Farmer Mac's commitment
to purchase the segregated loans from the counterparty based upon Farmer Mac's
original credit review and acceptance of the credit risk on the loans.
The specific events or circumstances that would require Farmer Mac to
purchase some or all of the segregated loans under its LTSPCs include: (1) the
failure of the borrower under any loan to make installment payments under that
loan for a period of four months; or (2) the determination by the holder of the
LTSPC to sell some or all of the loans under the LTSPC to Farmer Mac.
An LTSPC commits Farmer Mac to purchase these loans:
o at par, if the loans become four months delinquent, with accrued
and unpaid interest payable out of any future loan payments or
liquidation proceeds received;
o at a mark-to-market price, if the loans are not delinquent and
are standard Farmer Mac loan products;
o at a mark-to-market negotiated price for all (but not some) loans
in the pool, if they are not four months delinquent; or
o in exchange for Farmer Mac Guaranteed Securities.
The mark-to-market price would be based on either the sale of Farmer Mac
Guaranteed Securities in the capital markets or the funding obtained by Farmer
Mac through the issuance of debt in the capital markets.
As of June 30, 2003 and December 31, 2002, the maximum principal amount of
potential undiscounted future payments that Farmer Mac could be requested to
make under LTSPCs, not including offsets provided by any recourse provisions,
recoveries from third parties or collateral for the underlying loans, was $2.8
billion and $2.7 billion, respectively.
Farmer Mac believes that the credit risk assumed in LTSPC transactions is
the same as the credit risk assumed on Post-1996 Act Farmer Mac I Guaranteed
Securities. In the event of loan default, Farmer Mac would have the right to
enforce the terms of the loans including the right to foreclose upon the
collateral underlying such loans. Farmer Mac believes that it will generally
recover a significant portion of the value of the defaulted loans purchased
either through borrower payments, loan payoffs, payments by third parties or
foreclosure and sale of the collateral. To date, Farmer Mac has not incurred any
charge-offs on loans underlying LTSPCs.
As of June 30, 2003, the weighted-average remaining maturity of all loans
underlying LTSPCs was 15.4 years. For the LTSPCs that were executed on or before
December 31, 2002, Farmer Mac has recorded an allowance for probable losses that
was $13.0 million as of June 30, 2003 and $11.4 million as of December 31, 2002.
For those LTSPCs that were issued or modified on or after January 1, 2003,
Farmer Mac has recorded the fair value of its obligation to stand ready under
the commitment as a liability. As of June 30, 2003, this liability approximated
$3.6 million and was included in other liabilities on the condensed consolidated
balance sheet.
Note 3. Comprehensive Income
Comprehensive income 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 for the three
and six months ended June 30, 2003 and 2002. The changes in unrealized gains on
securities available-for-sale are net of the related deferred taxes of $4.7
million and $3.0 million for the three and six months ended June 30, 2003,
respectively, and $10.7 million and $6.3 million for the three and six months
ended June 30, 2002, respectively. The changes in the fair value of the
financial derivatives classified as cash flow hedges for the three and six
months ended June 20, 2003 are net of deferred taxes of $3.5 million and $2.9
million, respectively, and $7.9 million and $6.1 million for the three and six
months ended June 30, 2002, respectively.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ----------------------
2003 2002 2003 2002
------------ ------------ ---------- -----------
(in thousands)
Net income $ 8,926 $ 6,622 $ 17,910 $ 13,829
Change in unrealized gain on securities
available-for-sale, net of taxes 8,707 20,141 5,550 11,816
Change in the fair value of financial derivatives
classified as cash flow hedges, net of taxes and
reclassification adjustments (6,492) (14,600) (5,346) (11,279)
------------ ------------ ---------- -----------
Comprehensive income $ 11,141 $ 12,163 $ 18,114 $ 14,366
------------ ------------ ---------- -----------
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 report 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, LTSPC 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:
o the rate and direction of development of the secondary market for
agricultural mortgage loans;
o the possible establishment of additional statutory or regulatory
restrictions on Farmer Mac that could hamper its growth or restrain
its profitability;
o 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;
o possible reaction in the financial markets to events involving GSEs
other than Farmer Mac;
o Farmer Mac's access to the debt markets at favorable rates and terms;
o the possible effect of the risk-based capital requirement, which
could, under certain circumstances, be in excess of the statutory
minimum capital level;
o the outcome of the pending review of Farmer Mac by the U.S. General
Accounting Office (the "GAO");
o the rate of growth in agricultural mortgage indebtedness;
o lender interest in Farmer Mac credit products and the Farmer Mac
secondary market;
o borrower preferences for fixed-rate agricultural mortgage
indebtedness;
o competition in the origination or purchase of agricultural mortgage
loans and the sale of agricultural mortgage-backed and debt
securities;
o substantial changes in interest rates, agricultural land values,
commodity prices, export demand for U.S. agricultural products and the
general economy;
o protracted adverse weather, market or other conditions affecting
particular geographic regions or particular commodities related to
agricultural mortgage loans backing Farmer Mac I Guaranteed Securities
or under LTSPCs; or
o the effects on the agricultural economy of any changes in federal
assistance for agriculture.
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 the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires the
use of estimates and assumptions that affect the amounts reported in the
consolidated financial statements and related notes for the periods presented.
Actual results could differ from those estimates. The critical accounting policy
that is both important to the portrayal of Farmer Mac's financial condition and
results of operations and requires complex, subjective judgments is the
accounting policy for the allowance for losses. Farmer Mac's allowance for
losses is presented in three components on its consolidated balance sheet:
o an "Allowance for loan losses" on loans held for investment;
o a valuation allowance on real estate owned, which is included in the
balance sheet under "Real estate owned, net of valuation allowance";
and
o an allowance for losses on loans underlying Post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs, which is included in the balance
sheet under "Reserve for losses."
The purpose of the allowance for losses is to provide for estimated losses
that are probable to have occurred as of the balance sheet date, and not to
predict or account for future potential losses. The determination of the
allowance 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, which
may require additional allowances for losses in future periods.
Farmer Mac maintains an allowance for losses to cover estimated probable
losses on its loans held, real estate owned and loans underlying Post-1996 Act
Farmer Mac I Guaranteed Securities and LTSPCs. In estimating probable losses,
management considers the results of its proprietary loan pool simulation and
guarantee fee model. Those results may be modified by the application of
management's judgment that takes into account factors such as:
o economic conditions;
o geographic and agricultural commodity concentrations in Farmer Mac's
portfolio;
o the credit profile of Farmer Mac's portfolio;
o delinquency trends of Farmer Mac's portfolio;
o Farmer Mac's experience in the management and sale of real estate
owned; and
o historical charge-off and recovery activities of Farmer Mac's
portfolio.
The allowance is increased through periodic provisions for loan losses that are
charged against net interest income and provisions for losses that are charged
to operating expense and reduced by charge-offs for actual losses, net of
recoveries.
No allowance for losses has been made for loans underlying Farmer Mac I
Guaranteed Securities issued prior to the 1996 Act or Farmer Mac II Guaranteed
Securities. Farmer Mac I Guaranteed Securities issued prior to the 1996 Act are
supported by unguaranteed first loss subordinated interests, which are expected
to exceed the estimated credit losses on those loans. USDA-guaranteed portions
collateralizing Farmer Mac II Guaranteed Securities are obligations backed by
the full faith and credit of the United States. To date, Farmer Mac has
experienced no losses on any pre-1996 Act Farmer Mac I Guaranteed Securities or
on any Farmer Mac II Guaranteed Securities and does not expect to incur any such
losses in the future.
Further information regarding the allowance for losses is included in
"--Quantitative and Qualitative Disclosures About Market Risk Management--Credit
Risk."
Results of Operations
Overview. Net income available to common stockholders for second quarter
2003, was $8.4 million or $0.70 per diluted common share, compared to $6.3
million or $0.52 per diluted common share for second quarter 2002.
Farmer Mac's revenue growth continued in second quarter 2003, reflecting
the effects of outstanding guarantee and commitment volume as of June 30, 2003
that was more than $420 million higher than at the close of second quarter 2002
and increased net interest income. During second quarter 2003, Farmer Mac:
o added $179.0 million of Farmer Mac I eligible loans under LTSPCs;
o purchased $65.6 million of newly originated Farmer Mac I eligible
loans; and
o purchased $77.6 million of Farmer Mac II guaranteed portions of loans
guaranteed by USDA.
USDA is currently forecasting net cash income on farms for 2003 to be $55.1
billion, up 26 percent from 2002 forecasted levels of $43.8 billion. The
forecasted net cash income on farms for 2003 includes government payments of
$21.4 billion, as compared to $11.8 billion in 2002, and increases in total crop
and livestock receipts. USDA forecasts farm real estate values to rise by
approximately 3.0 percent in 2003. This forecast is up from 1.5 percent earlier
this year, but still slightly less than farm real estate growth of 4.0 percent
in 2002, 5.2 percent in 2001, and 6.8 percent in 2000. On average, farm real
estate values grew nearly 4.0 percent annually during the 1990s. Regionally,
farm real estate values may vary with differing rates of increase, or even
decrease, depending on differences in land quality and location, commodities
grown, credit conditions, non-farm investment opportunities, government farm
policies, and production risks and weather uncertainties unique to each region's
agriculture.
Set forth below is a more detailed discussion of Farmer Mac's results of
operations.
Net Interest Income. Net interest income was $9.2 million for second
quarter 2003 and $18.6 million year-to-date, compared to $8.9 million and $16.3
million, respectively, for the same periods in 2002. 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 92 basis points for year-to-date 2003,
compared to 91 basis points for year-to-date 2002. The net interest yields for
year-to-date 2003 and year-to-date 2002 included the benefits of yield
maintenance payments received of 12 basis points and 7 basis points,
respectively. Yield maintenance payments represent the present value of expected
future interest income streams and accelerate the recognition of interest income
from the related loans. Because the timing and size of these payments vary
greatly, 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 $2.2 million (11 basis points) of
guarantee fee income as interest income for year-to-date 2003, compared to $0.7
million (4 basis points) for year-to-date 2002.
The following table provides information regarding the average balances and
rates of interest-earning assets and funding for the six months ended June 30,
2003 and 2002. The balance of non-accruing loans is included in the average
balance of interest earning loans presented, though no related income is
included in the income figures presented. The decreases in the average rates for
cash and cash equivalents reflect their short-term nature. The decreases in the
average rates for investments and loans and Farmer Mac Guaranteed Securities
reflect the relatively large proportion of adjustable rates in those asset
categories (76.1 percent of investments and 63.9 percent of loans and Farmer Mac
Guaranteed Securities). The decrease in the average rate for discount notes also
reflects their short-term nature. The decreases in all of these rates track the
general decrease in market rates between the two periods.
Six Months Ended June 30,
-------------------------------------------------------------------------------
2003 2002
------------------------------------- -------------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
------------- ----------- ----------- ------------- ----------- -----------
(dollars in thousands)
Interest-earning assets:
Cash and cash equivalents $ 712,539 $ 4,744 1.33% $ 499,018 $ 5,023 2.01%
Investments 889,142 13,007 2.93% 944,140 15,859 3.36%
Loans and Farmer Mac Guaranteed Securities 2,438,231 64,337 5.28% 2,144,563 59,753 5.57%
-------------- ----------- ---------- ------------- ----------- -----------
Total interest earning assets 4,039,912 82,088 4.06% 3,587,721 80,635 4.50%
-------------- ----------- ------------- -----------
Funding:
Discount notes 2,752,969 32,218 2.34% 2,389,207 32,409 2.71%
Medium-term notes 1,121,492 31,264 5.58% 1,066,177 31,906 5.99%
-------------- ----------- -------- ------------- ----------- -----------
Total interest-bearing liabilities 3,874,461 63,482 3.28% 3,455,384 64,315 3.72%
Net non-interest-bearing funding 165,451 - - 132,337 - -
-------------- ----------- --------- ------------- ----------- -----------
Total funding $ 4,039,912 63,482 3.14% $3,587,721 64,315 3.59%
-------------- ----------- --------- ------------- ----------- -----------
Net interest income/yield $ 18,606 0.92% $ 16,320 0.91%
----------- -------- ----------- -----------
The following table sets forth 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. The
decreases due to rate reflect the short-term or adjustable-rate nature of most
assets or liabilities and the general decreases in market rates described above.
Six Months Ended June 30, 2003
Compared to Six Months Ended
June 30, 2002
--------------------------------------------
Increase/(Decrease) Due to
--------------------------------------------
Rate Volume Total
--------------- -------------- -------------
(in thousands)
Income from interest-earning assets
Cash and cash equivalents $ (2,022) $ 1,743 $ (279)
Investments (1,966) (887) (2,852)
Loans and Farmer Mac Guaranteed Securities (3,285) 7,870 4,584
--------------- -------------- -------------
Total (7,273) 8,726 1,453
Expense from interest-bearing liabilities (7,018) 6,185 (833)
--------------- -------------- -------------
Change in net interest income $ (255) $ 2,541 $ 2,286
--------------- -------------- -------------
Guarantee and Commitment Fees. Guarantee and commitment fees were $5.1
million for second quarter 2003, compared to $4.7 million for second quarter
2002. The increase in guarantee and commitment fees reflects an increase in the
average balance of outstanding guarantees and LTSPCs. Excluding the effects of
the adoption of SFAS 140 that reclassified $1.1 million and $0.7 million,
respectively, of guarantee fee income as interest income for second quarter 2003
and second quarter 2002, guarantee and commitment fees for second quarter 2003
and second quarter 2002 would have been $6.2 million and $5.4 million,
respectively. The difference or "spread" between the cost of Farmer Mac's debt
funding for loans and Post-1996 Act Farmer Mac I Guaranteed Securities 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 any retained
interest-only strip) if the asset were sold.
Miscellaneous income decreased to $0.1 million for second quarter 2003 from
$0.4 million for second quarter 2002 due to a reduction in late fees received.
Expenses. Compensation and employee benefits for second quarter 2003 were
$1.5 million, compared to $1.3 million for second quarter 2002. General and
administrative expenses for second quarter 2003 were $1.2 million, compared to
$1.5 million for second quarter 2002. Regulatory fees assessed by FCA for second
quarter 2003 were $0.4 million, compared to $0.2 million for second quarter
2002.
Farmer Mac's provision for losses was $0.7 million for second quarter 2003,
compared to $2.0 million for second quarter 2002. (See "--Quantitative and
Qualitative Disclosures About Market Risk Management--Credit Risk" for
additional information regarding Farmer Mac's provision for losses and provision
for loan losses.) As of June 30, 2003, Farmer Mac's total allowance for losses
totaled $21.9 million, or 0.45 percent of outstanding loans held or loans
underlying Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, compared
to $20.0 million (0.42 percent of outstanding loans held or loans underlying
Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs) as of December 31,
2002.
Gain on the Repurchase of Debt. For second quarter 2002, Farmer Mac
recognized a gain of $0.9 million on the repurchase of $18.9 million of
outstanding Farmer Mac debt that had a maturity date of October 14, 2011 and an
annual interest rate of 5.4 percent. Prior to the adoption of SFAS 145 on
January 1, 2003, this gain was presented as a net after-tax extraordinary gain
of $0.6 million. These debt securities were replaced with new fixed-rate funding
to the same maturity dates at more attractive interest rates, which preserves
Farmer Mac's asset-liability match and reduces future interest expense. There
were no gains or losses on the repurchase of debt during second quarter 2003.
Gains on Financial Derivatives and Trading Assets. For second quarter 2003,
the gain on financial derivatives and trading assets resulting from the effects
of SFAS 133 was $3.9 million, compared to a loss of $0.2 million for second
quarter 2002. The gain in second quarter 2003 resulted primarily from increases
in the fair values of callable interest rate contracts.
Non-GAAP Performance Measures. Farmer Mac reports its financial results in
accordance with GAAP. In addition to GAAP measures, Farmer Mac presents certain
non-GAAP performance measures. These non-GAAP performance measures are used by
Farmer Mac to develop financial plans, to measure corporate performance, and to
set incentive compensation. As described below, because FASB has adopted a mixed
attribute accounting model that does not reflect the economics for transactions
involving Farmer Mac's callable swaps, in management's view the non-GAAP
measures provide a more accurate representation of Farmer Mac's economic
performance, transaction economics and business trends. Investors and the
investment analyst community have previously relied upon similar measures to
evaluate performance and issue projections. These non-GAAP disclosures are not
intended to replace GAAP information but, rather, to supplement it.
One such non-GAAP measure is core earnings, which Farmer Mac developed to
present net income less the after-tax effects of SFAS 133, and less the
after-tax net gains and losses on the repurchase of debt that, prior to January
1, 2003, were reported as extraordinary items. Core earnings for the three and
six months ended June 30, 2003 were $5.8 million and $11.7 million,
respectively, compared to $5.8 million and $11.1 million for the three and six
months ended June 30, 2002. The reconciliation of GAAP net income available to
common stockholders to core earnings is presented in the following table:
Reconciliation of GAAP Results to Core Earnings
- ---------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
----------------------------------- ----------------------------------
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
----------------- ----------------- ----------------- ----------------
(in thousands)
GAAP net income available
to common stockholders $ 8,366 $ 6,286 $ 16,790 $ 13,493
Less the effects of FAS 133:
Gains/(Losses) on financial
derivatives and trading
assets, net of tax 2,521 (149) 4,963 (4)
Benefit from non-amortization
of premium payments
on financial derivatives,
net of tax 81 101 162 202
Less gains on the repurchase of
debt previously reported as
extraordinary items - 583 - 2,203
----------------- ----------------- ----------------- ----------------
Core earnings $ 5,764 $ 5,751 $ 11,665 $ 11,092
----------------- ----------------- ----------------- ----------------
Effects of SFAS 133 on Accounting for Callable Interest Rate Swaps. Farmer
Mac enters into financial derivative transactions principally to protect against
risk from the effects of market price or interest rate movements on the value of
certain assets and future cash flows or debt issuance, not for trading or
speculative purposes. Farmer Mac enters into interest rate swap contracts
principally to adjust the characteristics of the forecasted issuance of variable
rate short term funding to more closely match the cash flow and duration
characteristics of its longer-term mortgage and other assets, thereby reducing
interest rate risk. Specifically, interest rate swaps convert economically the
variable cash flows related to the forecasted issuance of short-term debt to
effectively fixed-rate medium-term and long-term notes that match the
anticipated duration, repricing and interest rate characteristics of the
corresponding assets. Since this strategy provides Farmer Mac with the same cash
flows as those that are inherent in the issuance of medium-term notes, Farmer
Mac uses either the bond market or the swap market based upon their relative
pricing efficiencies.
Farmer Mac uses callable interest rate swaps (in conjunction with the
issuance of short-term debt) as an alternative to callable medium-term notes
with equivalently structured maturities and call options. The call options on
the swaps are designed to match the implicit prepayment options on those
mortgage assets without prepayment protection. The blended durations of the
swaps are also designed to match the duration of the mortgages over their
estimated lives. If the mortgages prepay, the swaps can be called and the
short-term debt repaid; if the mortgages do not prepay, the swaps remain
outstanding and the short-term debt is rolled over, effectively providing
fixed-rate callable funding over the lives of the mortgages. Thus, the economics
of the assets are closely matched to the economics of the interest rate swap and
funding combination.
The callable interest rate swaps are recorded at fair value on Farmer Mac's
balance sheet with the related changes in fair value recognized in the
consolidated statement of operations. Although Farmer Mac believes that this
strategy achieves its economic and risk management objectives, the FASB has
adopted a mixed attribute accounting model for callable swaps that does not
reflect the economics of the transactions. Pursuant to that model, while the
issuance of a callable medium-term note is recorded at historical cost, the
economic equivalent (the issuance of short term-debt with the forecasted
rollover of that debt and the simultaneous issuance of a callable interest rate
swap) is recorded differently (the discount notes are recorded at historical
cost and the interest rate swap is recorded at fair value). Despite the closely
matched economics and optionality of the assets and the associated interest rate
swap and funding combination, the callable swaps do not qualify for hedge
accounting under SFAS 133 because the test for hedge effectiveness under SFAS
133 is based on the linkage between the forecasted short-term funding and the
callable interest rate swap and ignores the prepayable characteristics of the
associated assets being funded.
Business Volume. Loans are brought into the Farmer Mac I and Farmer Mac II
programs as follows:
o Farmer Mac purchases eligible loans and guarantees timely payments of
principal and interest of securities backed by those loans as part of
the Farmer Mac I program. Farmer Mac may retain some or all of those
securities in its portfolio or sell them to third parties in capital
markets transactions.
o Farmer Mac purchases USDA-guaranteed portions of loans and guarantees
timely payments of principal and interest of securities backed by
those guaranteed portions as part of the Farmer Mac II program. Farmer
Mac may retain some or all of those securities in its portfolio or
sell them to third parties in capital markets transactions.
o Farmer Mac also enters into LTSPCs for eligible loans. Farmer Mac's
commitments through LTSPCs include either newly originated or seasoned
eligible loans, and are part of the Farmer Mac I program.
o Farmer Mac exchanges Farmer Mac Guaranteed Securities for eligible
loans or USDA-guaranteed portions of loans ("swaps"). Farmer Mac's
swaps of Farmer Mac Guaranteed Securities for USDA-guaranteed portions
of loans are part of the Farmer Mac II program; Farmer Mac's swaps of
Farmer Mac Guaranteed Securities for any other eligible loans are part
of the Farmer Mac I program.
The following table sets forth the amount of all Farmer Mac I and Farmer
Mac II loan purchase and guarantee activities for newly originated and current
seasoned loans during the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
2003 2002 2003 2002
-------------- ------------- ------------- ---------------
(in thousands)
Loan purchase and guarantee and
commitment activity:
Farmer Mac I:
Loans $ 65,615 $551,690 $124,669 $ 626,565
LTSPCs 179,025 280,904 345,599 619,725
Farmer Mac II Guaranteed Securities 77,636 57,769 119,529 96,923
-------------- ------------- ------------- ---------------
Total purchases, guarantees
and commitments $ 322,276 $890,363 $589,797 $1,343,213
-------------- ------------- ------------- ---------------
Farmer Mac I Guaranteed Securities issuances:
Retained $ - $ - $ - $ -
Sold (1) 21,910 29,342 35,171 29,342
-------------- ------------- ------------- ---------------
Total $ 21,910 $ 29,342 $ 35,171 $ 29,342
-------------- ------------- ------------- ---------------
(1) Sold to Zions First National Bank or its affiliates, a related party.
The purchase price of newly originated and seasoned eligible loans and
portfolios purchased by Farmer Mac (none of which were delinquent at the time of
purchase) is the fair value based on current market interest rates and Farmer
Mac's target net yield, which includes an amount to compensate Farmer Mac for
credit risk that is similar to the guarantee or commitment fee it receives for
accepting credit risk on loans underlying Post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs. As part of fulfilling its guarantee obligations for
Farmer Mac I Guaranteed Securities and assumption of credit risk on commitments
to purchase eligible loans underlying LTSPCs, Farmer Mac purchases defaulted
loans (all of which are at least 90 days delinquent at the time of purchase) out
of those securities and pools. The purchase price for defaulted loans purchased
out of Farmer Mac I Guaranteed Securities is the current outstanding principal
balance of the loan plus accrued and unpaid interest. The purchase price for
defaulted loans purchased under an LTSPC is the current outstanding principal
balance of the loan, with accrued and unpaid interest on the defaulted loans
payable out of any future loan payments or liquidation proceeds received. The
following table presents Farmer Mac's loan purchases of newly originated and
current seasoned loans and defaulted loans purchased underlying Farmer Mac I
Guaranteed Securities and LTSPCs.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ---------------------------
2003 2002 2003 2002
-------------- ------------- ------------- ------------
(in thousands)
Farmer Mac I newly originated
and current seasoned loan purchases $ 65,615 $ 551,690 $ 124,669 $ 626,565
Defaulted loans purchased from
off-balance sheet Farmer Mac I
Guaranteed Securities 523 454 24,001 20,319
Defaulted loans transferred from
on-balance sheet Farmer Mac I
Guaranteed Securities 2,394 443 22,413 6,997
Defaulted loans purchased
from LTSPCs 2,239 - 3,098 197
The decrease in newly originated and current seasoned loan purchases was
attributable to a decrease in newly originated Farmer Mac I loan purchases and a
large portfolio purchase in second quarter 2002 that has not been replicated in
2003. The increases in defaulted loans purchased and in defaulted loans
transferred to loans reflect:
o Farmer Mac's practice of purchasing 90-day delinquent loans out of
Farmer Mac I Guaranteed Securities; and
o recordation in the consolidated financial statements of other loans
over which Farmer Mac regained effective control during the period.
With respect to the second circumstance cited, when particular criteria are met,
such as the default of the borrower, Farmer Mac becomes entitled to exercise its
option to purchase the defaulted loans underlying Farmer Mac Guaranteed
Securities (these options are commonly referred to as "removal-of-account"
provisions). Farmer Mac records these loans in the consolidated financial
statements during the period in which Farmer Mac has the option to repurchase
the loans and therefore regains effective control over the transferred loans.
The weighted-average age of the Farmer Mac I newly originated and current
seasoned loans purchased during second quarter 2003 and second quarter 2002 was
less than one month and four months, respectively. Of the Farmer Mac I newly
originated and current seasoned loans purchased during second quarter 2003 and
second quarter 2002, 75 percent and 83 percent, respectively, had principal
amortization periods longer than the maturity date, resulting in balloon
payments at maturity, with a weighted-average remaining term to maturity of 15.1
years and 10.1 years, respectively. The weighted-average age of delinquent loans
purchased out of securitized pools and LTSPCs during second quarter 2003 and
second quarter 2002 was 6.1 years and 4.5 years, respectively.
Indicators of future loan purchase and guarantee volume (but not of future
LTSPC, swap or portfolio purchase volume) in the immediately succeeding
reporting period include outstanding commitments to purchase loans (other than
under an LTSPC) 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, 2003, outstanding commitments to purchase Farmer Mac I loans totaled
$10.7 million, compared to $15.6 million as of June 30, 2002. Of the total
Farmer Mac I commitments outstanding as of June 30, 2003 and 2002, $3.6 million
and $10.6 million, respectively, were mandatory commitments. Loans submitted for
approval or approved but not yet committed to purchase totaled $59.8 million as
of June 30, 2003, compared to $86.1 million as of June 30, 2002. Not all of
these loans will be purchased, as some will ultimately be 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. Acceptance of Farmer Mac's
programs is increasing among lenders, reflecting the competitive rates, terms
and products offered and the advantages Farmer Mac's programs provide, including
increased liquidity and lending capacity. As of June 30, 2003, Farmer Mac's
outstanding program volume was $5.6 billion, which represented approximately 12%
of management's estimate of a $46 billion market of eligible agricultural
mortgage loans. For Farmer Mac to succeed in realizing its business development
and profitability objectives over the longer term, the use of Farmer Mac's
programs and products by agricultural mortgage lenders, whether traditional or
non-traditional, must continue to expand.
New business volume was down for the first six months of 2003 compared to
the same period in 2002. Farmer Mac believes this trend is traceable to:
o general conditions in the agricultural mortgage market affecting all
agricultural mortgage lenders, including the reduced interest of
borrowers in long-term fixed rate financing;
o diminished expansion in the capital intensive livestock and permanent
crop sectors; and
o residual effects of adverse publicity based on misinformation about
Farmer Mac disseminated in 2002.
Nonetheless, lender interest in Farmer Mac has produced a steady stream of new
volume in the form of Farmer Mac I and II individual loan purchases and
additions to existing LTSPC arrangements during 2003. The outlook for the second
half of 2003 is for new volume to approximate the level of the first half of
2003. Farmer Mac believes that prospects for larger portfolio transactions
similar to those that have accounted for a significant portion of growth in
prior years continue to exist, but no assurance can be given at this time as to
the certainty or timing of such transactions. Growth in Farmer Mac's business
volume is dependent on both an increase in its market share of existing
agricultural mortgages and continued growth in the total agricultural mortgage
market.
As of June 30, 2003, there were 124 approved loan sellers in the Farmer Mac
I program ranging from single-office to multi-branch institutions, spanning
community banks, Farm Credit System associations, mortgage companies, large
multi-state Farm Credit System banks, commercial banks and insurance companies.
The increase of 53 approved sellers from the 71 approved sellers as of March 31,
2003 resulted primarily from the recertification of sellers who had not provided
necessary certification information as of the earlier date. During 2002, there
were 79 approved loan sellers active in the Farmer Mac I program. In addition to
participating directly in the Farmer Mac I program, some of the approved loan
sellers enable other lenders to participate indirectly in the Farmer Mac I
program by managing correspondent networks of lenders from which they purchase
loans to sell to Farmer Mac. As of June 30, 2003, more than 75 lenders were
participating in those networks, bringing the total Farmer Mac I program
participants to more than 200 as of June 30, 2003.
To be considered for approval as a Farmer Mac I seller, a financial
institution must meet criteria established by Farmer Mac, including:
o owning a requisite amount of Farmer Mac Class A or Class B voting
common stock according to a schedule prescribed for the size and type
of institution;
o having the ability and experience to make or purchase and sell
agricultural mortgage loans of the type that will qualify for purchase
by Farmer Mac and service such mortgage loans in accordance with the
Farmer Mac requirements either through its own staff or through
contractors and originators;
o maintaining a minimum adjusted net worth of $1.0 million;
o maintaining a fidelity bond and errors and omissions insurance
coverage (or acceptable substitute insurance coverage) in a prescribed
amount according to the size of the institution; and
o entering into a Seller/Servicer agreement to comply with the terms of
the Farmer Mac Seller/Servicer Guide, including representations and
warranties regarding the eligibility of the loans and accuracy of loan
data provided to Farmer Mac.
Any lender authorized by the USDA to obtain a USDA guarantee on a loan may
be a seller in the Farmer Mac II program. As of June 30, 2003, there were 179
active sellers in the Farmer Mac II program, compared to 143 as of December 31,
2002 and 131 as of June 30, 2002. Sellers in the Farmer Mac II program consist
mostly of community and regional banks.
In the aggregate, more than 325 lenders were actively participating either
directly or indirectly in one or both of the Farmer Mac I or Farmer Mac II
programs as of June 30, 2003.
Balance Sheet Review
During the six months ended June 30, 2003, total assets increased by $44.9
million from December 31, 2002, with decreases in program assets (Farmer Mac
Guaranteed Securities and loans) of $26.6 million (exclusive of real estate
owned) offset by increases in non-program assets. For further information
regarding on- and off-balance sheet program activities, see "--Off-Balance Sheet
Program Activities" below. Consistent with the increase in total assets during
the period, total liabilities increased by $25.8 million from December 31, 2002
to June 30, 2003.
During the six months ended June 30, 2003, accumulated other comprehensive
income (loss) increased $0.2 million, which is the net effect of a $5.5 million
increase in unrealized gains on securities available for sale and a $5.3 million
decrease in the fair value of financial derivatives classified as cash flow
hedges. Accumulated other comprehensive income (loss) is not a component of
Farmer Mac's core capital or regulatory capital.
As of June 30, 2003, Farmer Mac's core capital totaled $202.9 million,
compared to $184.0 million as of December 31, 2002. As of June 30, 2003, core
capital exceeded Farmer Mac's statutory minimum capital requirement of $138.8
million by $64.1 million.
FCA issued its final risk-based capital regulation for Farmer Mac on April
12, 2001. Farmer Mac was required to meet the risk-based capital standards
beginning on May 23, 2002. The risk-based capital stress test promulgated by FCA
is intended to determine the amount of regulatory capital (core capital plus
allowance for losses) that Farmer Mac would need to maintain positive capital
during a ten-year period in which:
o losses occur at a rate of default and severity "reasonably related" to
the rates of the highest sequential two years in a limited U.S.
geographic area; and
o there is an initial interest rate shock at the lesser of 600 basis
points or 50 percent of the ten-year U.S. Treasury rate, and interest
rates remain at such level for the remainder of the period.
The risk-based capital stress test then adds an additional 30 percent to the
resulting capital requirement for management and operational risk.
Farmer Mac was in compliance with the risk-based capital standards under
the regulation as of June 30, 2003. As of June 30, 2003, the risk-based capital
stress test generated a regulatory capital requirement of $45.4 million. Farmer
Mac's regulatory capital of $224.8 million exceeded that amount by approximately
$179.4 million. The decrease in the risk-based capital requirement from December
31, 2002 ($73.4 million) to June 30, 2003 ($45.4 million) was a result of
changes in the interest rate environment and the ageing of Farmer Mac's loan
portfolio. Farmer Mac is required to hold capital at the higher of the statutory
minimum capital requirement or the amount required by the risk-based capital
stress test.
Off-Balance Sheet Program Activities
Farmer Mac offers approved agricultural and rural residential mortgage
lenders two off-balance sheet alternatives to increase their liquidity or
lending capacity while retaining the cash flow benefits of their loans: (1)
Farmer Mac Guaranteed Securities, which are available through either the Farmer
Mac I program or the Farmer Mac II program, and (2) LTSPCs, which are available
only through the Farmer Mac I program.
To be eligible for the Farmer Mac I program, a loan must meet Farmer Mac's
credit underwriting, appraisal and documentation standards. Accordingly, Farmer
Mac believes the credit risk it assumes for Farmer Mac Guaranteed Securities
backed by loans that are eligible for the Farmer Mac I program and for LTSPCs is
the same and considers the effects of all on- and off-balance sheet activities
on its overall portfolio diversification and credit risk. See Note 2 to Farmer
Mac's condensed consolidated financial statements above for more detail on the
Corporation's off-balance sheet program activities.
Quantitative and Qualitative Disclosures About Market 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
loans held and Farmer Mac Guaranteed 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 interest rate environment can reduce the 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 and other prepayment penalties contained in
many agricultural mortgage loans reduce, but do not eliminate, this prepayment
risk, particularly in the case of a defaulted loan where yield maintenance might
not be collected. Those provisions require borrowers to make an additional
payment when they prepay their loans, so that, when reinvested with the prepaid
principal, yield maintenance payments generate substantially the same cash flows
that would have been generated had the loan not prepaid. Those provisions create
a disincentive to prepayment and in the event of prepayment, compensate the
Corporation for its interest rate risks to a large degree. As of June 30, 2003,
54 percent of the outstanding balance of all loans held and loans underlying
on-balance sheet Farmer Mac I Guaranteed Securities (including 90 percent of all
loans with fixed interest rates) were covered by yield maintenance provisions
and other prepayment penalties. Of the Farmer Mac I new and current loans
purchased in second quarter 2003, 12 percent had yield maintenance or another
form of prepayment protection (including 56 percent of all loans with fixed
interest rates). None of the USDA-guaranteed portions underlying Farmer Mac II
Guaranteed Securities had yield maintenance provisions.
Taking into consideration the prepayment provisions and the default
probabilities associated with its mortgage assets, Farmer Mac uses prepayment
models to project and value cash flows associated with these assets. Because
borrowers' behavior in various interest rate environments may change over time,
Farmer Mac periodically evaluates the effectiveness of these models compared to
actual prepayment experience and adjusts and refines the models as necessary to
improve the precision of subsequent prepayment forecasts. In addition, Farmer
Mac consults with independent prepayment experts as part of the model evaluation
process.
The goal of Farmer Mac's interest-rate-risk management is to create a
portfolio that generates stable earnings and value across a variety of interest
rate environments. Farmer Mac's primary strategy for managing interest rate risk
is to fund asset purchases with liabilities that have similar durations so that
they will perform similarly as interest rates change. To achieve this match,
Farmer Mac issues discount notes and medium-term notes across a spectrum of
maturities. Additionally, Farmer Mac issues callable debt to offset the
prepayment risk associated with some mortgage assets. By using a blend of
liabilities that includes callable debt, the interest rate sensitivities of the
liabilities tend to increase or decrease as interest rates change in a manner
similar to changes in the interest rate sensitivities of the assets. Farmer Mac
also uses financial derivatives to better match the durations of assets and
liabilities thereby reducing overall interest rate sensitivity.
Farmer Mac's $620.6 million of cash and cash equivalents as of June 30,
2003 matures within three months and are match-funded with discount notes having
similar maturities. Investment securities of $976.3 million as of June 30, 2003
consist of $742.6 million (76.1 percent) of floating rate securities that all
have rates that adjust within one year. These floating rate investments are
funded using a series of discount note issuances. Each successive discount note
issuance matures on or about 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 has not yet purchased. When Farmer
Mac commits to purchase a loan, it is exposed to interest rate risk between the
time it commits to purchase the loan and the time it either:
o sells Farmer Mac Guaranteed Securities backed by the loan; or
o issues debt to retain the loan in its portfolio (although issuing debt
to fund the loan as an investment does not fully eliminate 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 any related
Farmer Mac Guaranteed Securities or debt issuance, through the use of forward
sale contracts on the debt and mortgage-backed securities of other
government-sponsored enterprises and futures contracts involving U.S. Treasury
securities. Farmer Mac uses forward sale contracts on government-sponsored
enterprise securities to reduce its interest rate exposure to changes in both
Treasury rates and spreads on Farmer Mac debt and Farmer Mac I Guaranteed
Securities.
Since interest rate sensitivity may change with the passage of time and as
interest rates change, Farmer Mac assesses this exposure on a regular basis and
rebalances its portfolio of assets and liabilities as necessary through:
o purchasing mortgage assets in the ordinary course of business;
o refunding existing liabilities; or
o using derivatives to alter the characteristics of existing assets or
liabilities.
The most strenuous measure of the interest rate risk of Farmer Mac's
current portfolio is the sensitivity of its Market Value of Equity ("MVE") to
parallel yield curve shocks. MVE represents the present value of all future cash
flows from on- and off-balance sheet assets, liabilities, including financial
derivatives, discounted at current interest rates and spreads. The following
schedule summarizes the results of Farmer Mac's MVE sensitivity analysis as of
June 30, 2003 and December 31, 2002 to an immediate and instantaneous parallel
shift in the yield curve.
Percentage Change in MVE from
Base Case
----------------------------------
Interest Rate June 30, December 31,
Scenario 2003 2002
--------------- ---------------- ----------------
+ 300 bp 1.7% 15.6%
+ 200 bp 2.0% 11.0%
+ 100 bp 1.5% 5.9%
- 100 bp -2.9% -7.1%
- 200 bp N/A* N/A*
- 300 bp N/A* N/A*
* As of the date indicated, a -200 bp parallel shift of the U. S. Treasury
yield curve produced negative interest rates for maturities of 2 years and
shorter.
During 2002 and through second quarter 2003, interest rates fell to
historic lows and interest rate volatility increased significantly. Despite the
volatile interest rate environment, Farmer Mac maintained a relatively low level
of interest rate sensitivity during second quarter 2003 through ongoing
asset/liability rebalancing activities. As of June 30, 2003, Farmer Mac's
effective duration gap, another standard measure of interest rate risk, was
improved to minus 1.2 months, compared to minus 3.6 months as of December 31,
2002, as a result of the rebalancing activities conducted during second quarter
2003. As of both June 30, 2003 and December 31, 2002, Farmer Mac's MVE and net
interest income ("NII") showed positive sensitivity to increasing interest rates
and negative sensitivity to continued decreases in interest rates.
As of June 30, 2003, a uniform or "parallel" increase of 100 basis points
would have increased NII, a shorter-term measure of interest rate risk, by 7.6
percent, while a parallel decrease of 100 basis points would have decreased NII
by 7.8 percent. Farmer Mac also measures the sensitivity of both MVE and NII to
a variety of non-parallel interest rate shocks, including flattening and
steepening yield curve scenarios. Both MVE and NII continue to be less sensitive
to non-parallel shocks than to the parallel shocks. The sensitivity of Farmer
Mac's MVE and NII to both parallel and non-parallel interest rate shocks, and
its duration gap, are indicators of the effectiveness of the Corporation's
approach to managing its interest rate risk exposures.
The economic effects of financial derivatives, including interest rate
swaps, are included in the MVE, NII and duration gap analyses. Farmer Mac
generally enters into various interest rate swaps to reduce interest rate risk
as follows:
o "floating-to-fixed interest rate swaps" in which it pays fixed rates
of interest to, and receives floating rates of interest from,
counterparties; these swaps adjust the characteristics of short-term
debt to match more closely the cash flow and duration characteristics
of longer-term reset and fixed-rate mortgages and other assets and may
provide an overall lower effective cost of borrowing than would
otherwise be available in the conventional debt market;
o "fixed-to-floating interest rate swaps" in which it receives fixed
rates of interest from, and pays floating rates of interest to,
counterparties; these swaps adjust the characteristics of long-term
debt to match more closely the cash flow and duration characteristics
of short-term assets; and
o "basis swaps" in which it pays variable rates of interest based on one
index to, and receives variable rates of interest based on another
index from, counterparties; these swaps alter interest rate indices of
liabilities to match those of assets, and vice versa.
As of June 30, 2003, Farmer Mac had $1.182 billion combined notional amount of
interest rate swaps with terms ranging from one month to 15 years. Of those
interest rate swaps, $703.0 million were floating-to-fixed rate interest rate
swaps, $378.7 million were basis swaps and $100.0 million were fixed-to-floating
interest rate swaps.
Farmer Mac employs financial derivatives as an end-user for hedging
purposes, not for trading or speculative purposes. When financial derivatives
meet the specific hedge criteria under 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 value of those financial derivatives are reported as a gain or loss on
financial derivatives and trading assets in the consolidated statements of
operations. All of Farmer Mac's financial derivative transactions are conducted
under standard collateralized agreements that limit Farmer Mac's potential
credit exposure to any counterparty. As of June 30, 2003, Farmer Mac had no
uncollateralized net exposure to any counterparty.
Credit Risk. Farmer Mac's primary exposure to credit risk is the risk of
loss resulting from the inability of a borrower to repay the mortgage combined
with a deficiency in the value of the collateral relative to the amount
outstanding on the mortgage and the costs of liquidation. Farmer Mac is exposed
to credit risk on:
o loans it holds;
o loans underlying Farmer Mac Guaranteed Securities; and
o loans underlying LTSPCs.
Loans held or loans underlying Farmer Mac Guaranteed Securities or LTSPCs can be
divided into four groups:
o loans held for investment;
o loans underlying pre-1996 Act Farmer Mac I Guaranteed Securities;
o loans underlying Post-1996 Act Farmer Mac I Guaranteed Securities or
LTSPCs; and
o USDA-guaranteed portions underlying Farmer Mac II Guaranteed
Securities.
For loans underlying pre-1996 Act Farmer Mac I Guaranteed Securities, ten
percent first-loss subordinated interests mitigate Farmer Mac's credit risk
exposure. Before Farmer Mac incurs a credit loss, full recourse must first be
taken against the subordinated interest. The 1996 Act eliminated the
subordinated interest requirement. As a result, Farmer Mac generally assumes 100
percent of the credit risk on loans held for investment and loans underlying
Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs. Farmer Mac's credit
exposure on USDA-guaranteed portions is covered by the full faith and credit of
the United States. Farmer Mac believes it has little or no credit risk exposure
to loans underlying pre-1996 Act Farmer Mac I Guaranteed Securities because of
the subordinated interests, or to USDA-guaranteed portions because of the USDA
guarantee. The outstanding principal balance of loans held and loans underlying
Farmer Mac Guaranteed Securities (including AgVantage bonds) or LTSPCs is
summarized in the table below.
June 30, December 31,
2003 2002
---------------- ---------------
(in thousands)
Farmer Mac I:
Post-1996 Act $ 4,898,660 $ 4,850,234
Pre-1996 Act 28,057 31,960
Farmer Mac II:
USDA-guaranteed portions 668,899 645,790
---------------- ---------------
$ 5,595,616 $ 5,527,984
---------------- ---------------
For several years, Farmer Mac has conducted guarantee fee adequacy
analyses, using stress-test models developed internally and with the assistance
of outside experts. These analyses have taken into account the diverse and
dissimilar characteristics of the various asset categories for which Farmer Mac
manages its risk exposures, and have evolved as the mix and character of assets
under management has shifted with growth in the business and the addition of new
asset categories. Based on current information, Farmer Mac believes that its
guarantee fee is adequate compensation for the credit risk that it assumes.
Farmer Mac has established underwriting, appraisal and documentation
standards for agricultural mortgage loans to mitigate the risk of loss from
borrower defaults and to provide guidance concerning the management,
administration and conduct of underwriting and appraisals to all participating
sellers and potential sellers in its programs. These standards were developed on
the basis of industry norms for agricultural mortgage loans and are designed to
assess the creditworthiness of the borrower, as well as the value of the
collateral securing the loan. Farmer Mac requires sellers to make
representations and warranties regarding the conformity of eligible mortgage
loans to these standards, the accuracy of loan data provided to Farmer Mac and
other requirements related to the loans.
Farmer Mac I credit underwriting standards require that the loan-to-value
("LTV") ratio for any loan not exceed 70 percent, except that a loan secured by
a livestock facility and supported by a contract with an integrator (e.g., a
food processing company) may have an LTV ratio of up to 75 percent, a part-time
farm loan supported by private mortgage insurance may have an LTV ratio of up to
85 percent and a rural housing loan supported by private mortgage insurance may
have an LTV ratio of up to 97 percent. In the case of newly originated loans
that are not part-time farm or rural housing loans, borrowers on the loans must,
among other criteria set forth in Farmer Mac's underwriting standards, also meet
the following standard pro forma (that is, giving effect to the new loan) credit
ratios:
o debt-to-asset ratio of 50 percent or less;
o cash flow debt service coverage ratio on the mortgaged property of not
less than 1:1;
o total debt service coverage ratio, including farm and non-farm income,
of not less than 1.25:1; and
o ratio of current assets to current liabilities of not less than 1:1.
Farmer Mac's underwriting standards provide for acceptance of loans that do
not conform to one or more of the standard underwriting ratios, other than LTV
ratio, when:
o those loans exceed one or more of the underwriting standards to a
degree that compensates for noncompliance with one or more other
standards, referred to as compensating strengths; and
o those loans are made to producers of particular agricultural
commodities in a segment of agriculture in which such compensating
strengths are typical of the financial condition of sound borrowers in
that segment.
Farmer Mac's use of compensating strengths is not intended to provide a basis
for waiving or lessening the requirement that eligible mortgage loans under the
Farmer Mac I program be of consistently high quality. In fact, loans approved on
the basis of compensating strengths have historically demonstrated a lower rate
of default than that of loans that conformed to all of the standard credit
ratios. As of June 30, 2003, a total of $1.5 billion (31.3 percent) of the
outstanding balance of loans held and loans underlying LTSPCs and Post-1996 Act
Farmer Mac I Guaranteed Securities were approved based upon compensating
strengths. During second quarter 2003, $75.3 million (30.8 percent) of the loans
purchased or added under LTSPCs were approved based upon compensating strengths.
In the case of a seasoned loan, Farmer Mac considers sustained performance
to be a reliable alternative indicator of a borrower's ability to pay the loan
according to its terms. A seasoned loan generally will be deemed an eligible
loan if:
o it has been outstanding for at least five years and has a
loan-to-value ratio of 60 percent or less;
o there have been no payments on the loan more than 30 days past due
during the previous three years; and
o there have been no material restructurings or modifications for credit
reasons during the previous five years.
A seasoned loan that has been outstanding for more than one year but less
than five years must substantially comply with the underwriting standards for
newly originated loans as of the date the loan was originated by the lender. The
loan must also have a payment history that shows no payment more than 30 days
past due during the three-year period immediately prior to the date the loan is
either purchased by Farmer Mac or made subject to an LTSPC. As with the
secondary market for residential mortgages, there is no requirement that each
loan's compliance with the underwriting standards be re-evaluated after Farmer
Mac accepts the loan into its program.
The due diligence Farmer Mac performs before purchasing, guaranteeing
securities backed by, or committing to purchase, seasoned loans includes:
o evaluation of loan database information to determine conformity to the
criteria described above;
o confirmation that loan file data conform to database information;
o validation of supporting credit information in the loan files; and
o review of loan collateral appraisals.
All of the foregoing are performed through methods that give due regard to the
size, age, leverage and nature of the collateral for the loans.
In the case of rural housing and part-time farm loans, the borrower may
finance up to 97 percent and 85 percent, respectively, of the appraised value of
the property if the amount above 80 percent is covered by private mortgage
insurance. For newly originated part-time farm loans, the borrower must generate
sufficient income from all sources to repay all creditors. A borrower's capacity
to repay debt obligations generally is determined by two tests:
o the borrower's monthly mortgage payment-to-income ratio should be 28
percent or less; and
o the borrower's total monthly debt payment-to-income ratio should be 36
percent or less.
Farmer Mac's appraisal standards for newly originated loans require, among
other things, that the appraisal function be performed independently of the
credit decision-making process and conform to the Uniform Standards of
Professional Appraisal Practice promulgated by the Appraisal Standards Board.
Farmer Mac's appraisal standards require the appraisal function to be conducted
or administered by an individual meeting specific qualification and competence
criteria and who:
o is not associated, except by the engagement for the appraisal, with
the credit underwriters making the loan decision, though both the
appraiser and the credit underwriter may be directly or indirectly
employed by a common employer;
o receives no financial or professional benefit of any kind by virtue of
the report content, valuation or credit decision made or based on the
appraisal product; and
o has no present or contemplated future direct or indirect interest in
the appraised property.
The appraisal standards also require uniform reporting of reliable and credible
opinions of the market value, market rent and property net income
characteristics of the mortgaged property and the relative market forces.
Farmer Mac requires current collateral valuations in conformance with the
Uniform Standards of Professional Appraisal Practice for newly originated loans
purchased or placed under a Farmer Mac I Guaranteed Security or LTSPC. For
seasoned loans, Farmer Mac obtains appraisal updates as considered necessary by
its assessment of collateral risk determined in the due diligence process.
Farmer Mac maintains an allowance for losses to cover estimated probable
losses on loans held, real estate owned and loans underlying Post-1996 Act
Farmer Mac I Guaranteed Securities and LTSPCs in accordance with Statement of
Financial Accounting Standard No. 5, Accounting for Contingencies ("SFAS 5") and
Statement of Financial Accounting Standard No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS 114"). The methodology for determining the allowance
for losses is the same for loans held for investment and loans underlying
Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs because Farmer Mac
believes the ultimate credit risk is the same, i.e., the underlying agricultural
mortgage loans all meet the same credit underwriting and appraisal standards.
For accepting the credit risk on loans underlying Post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs, Farmer Mac receives guarantee fees and
commitment fees, respectively. For loans held, Farmer Mac receives interest
income that includes a component that correlates to its guarantee fee, which
Farmer Mac views as compensation for accepting credit risk.
No allowance for losses has been made for loans underlying Farmer Mac I
Guaranteed Securities issued prior to the 1996 Act or Farmer Mac II Guaranteed
Securities. Farmer Mac I Guaranteed Securities issued prior to the 1996 Act are
supported by unguaranteed first-loss subordinated interests, which are expected
to exceed the estimated credit losses on those loans. USDA-guaranteed portions
collateralizing Farmer Mac II Guaranteed Securities are obligations backed by
the full faith and credit of the United States. To date, Farmer Mac has
experienced no credit losses on any pre-1996 Act Farmer Mac I Guaranteed
Securities or on any Farmer Mac II Guaranteed Securities and does not expect to
incur any such losses in the future.
Farmer Mac's allowance for losses is presented in three components on its
consolidated balance sheet:
o an "Allowance for loan losses" on loans held for investment;
o a valuation allowance on real estate owned, which is included in the
balance sheet under "Real estate owned, net of valuation allowance";
and
o an allowance for losses on loans underlying Post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs, which is included in the balance
sheet under "Reserve for losses."
Farmer Mac's provision for losses is presented in two components on its
consolidated statement of operations:
o a "Provision for loan losses," which represents losses on Farmer Mac's
loans held for investment; and
o a "Provision for losses," which represents losses on loans underlying
Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs and real
estate owned.
Farmer Mac's allowance for losses is estimated using a systematic process
that begins with management's evaluation of the results of its proprietary loan
pool simulation and guarantee fee model (the "Model"); those results may be
modified by the application of management's judgment that takes into account
factors including:
o economic conditions;
o geographic and agricultural commodity concentrations in Farmer Mac's
portfolio;
o the credit profile of Farmer Mac's portfolio;
o delinquency trends of Farmer Mac's portfolio;
o Farmer Mac's experience in the management and sale of real estate
owned; and
o historical charge-off and recovery activities of Farmer Mac's
portfolio.
The Model offers historical loss experience on agricultural mortgage loans
similar to those on which Farmer Mac has assumed credit risk, but over a longer
period of time than Farmer Mac's own experience to date. Farmer Mac's systematic
methodology for determining its allowance for losses is expected to migrate over
time, away from the Model and toward the increased use of Farmer Mac's own
historical portfolio loss experience, as that experience continues to develop.
During this migration, Farmer Mac will continue to use the results from the
Model, augmented by the application of management's judgment, to determine its
loan loss allowance.
Management believes that its use of this methodology produces a reliable
estimate of total probable losses, as of the balance sheet date, for all loans
included in Farmer Mac's portfolio, including loans held, real estate owned and
loans underlying Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs.
In addition, Farmer Mac specifically analyzes its portfolio of
non-performing assets (loans 90 days or more past due, in foreclosure,
restructured, in bankruptcy, including loans performing under either their
original loan terms or a court-approved bankruptcy plan, and real estate owned)
on a loan-by-loan basis. This analysis measures impairment based on the fair
value of the underlying collateral for each individual loan relative to the
total amount due, including principal, interest and advances under SFAS 114. In
the event that the updated appraisal or management's estimate of discounted
collateral value does not support the total amount due, Farmer Mac specifically
determines an allowance for the loan for the difference between the recorded
investment and its fair value, less estimated costs to liquidate the collateral.
Management believes that the general allowance, which is the difference
between the total allowance for losses (generated through use of the Model) and
the specific allowances, adequately covers any probable losses inherent in the
portfolio of performing loans under SFAS 5.
Farmer Mac believes that the methodology described above produces a
reliable estimate of the total probable losses inherent in the Farmer Mac
portfolio. The Model:
o runs various configurations of loan types, terms, economic conditions
and borrower eligibility criteria to generate a distribution of loss
exposures over time for all loans in the portfolio;
o uses historical agricultural real estate loan origination and
servicing data that reflect varied economic conditions and stress
levels in the agricultural sector;
o contains features that allow variations for changes in loan portfolio
characteristics to make the data set more representative of Farmer
Mac's portfolio and credit underwriting standards; and
o considers the effects of the ageing of the loan portfolio along the
expected loss curves associated with individual cohort origination
years, including the segments that are entering into or coming out of
their peak default years.
Farmer Mac analyzes various iterations of the Model data to evaluate its
overall allowance for losses and back tests the results to validate the Model.
Such tests use prior period data to project losses expected in a current period
and compare those projections to actual losses incurred during the current
period.
The allowance for losses is increased through periodic provisions for
losses charged to expense and reduced by charge-offs for actual losses, net of
recoveries that are recognized if liquidation proceeds exceed previous
estimates. Charge-offs represent losses on the outstanding principal balance,
any interest payments previously accrued or advanced and expected costs of
liquidation.
The following table summarizes the changes in the components of Farmer
Mac's allowance for losses for the three and six months ended June 30, 2003 and
2002:
June 30, 2003 June 30, 2002
---------------------------------------------------- ------------------------------------------------
Allowance REO Total Allowance REO Total
for Loan Valuation Reserve Allowance for Loan Valuation Reserve Allowance
Losses Allowance for Losses for Losses Losses Allowance for Losses for Losses
------------ ----------- ------------ ------------- ----------- ----------- ------------ -----------
(in thousands) (in thousands)
Three Months Ended:
Beginning balance $ 3,028 $ 592 $ 17,472 $ 21,092 $ 2,436 $ - $ 14,581 $ 17,017
Provision for losses 1,416 - 697 2,113 - - 2,022 2,022
Net allocation of
allowance - - - - 2,746 - (2,746) -
Net charge-offs (1,342) - - (1,342) (510) - (202) (712)
------------ ----------- ------------ ------------- ----------- ---------- ------------ -----------
Ending balance $ 3,102 $ 592 $ 18,169 $ 21,863 $ 4,672 $ - $ 13,655 $ 18,327
------------ ----------- ------------ ------------- ----------- ---------- ------------ -----------
Six Months Ended:
Beginning balance $ 2,662 $ 592 $ 16,757 $ 20,011 $ 1,352 $ - $ 14,532 $ 15,884
Provision for losses 2,624 - 1,592 4,216 - - 4,038 4,038
Net allocation of
allowance - - - - 4,646 - (4,646) -
Net charge-offs (2,184) - (180) (2,364) (1,326) - (269) (1,595)
------------ ----------- ------------ ------------- ----------- ---------- ------------ -----------
Ending balance $ 3,102 $ 592 $ 18,169 $ 21,863 $ 4,672 $ - $ 13,655 $ 18,327
------------ ----------- ------------ ------------- ----------- ---------- ------------ -----------
When certain criteria are met, such as the default of the borrower, Farmer
Mac has the option to purchase the defaulted loans underlying Farmer Mac
Guaranteed Securities and is obligated to purchase those underlying an LTSPC.
These acquisitions are recorded in the consolidated financial statements at
their fair value. Fair value is determined by appraisal or management's estimate
of discounted collateral value. In September 2002, Farmer Mac adopted EITF issue
02-9, Accounting for Changes That Result in a Transferor Regaining Control of
Financial Assets Sold ("the consensus" or "EITF 02-9"). The consensus requires
that Farmer Mac record, at acquisition, the difference between each loan's
acquisition cost and its fair value, if any, as a charge to the reserve for
losses. Prior to the adoption of the consensus, any specific allowance that had
been established for the off-balance sheet obligation would have been
transferred from the reserve for losses to the allowance for loan losses
(referred to as "net allocation of the allowance" in the table above). Upon the
receipt of each loan's updated appraisal or determination of management's
estimate of discounted collateral value, the difference between the acquisition
cost of the loan and its fair value, if any, was recorded as a charge to the
allowance for loan losses.
Farmer Mac's total provision for losses was $2.1 million for second quarter
2003, compared to $2.0 million for second quarter 2002. During second quarter
2003, Farmer Mac charged off $1.3 million in losses against the allowance for
losses and had no recoveries. During second quarter 2002, Farmer Mac charged off
$0.9 million in losses against the allowance for losses and recovered $0.2
million from previously charged off losses, for net charge-offs of $0.7 million.
As of June 30, 2003, Farmer Mac's allowance for losses totaled $21.9 million, or
45 basis points of the outstanding principal balance of loans held and loans
underlying Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, compared
to $20.0 million (42 basis points) as of December 31, 2002.
As of June 30, 2003, loans held and loans underlying Post-1996 Act Farmer
Mac I Guaranteed Securities and LTSPCs that were 90 days or more past due, in
foreclosure, restructured after delinquency, in bankruptcy (including loans
performing under either their original loan terms or a court-approved bankruptcy
plan) and real estate owned ("Post-1996 Act non-performing assets") totaled
$80.2 million and represented 1.64 percent of the principal balance of all loans
held and loans underlying Post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs, compared to $65.2 million (1.45 percent) as of June 30, 2002. Loans that
have been restructured after delinquency were insignificant and are included
within the reported 90-day delinquency and non-performing asset disclosures. As
of June 30, 2003, Farmer Mac's 90-day delinquencies totaled $51.3 million and
represented 1.06 percent of the principal balance of all loans held and loans
underlying Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, compared
to $50.3 million (1.12 percent) as of June 30, 2002. From quarter to quarter,
Farmer Mac anticipates the 90-day delinquencies will fluctuate, 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 corresponding to the
semi-annual (January 1st and July 1st) payment characteristics of most Farmer
Mac I loans.
The following table presents historical information regarding Farmer Mac's
non-performing assets and 90-day delinquencies:
Outstanding
Post-1996 Act Less:
Loans, Non- REO and
Guarantees and performing Performing 90-Day
LTSPCs Assets Percentage Bankruptcies Delinquencies Percentage
------------------ -------------- ------------- ---------------- --------------- --------------
(dollars in thousands)
As of:
June 30, 2003 $ 4,875,059 $ 80,169 1.64% $ 28,883 $ 51,286 1.06%
March 31, 2003 4,820,887 94,822 1.97% 18,662 76,160 1.58%
December 31, 2002 4,821,634 75,308 1.56% 17,094 58,214 1.21%
September 30, 2002 4,506,330 91,286 2.03% 11,460 79,826 1.77%
June 30, 2002 4,489,735 65,196 1.45% 14,931 50,265 1.12%
March 31, 2002 3,754,171 87,097 2.32% 7,903 79,194 2.11%
December 31, 2001 3,428,176 58,279 1.70% 3,743 54,536 1.59%
September 30, 2001 3,318,796 71,686 2.16% 5,183 66,503 2.00%
June 30, 2001 3,089,460 53,139 1.72% 4,274 48,865 1.58%
As of June 30, 2003, approximately $1.8 billion (37.1 percent) of Farmer
Mac's outstanding loans held and loans underlying Post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs were in their peak delinquency and default
years compared to $1.7 billion (38.4 percent) of such loans as of June 30, 2002.
The Model takes the portfolio age distribution and maturation into
consideration. Accordingly, those trends did not cause management to alter the
Model's projection for the provisions for losses.
As of June 30, 2003, Farmer Mac's loan-by-loan analysis of its $80.2
million of non-performing assets and their updated appraisals or management's
estimates of discounted collateral values indicated that $68.3 million of
non-performing assets were adequately collateralized, and that the allocation of
specific allowances to those loans was not necessary. Farmer Mac's loan-by-loan
analyses indicated that the remaining $11.9 million had insufficient collateral
to cover the loan balance, accrued interest and expenses. Farmer Mac has
specifically allocated $2.8 million of allowances to those under-collateralized
loans. As of June 30, 2003, after the allocation of specific allowances to
under-collateralized loans, Farmer Mac had additional non-specific or general
allowances of $19.1 million relating to inherent probable loss in the portfolio,
bringing the total allowance for losses to $21.9 million. Based on Farmer Mac's
loan-by-loan analyses and loan collection experience, Farmer Mac believes that
specific and inherent probable losses are covered adequately by the allowance
for losses.
The following table summarizes Farmer Mac's non-performing assets and
allowance for losses:
Farmer Mac I Post-1996 Act Non-performing Assets and Allowance for Losses
- ------------------------------------------------------------------------------------------------------------
As of June 30, 2003 As of December 31, 2002
------------------------------------ -----------------------------------
(in thousands)
Specific Specific
Non-performing Allowance Non-performing Allowance
Assets for Losses Assets for Losses
------------------- --------------- ------------------- --------------
Loans 90 days or more past due $ 12,367 $ 452 $ 17,600 $ 238
Loans in foreclosure 17,323 1,179 16,856 519
Loans in bankruptcy * 32,646 539 35,229 687
Real estate owned 17,833 592 5,623 592
------------------- --------------- ------------------- --------------
Total $ 80,169 $ 2,762 $ 75,308 $ 2,036
------------------- --------------- ------------------- --------------
Allowance Allowance
for Losses for Losses
--------------- --------------
Specific allowance for losses $ 2,762 $ 2,036
General allowance for losses 19,101 17,975
--------------- --------------
Total allowance for losses $ 21,863 $ 20,011
--------------- --------------
* Includes loans that are performing under either their original loan terms
or a court-approved bankruptcy plan.
Original loan-to-value ratios are one of many factors Farmer Mac considers
in evaluating loss severity. Other factors include, but are not limited to,
other underwriting standards, commodity and farming forecasts and regional
economic and agricultural conditions. Loans in the Farmer Mac I program are all
first mortgage agricultural real estate loans. Accordingly, Farmer Mac's
exposure on a loan is limited to the difference between the total of the accrued
interest, advances and principal balance of a loan and the value of the
property. Measurement of that excess or shortfall is the best predictor and
determinant of loss compared to other measures that evaluate the efficiency of a
particular farm operator.
Loan-to-value ratios depend upon the economic value of a property with due
regard for its income-producing potential in the hands of a competent operator.
As required by Farmer Mac's collateral valuation standards, an appraisal of
agricultural real estate must include analysis of the income producing
capability of the property and address the income estimate in the market
analysis. Debt service ratios depend upon farm operator efficiency and leverage,
which can vary widely within a geographic region, commodity type or an
operator's business and farming skills.
As of June 30, 2003, the weighted-average original loan-to-value ratio for
all loans held and loans underlying Post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs was 49 percent, and the weighted-average original
loan-to-value ratio for all Post-1996 Act non-performing assets was 57 percent.
The following table summarizes the Post-1996 Act non-performing assets by
original loan-to-value ratio (calculated by dividing the loan principal balance
at the time of guarantee, purchase or commitment by the appraised value at the
date of loan origination or, when available, updated appraised value at the time
of guarantee, purchase or commitment):
Distribution of Post-1996 Act Non-performing
Assets by Original LTV Ratio
as of June 30, 2003
- --------------------------------------------------
(dollars in thousands)
Post-1996 Act
Non-performing
Original LTV Ratio Assets Percentage
-------------------- ---------------- ------------
0.00% to 40.00% $ 10,106 13%
40.01% to 50.00% 10,788 13%
50.01% to 60.00% 26,421 33%
60.01% to 70.00% 29,897 37%
70.01% to 80.00% 2,264 3%
80.01% + 693 1%
-----------------------------
Total $ 80,169 100%
-----------------------------
The following table presents outstanding loans held and loans underlying
Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, Post-1996 Act
non-performing assets and specific allowances for losses as of June 30, 2003 by
year of origination, geographic region and commodity.
Farmer Mac I Post-1996 Act Non-performing Assets and Specific Allowance for Losses
- -----------------------------------------------------------------------------------------------------------------------
Distribution of
Outstanding Outstanding Post-1996 Act
Loans, Loans, Non- Non- Specific
Guarantees and Guarantees and performing performing Allowance
LTSPCs LTSPCs Assets (1) Asset Rate for Losses
------------------- ------------------ ---------------- ---------------- --------------
(dollars in thousands)
By year of origination:
Before 1994 13% $ 643,843 $ 4,076 0.63% $ -
1994 3% 157,836 610 0.39% -
1995 3% 148,556 3,452 2.32% 222
1996 7% 347,339 12,552 3.61% -
1997 8% 397,069 15,846 3.99% -
1998 14% 672,812 14,725 2.19% 688
1999 15% 714,419 12,846 1.80% 579
2000 9% 425,127 9,123 2.15% 780
2001 12% 609,014 6,570 1.08% 493
2002 12% 579,485 - 0.00% -
2003 4% 179,559 369 0.21% -
------------------- ------------------ --------------- ---------------- --------------
Total 100% $ 4,875,059 $ 80,169 1.64% $ 2,762
------------------- ------------------ ---------------- ---------------- --------------
By geographic region (2):
Northwest 23% $ 1,120,697 $ 43,785 3.91% $ 1,079
Southwest 47% 2,298,658 24,401 1.06% 683
Mid-North 13% 628,284 4,519 0.72% -
Mid-South 5% 238,587 5,574 2.34% 960
Northeast 6% 287,851 1,117 0.39% 40
Southeast 6% 300,982 773 0.26% -
------------------- ------------------ ---------------- ---------------- --------------
Total 100% $ 4,875,059 $ 80,169 1.64% $ 2,762
------------------- ------------------ ---------------- ---------------- --------------
By commodity:
Crops 44% $ 2,145,804 $ 28,913 1.35% $ 668
Permanent plantings 27% 1,329,440 35,802 2.69% 1,574
Livestock 21% 997,988 13,722 1.37% 480
Part-time farm 7% 365,219 1,732 0.47% 40
Other 1% 36,608 - 0.00% -
------------------- ------------------ ---------------- ---------------- --------------
Total 100% $ 4,875,059 $ 80,169 1.64% $ 2,762
------------------- ------------------ ---------------- ---------------- --------------
(1) Includes loans 90 days or more past due, in foreclosure, restructured after
delinquency, in bankruptcy (including loans performing under either their
original loan terms or a court-approved bankruptcy plan), and real estate
owned.
(2) Geographic regions - Northwest (AK, 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 cumulative charge-offs and
current specific allowances relative to the cumulative originally purchased,
guaranteed or committed principal balance for all loans purchased and loans
underlying Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs. This
information is presented by year of origination, geographic region and
commodity. The purpose of this table is to present information regarding losses
and collateral deficiencies relative to original guarantees and commitments.
Farmer Mac I Post-1996 Act Charge-offs and Specific Allowance for Losses
Relative to all Cumulative Original Loans, Guarantees and LTSPCs
- -----------------------------------------------------------------------------------------------------------------------
Cumulative Combined
Cumulative Original Loans, Cumulative Current Charge-off
Net Guarantees Charge-off Specific and Specific
Charge-offs and LTSPCs Rate Allowances Allowance Rate
---------------- ---------------- ----------------- ----------------- -----------------
(dollars in thousands)
By year of origination:
Before 1994 $ - $ 1,829,506 0.00% $ - 0.00%
1994 - 332,152 0.00% - 0.00%
1995 300 298,738 0.10% 222 0.17%
1996 1,418 591,110 0.24% - 0.24%
1997 3,047 666,953 0.46% - 0.46%
1998 2,254 1,007,615 0.22% 688 0.29%
1999 1,144 1,025,846 0.11% 579 0.17%
2000 869 613,913 0.14% 780 0.27%
2001 - 795,904 0.00% 493 0.06%
2002 - 768,490 0.00% - 0.00%
2003 - 117,130 0.00% - 0.00%
---------------- ---------------- ----------------- ----------------- ----------------
Total $ 9,032 $ 8,047,357 0.11% $ 2,762 0.15%
---------------- ---------------- -----------------
By geographic region (1):
Northwest $ 4,480 $ 1,951,378 0.23% $ 1,079 0.28%
Southwest 4,447 3,568,320 0.12% 683 0.14%
Mid-North - 960,189 0.00% - 0.00%
Mid-South 5 357,980 0.00% 960 0.27%
Northeast - 550,616 0.00% 40 0.01%
Southeast 100 658,874 0.02% - 0.02%
--------------- ----------------- ----------------- ----------------- ---------------
Total $ 9,032 $ 8,047,357 0.11% $ 2,762 0.15%
--------------- ----------------- -----------------
By commodity:
Crops $ 1,368 $ 3,422,452 0.04% $ 668 0.06%
Permanent plantings 6,227 2,134,437 0.29% 1,574 0.37%
Livestock 1,137 1,754,212 0.06% 480 0.09%
Part-time farm 300 640,977 0.05% 40 0.05%
Other - 95,279 0.00% - 0.00%
--------------- ----------------- ----------------- ----------------- ----------------
Total $ 9,032 $ 8,047,357 0.11% $ 2,762 0.15%
--------------- ----------------- -----------------
(1) Geographic regions - Northwest (AK, 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 historical 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
approximately their third and fifth years subsequent to origination, regardless
of the year the loans were added to the Farmer Mac's portfolio. As a consequence
of the combination of principal amortization and collateral value appreciation,
there are few loans in the portfolio originated prior to 1996 with known
collateral deficiencies. While Farmer Mac expects that there will be loans that
have aged past their fifth year that will become delinquent and possibly
default, Farmer Mac does not anticipate significant losses on such loans.
Analysis of the portfolio by its geographic and commodity distribution
indicates that losses and collateral deficiencies have been and are expected to
remain most prevalent in the loans concentrated in the areas that do not receive
significant government support. This analysis is consistent with corresponding
commodity analysis, which indicates that Farmer Mac has experienced higher loss
and collateral deficiency rates in its loans classified as permanent plantings.
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 requires 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 Farmer Mac's ability to meet the financing
needs of all commodity groups.
Farmer Mac's methodologies for pricing its guarantee and commitment fees,
managing credit risks and providing adequate allowances for losses consider all
of the foregoing factors and information.
Liquidity and Capital Resources
Farmer Mac has sufficient liquidity and capital resources to support its
operations for the next twelve months and has a contingency funding plan to
handle unanticipated disruptions in its access to those resources.
Debt Issuance. Section 8.6(e) of Farmer Mac's statutory charter (12 U.S.C.
ss. 2279aa-6(e)) authorizes Farmer Mac to issue debt obligations to purchase
eligible mortgage loans and Farmer Mac Guaranteed Securities and to maintain
reasonable amounts for business operations, including adequate liquidity. Farmer
Mac funds its program operations primarily by issuing debt obligations of
various maturities in the public capital markets. Farmer Mac's debt obligations
consist of discount notes and medium-term notes issued to obtain funds
principally to cover the costs of purchasing and holding loans and securities
(including Farmer Mac Guaranteed Securities). Farmer Mac also issues discount
notes and medium-term notes to obtain funds for investments, transaction costs
and guarantee payments. The Corporation's discount notes and medium-term 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 FCA 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, but is not liable for any debt or obligation of any other
institution of the Farm Credit System. Likewise, neither the Farm Credit System
nor any other individual institution of the Farm Credit System is liable for any
debt or obligation of Farmer Mac. Income on Farmer Mac's discount notes and
medium-term 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 discount notes and medium-term notes (of which $3.9 billion was
outstanding as of June 30, 2003), 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 loans, Farmer Mac Guaranteed Securities and
non-program investment assets in accordance with guidelines established by its
board of directors.
Liquidity. The funding and liquidity needs of Farmer Mac's business
programs are driven by the purchase and retention of eligible loans and Farmer
Mac Guaranteed Securities, the maturities of Farmer Mac's discount notes and
medium-term notes and payment of principal and interest on Farmer Mac Guaranteed
Securities. Farmer Mac's primary sources of funds to meet these needs are:
o principal and interest payments and ongoing guarantee and commitment
fees received on loans, Farmer Mac Guaranteed Securities and LTSPCs;
and
o the issuance of discount notes and medium-term notes in the capital
markets.
Farmer Mac projects its expected cash flows from loans and securities,
other earnings and the sale of assets and matches those with its obligations to
retire debt and pay other liabilities as they come due. Farmer Mac issues
discount notes and medium-term notes to meet the needs associated with its
business operations, including liquidity, and also to increase its presence in
the capital markets in order to enhance the liquidity and pricing efficiency of
its discount notes and medium-term notes and Farmer Mac Guaranteed Securities
transactions and so improve the mortgage rates available to farmers, ranchers
and rural homeowners.
Though Farmer Mac's mortgage purchases do not currently necessitate daily
debt issuance, the Corporation continued its strategy of using its non-program
investment portfolio (referred to as Farmer Mac's liquidity portfolio) to
facilitate increasing its ongoing presence in the capital markets during 2003.
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 of less than one year and 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 can purchase mortgages from lenders
who may pass that benefit to farmers, ranchers and rural homeowners through the
Farmer Mac programs. Subject to dollar limitations, the Corporation's board of
directors has authorized non-program investments in:
o U.S. treasury obligations;
o agency and instrumentality obligations;
o repurchase agreements;
o commercial paper;
o guaranteed investment contracts;
o certificates of deposit;
o federal funds and bankers acceptances;
o certain securities and debt obligations of corporate and municipal
issuers;
o asset-backed securities;
o corporate money market funds; and
o preferred stock of government-sponsored enterprises.
As of June 30, 2003, Farmer Mac was in compliance with the dollar limitations
and investment authorizations set forth in its investment guidelines.
As a result of Farmer Mac's regular issuance of discount notes and
medium-term 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. During 2003 and throughout the period of inaccurate and
misleading publicity about the Corporation during 2002, Farmer Mac maintained
regular daily access to the discount note market at rates comparable to the
issuance and trading levels of other government-sponsored enterprise discount
notes. Farmer Mac's continued ability to access the discount note market at such
favorable rates could be affected by further inaccurate and misleading publicity
about Farmer Mac or unusual trading in its securities. Farmer Mac believes such
factors caused spread levels in secondary market trading of its outstanding
medium-term notes to widen during second quarter 2002. Although Farmer Mac
returned to issuing medium-term notes at favorable issuance spreads, the
foregoing factors could affect future medium-term note issuance spreads
adversely and cause Farmer Mac to emphasize floating-to-fixed interest rate
swaps, combined with discount note issuances, as a source of fixed-rate funding.
While the swap market may provide favorable fixed rates, swap transactions
expose Farmer Mac to the risk of future widening of its own issuance spreads
versus corresponding LIBOR rates. 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 cost of medium-term notes without
regard to the savings that may be achievable in the interest rate swap market.
Farmer Mac maintains an investment portfolio of cash and cash equivalents
(including commercial paper and other short-term money market instruments) and
investment securities consisting mostly of floating rate securities that reprice
within one year, which can be drawn upon for liquidity needs. As of June 30,
2003, Farmer Mac's cash and cash equivalents and investment securities totaled
$620.6 million and $976.3 million, respectively, a combined 37.4 percent of
total assets. For second quarter 2003, exclusive of daily overnight discount
note issuances that were invested overnight, the average discount note issuance
term and re-funding frequency was approximately 64 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 reports that Farmer Mac believes are misleading, speculation about
Farmer Mac produced by certain hedge funds acting as "short sellers," who stood
to gain if the price of Farmer Mac securities was depressed, and inaccurate
articles published by a reporter for a major newspaper. Farmer Mac has made
clear that those reports and articles are inaccurate and misleading.
It is anticipated that the analysis by the GAO would 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 Congressional mission. Farmer Mac welcomes the
independent analysis by the GAO as an opportunity to remove any confusion that
has been cast over its integrity, so that it may continue to fulfill it
Congressional mission in a financially safe and sound manner.
Supplemental Information
------------------------
The following tables present quarterly and annual information regarding
loan purchases, guarantees and commitments and outstanding guarantees and
commitments.
Farmer Mac Purchases, Guarantees and Commitments
- ------------------------------------------------------------------------------------------------
Farmer Mac I
-----------------------------------
Loans and
Guaranteed
Securities LTSPCs Farmer Mac II Total
----------------- ----------------- ----------------- -----------------
(in thousands)
For the quarter ended:
June 30, 2003 $ 65,615 $ 179,025 $ 77,636 $ 322,276
March 31, 2003 59,054 166,574 41,893 267,521
December 31, 2002 62,841 395,597 38,714 497,152
September 30, 2002 58,475 140,157 37,374 236,006
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
For the year ended:
December 31, 2002 747,881 1,155,479 173,011 2,076,371
December 31, 2001 272,127 1,032,967 198,171 1,503,265
Outstanding Balance of Farmer Mac Loans and
On- and Off-Balance Sheet Guarantees and Commitments (1)
- -------------------------------------------------------------------------------------------------------------
Farmer Mac I
--------------------------------------------------
Post-1996 Act
---------------------------------
Loans and
Guaranteed
Securities (2) LTSPCs Pre-1996 Act Farmer Mac II Total
---------------- ---------------- ---------------- ---------------- ----------------
(in thousands)
As of:
June 30, 2003 $ 2,108,180 $ 2,790,480 $ 28,057 $ 668,899 $ 5,595,616
March 31, 2003 2,111,861 2,732,620 29,216 650,152 5,523,849
December 31, 2002 2,168,994 2,681,240 31,960 645,790 5,527,984
September 30, 2002 2,127,460 2,407,469 35,297 630,452 5,200,678
June 30, 2002 2,180,948 2,336,886 37,873 617,503 5,173,210
March 31, 2002 1,655,485 2,126,485 41,414 592,836 4,416,220
December 31, 2001 1,658,716 1,884,260 48,979 595,156 4,187,111
September 30, 2001 1,605,160 1,731,861 58,813 608,944 4,004,778
June 30, 2001 1,572,800 1,537,061 65,709 579,251 3,754,821
(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 first
loss 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 Farmer Mac I Guaranteed
Securities.
Outstanding Balance of Loans Held and Loans Underlying
On-Balance Sheet Farmer Mac Guaranteed Securities
- --------------------------------------------------------------------------------------------------------------------------
Total
Fixed Rate 5-to-10-Year 1-Month-to-3-Year Held in
(10-yr. wtd. avg. term) ARMs & Resets ARMs Portfolio
--------------------- ---------------------- ---------------------- ----------------------
(in thousands)
As of:
June 30, 2003 $ 889,839 $ 1,064,824 $ 511,700 $ 2,466,363
March 31, 2003 880,316 1,057,310 515,910 2,453,536
December 31, 2002 1,003,434 981,548 494,713 2,479,695
September 30, 2002 1,000,518 934,435 498,815 2,433,768
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 financial derivatives, and by monitoring its exposure to
changes in interest rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quantitative and Qualitative
Disclosures About Market Risk Management--Interest Rate Risk" for more
information about Farmer Mac's exposure to interest rate risk and strategies to
manage such risk. For information regarding Farmer Mac's use of and accounting
policies for financial derivatives, see Note 1(d) of the condensed consolidated
financial statements. 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.
Item 4. Controls and Procedures
Farmer Mac maintains disclosure controls and procedures designed to ensure
that information required to be disclosed in the Corporation's periodic filings
under the Securities Exchange Act of 1934 (the "Exchange Act"), including this
report, is recorded, processed, summarized and reported on a timely basis. These
disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed under the Exchange Act is
accumulated and communicated to the Corporation's management on a timely basis
to allow decisions regarding required disclosure. Farmer Mac's Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of the
design and operation of the Corporation's disclosure controls and procedures (as
defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30,
2003. Based upon that evaluation, Farmer Mac's Chief Executive Officer and Chief
Financial Officer have concluded that the Corporation's disclosure controls and
procedures are adequate and effective. There have been no changes in Farmer
Mac's internal control over financial reporting that occurred during the quarter
ended June 30, 2003 that have materially affected, or are reasonably likely to
materially affect, the Corporation's internal controls over financial reporting.
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) Not applicable.
(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 10, 2003, Farmer Mac issued
an aggregate of 800 shares of its Class C Non-Voting Common Stock, at
an issue price of $21.79 per share, to the nine Directors who elected
to receive such stock in lieu of their cash retainers.
On June 5, 2003, Farmer Mac issued an aggregate of 37,045 shares of
its Class C Non-Voting Common Stock, at an issue price of $22.40 per
share, to the officers of Farmer Mac as incentive compensation.
During the second quarter of 2003, Farmer Mac granted options under
its 1997 Stock Option Plan to purchase an aggregate of 343,104 shares
of Class C Non-Voting Common Stock, at an exercise price of $22.40 per
share, to officers and directors as incentive compensation.
(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 5, 2003.
(b) See paragraph (c)(1) below. In addition to the Directors elected at
the Annual Meeting of Stockholders on June 5, 2003, the following
Directors appointed by the President of the United States continue to
serve as Directors of Farmer Mac:
Fred L. Dailey (Chairman)
Julia Bartling
Grace T. Daniel
Lowell L. Junkins
Glen Klippenstein
(c) (1) Election of Directors:
Class A Nominees
Number of Shares
For Withheld
-----------------------------
Dennis L. Brack 756,602 34,264
W. David Hemingway 737,437 53,429
Mitchell A. Johnson 737,437 53,429
Charles E. Kruse 788,566 2,300
Peter T. Paul 788,566 2,300
Class B Nominees
Number of Shares
For Withheld
-----------------------------
Ralph "Buddy" Cortese 491,301 750
Paul A. DeBriyn 491,301 750
Kenneth E. Graff 491,301 750
John G. Nelson III 391,028 101,023
John Dan Raines 491,301 750
(2) Selection of Independent Auditors (Deloitte & Touche LLP):
Class A Stockholders
Number of Shares
For 787,266
Against 2,400
Abstain 1,200
Class B Stockholders
Number of Shares
For 491,851
Against 100
Abstain 100
(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).
** 4.1 - Specimen Certificate for Farmer Mac Class A Voting Common
Stock.
** 4.2 - Specimen Certificate for Farmer Mac Class B Voting Common
Stock.
** 4.3 - Specimen Certificate for Farmer Mac Class C Non-Voting
Common Stock.
** 4.4 - Certificate of Designation of Terms and Conditions of Farmer
Mac 6.40% Cumulative Preferred Stock, Series A.
+* 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 12, 1999).
+* 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).
_____________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 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).
+* 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 (Form 10-Q filed
August 14, 2002).
+** 10.2.12 - Amendment No. 12 dated as of June 5, 2003 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).
_____________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 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).
+* 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).
_____________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 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 (Form 10-Q filed
August 14, 2002).
+** 10.3.15 - Amendment No. 15 dated as of June 5, 2003 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).
+* 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 (Form 10-Q filed August
14, 2002).
+** 10.4.6 - Amendment No. 6 dated as of June 5, 2003 to Employment Contract
between Tom D. Stenson and the Registrant.
_____________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 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 (Form 10-Q filed
August 14, 2002).
+** 10.5.4 - Amendment No. 4 dated as of June 5, 2003 to Employment Contract
between Jerome G. Oslick and the Registrant.
+** 10.6 - Employment Contract dated June 5, 2003 between Timothy L. Buzby
and the Registrant.
* 10.7 - Farmer Mac I Seller/Servicer Agreement dated as of August 7, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
* 10.8 - Medium-Term Notes U.S. Selling Agency Agreement dated as of
October 1, 1998 between Zions First National Bank and the
Registrant (Form 10-Q filed November 14, 2002).
* 0.9 - Discount Note Dealer Agreement dated as of September 18, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
*# 10.10 - ISDA Master Agreement and Credit Support Annex dated as of
June 26, 1997 between Zions First National Bank and the
Registrant (Form 10-Q filed November 14, 2002).
*# 10.11 - Master Central Servicing Agreement dated as of December 17, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
_____________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
*# 10.11.1 - Amendment No. 1 dated as of February 26, 1997 to Master Central
Servicing Agreement dated as of December 17, 1996 between Zions
First National Bank and the Registrant (Form 10-Q filed November
14, 2002).
*# 10.12 - Loan File Review and Underwriting Agreement dated as of December
17, 1996 between Zions First National Bank and the Registrant
(Form 10-Q filed November 14, 2002).
*# 10.12.1 - Amendment No. 1 dated as of January 20, 2000 to Loan File Review
and Underwriting Agreement dated as of December 17, 1996 between
Zions First National Bank and the Registrant (Form 10-Q filed
November 14, 2002).
*# 10.13 - Long Term Standby Commitment to Purchase dated as of August 1,
1998 between AgFirst Farm Credit Bank and the Registrant (Form
10-Q filed November 14, 2002).
*# 10.13.1 - Amendment No. 1 dated as of January 1, 2000 to Long Term Standby
Commitment to Purchase dated as of August 1, 1998 between AgFirst
Farm Credit Bank and the Registrant (Form 10-Q filed November 14,
2002).
* 10.13.2 - Amendment No. 2 dated as of September 1, 2002 to Long Term
Standby Commitment to Purchase dated as of August 1, 1998, as
amended by Amendment No. 1 dated as of January 1, 2000, between
AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed
November 14, 2002).
* 10.14 - 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.
** 31.1 - Certification of Chief Executive Officer relating to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003, pursuant to Rule 13a-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
** 31.2 - Certification of Chief Financial Officer relating to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003, pursuant to Rule 13a-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
_____________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
** 32 - Certification of Chief Executive Officer and Chief Financial
Officer relating to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003, pursuant to
18 U.S.C.ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On April 24, 2003, Farmer Mac furnished to the Securities and Exchange
Commission a Current Report on Form 8-K that attached a press release announcing
Farmer Mac's financial results for first quarter 2003.
On May 15, 2003, Farmer Mac furnished to the Securities and Exchange
Commission a Current Report on Form 8-K attaching the certifications of Henry D.
Edelman, Farmer Mac's Chief Executive Officer, and Nancy E. Corsiglia, Farmer
Mac's Chief Financial Officer, as required pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
On May 30, 2003, Farmer Mac filed with the Securities and Exchange
Commission a Current Report on Form 8-K that attached a press release announcing
that its Chief Executive Officer and Chief Financial Officer had each entered
into a trading plan in compliance with Rule 10b5-1 of the Securities Exchange
Act of 1934, as amended.
On June 10, 2003, Farmer Mac filed with the Securities and Exchange
Commission a Current Report on Form 8-K announcing that, on June 5, 2003, the
Board of Directors of Farmer Mac had declared a quarterly dividends on the
Corporation's 6.40% Cumulative Preferred Stock, Series A.
On June 26, 2003, Farmer Mac filed with the Securities and Exchange
Commission a Current Report on Form 8-K announcing the appointments of
presidential nominees Glen Klippenstein and Julia Bartling to replace Marilyn
Peters and Charles Eugene Branstool as members of Farmer Mac's Board of
Directors.
_____________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
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, 2003
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, 2003
EXHIBIT INDEX
Exhibit No. Description
10.2.12 - Amendment No. 12 dated as of June 5, 2003 to Employment Contract
between Henry D. Edelman and the Registrant.
10.3.15 - Amendment No. 15 dated as of June 5, 2003 to Employment Contract
between Nancy E. Corsiglia and the Registrant.
10.4.6 - Amendment No. 6 dated as of June 5, 2003 to Employment Contract
between
Tom D. Stenson and the Registrant.
10.5.4 - Amendment No.4 dated as of June 5, 2003 to Employment Contract
between Jerome G. Oslick and the Registrant.
10.6 - Employment Contract dated June 5, 2003 between Timothy L. Buzby and
the Registrant.
31.1 - Certification of Chief Executive Officer relating to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2003, pursuant to Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 - Certification of Chief Financial Officer relating to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2003, pursuant to Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 - Certification of Chief Executive Officer and Chief Financial Officer
relating to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003, pursuant to 18 U.S.C.ss.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 10.2.12
AMENDMENT NO. 12 TO EMPLOYMENT CONTRACT
Agreed, as of the 5th day of June 2003, 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, Amendment No. 10 to Employment Contract dated
as of June 7, 2001 and Amendment No. 11 to Employment Contract dated as of June
6, 2002 (collectively, the Agreement), be and hereby is amended as follows:
Section 4 (a) of the Agreement is replaced in its entirety with the
following new section:
4 (a). Base Salary. You will be paid a base salary (the Base Salary) during
the Term of Four Hundred Seventy-Nine Thousand Four Hundred and Sixty Dollars
($479,460) per year, payable in arrears on a bi-weekly basis; and
As amended hereby, the Agreement remains in full force and effect.
Federal Agricultural Mortgage Corporation Employee
By: /s/ Fred L. Dailey /s/ Henry D. Edelman
----------------------------- -------------------------------
Chairman of the Board
Exhibit 10.3.15
AMENDMENT NO. 15 TO EMPLOYMENT CONTRACT
Agreed, as of the 5th day of June 2003, 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, Amendment No. 13 to Employment
Contract dated as of June 7, 2001 and Amendment No. 14 to Employment Contract
dated as of June 6, 2002 (collectively, the Agreement), be and hereby is amended
as follows:
Sections 3 (a) of the Agreement is replaced in its entirety with the
following new section:
3 (a). Base Salary. You will be paid a base salary (the Base Salary) during
the Term of Three Hundred Seven Thousand Five Hundred Seventy-Eight Dollars
($307,578) per year, payable in arrears on a bi-weekly basis; and
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 10.4.6
AMENDMENT NO. 6 TO EMPLOYMENT CONTRACT
Agreed, as of the 5th day of June 2003, 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, Amendment No. 4 to Employment
Contract dated as of June 7, 2001 and Amendment No. 5 to Employment Contract
dated as of June 6, 2002 (collectively, the Agreement), be and hereby is amended
as follows:
Section 3 (a) of the Agreement is replaced in its entirety with the
following new section:
3 (a). Base Salary. You will be paid a base salary (the Base Salary) during
the Term of Two Hundred Fifty-One Thousand Eight Hundred Sixteen ($251,816) per
year, payable in arrears on a bi-weekly basis.
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 10.5.4
AMENDMENT NO. 4 TO EMPLOYMENT CONTRACT
Agreed, as of the 5th day of June 2003, 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, Amendment
No. 2 to Employment Contract dated as of June 7, 2001 and Amendment No. 3 to
Employment Contract dated as of June 6, 2002 (collectively, the Agreement), be
and hereby is amended as follows:
Section 3 (a) of the Agreement is replaced in its entirety with the
following new section:
3 (a). Base Salary. You will be paid a base salary (the Base Salary) during
the Term of Two Hundred Forty-Nine Thousand One Hundred Eleven Dollars
($249,111) per year, payable in arrears on a bi-weekly basis.
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
Exhibit 10.6
EMPLOYMENT CONTRACT
AGREED, as of the 5th day of June 2003, between the Federal Agricultural
Mortgage Corporation ("Farmer Mac") and Timothy L. Buzby ("Employee" or "you"),
that the following terms and conditions shall apply to the employment
relationship between the parties:
1. Term. The term of your employment shall continue until June 1, 2007 or
any earlier effective date of termination pursuant to Paragraph 7 hereof (the
"Term").
2. Scope of Authority and Employment. You will report directly to the
President of Farmer Mac. You will have responsibility for the general accounting
affairs of the corporation under business plans submitted by management to, and
approved by, the Board of Directors of Farmer Mac. You shall be an officer of
Farmer Mac, with the title of Vice President - Controller.
You will devote your best efforts and substantially all your time and
endeavor to your duties hereunder, and you will not engage in any other gainful
occupation without the prior written consent of Farmer Mac; provided, however,
that this provision will not be construed to prevent you from personally, and
for your own account or that of members of your immediate family, investing or
trading in real estate, stocks, bonds, securities, commodities, or other forms
of investment, so long as such investing or trading is not in conflict with the
best interests of Farmer Mac. You will be employed to perform your duties at the
principal office of Farmer Mac. Notwithstanding this, it is expected that you
will be required to travel a reasonable amount of time in the performance of
your duties under this Agreement.
3. Compensation. Farmer Mac will pay to you the following aggregate
compensation for all services rendered by you under this Agreement:
(a) Base Salary. You will be paid a base salary (the "Base Salary")
during the Term of One Hundred Seventy-Seven Thousand Two Dollars
($177,002) per year, payable in arrears on a bi-weekly basis;
(b) Incentive Compensation. In addition to your Base Salary, you will
be paid additional payments during the term of this Agreement in respect of
the work performed by you during the preceding "Planning Year" (June 1
through May 31), or portion thereof as follows: on June 1 of each year
through and including the effective date of termination, an additional
payment in an amount at the sole discretion of the Board of Directors if it
determines that you have performed in an extraordinary manner your duties,
pursuant to business plans proposed by management and approved by the Board
of Directors, during the preceding Planning Year.
4. Expenses. Farmer Mac will reimburse you for your reasonable and
necessary expenses incurred in carrying out your duties under this Agreement,
including, without limitation, expenses for: travel; attending approved business
meetings, continuing legal education, conventions and similar gatherings; and
business entertainment. Reimbursement will be made to you within ten (10) days
after presentation to Farmer Mac of an itemized accounting and documentation of
such expenses. You will notify the President of Farmer Mac prior to incurring
any such expenses of an extraordinary or unusual nature.
5. Vacation and Sick Leave. You will be entitled to four (4) weeks of paid
vacation for each full Planning Year during the Term of this Agreement, to be
taken in spans not exceeding two (2) weeks each. Vacation rights must be
exercised within two months after the end of the Planning Year or forfeited. You
will be entitled to reasonable and customary amounts of sick leave.
6. Employee Benefits. Farmer Mac will provide you with all employee
benefits regularly provided to employees of Farmer Mac and the following other
(or upgraded) benefits: the best level of personal and family health insurance
obtainable by Farmer Mac on reasonable terms; an annual medical examination;
business travel and personal accident insurance; life insurance in the amount of
Two Hundred Fifty Thousand Dollars ($250,000); disability benefits at least
equal to statutory benefits in the District of Columbia; participation in the
Farmer Mac Pension Plan; and participation in a savings plan established under
Paragraph 401(k) of the Internal Revenue Code. The providers of any insurance
will be listed in Best's Insurance Guide. All of the foregoing is subject to the
limitation that the total cost thereof will not exceed twenty five percent (25%)
of your Base Salary, exclusive of administrative expense. In the event that such
cost limitation would be exceeded in any year, you may be required to select
from among the foregoing a group of benefits within that cost limitation.
7. Termination.
(a) Events of Termination. This Agreement will be terminated and the
employment relationship between you and Farmer Mac will be severed as set
forth below:
(1) Farmer Mac may terminate your employment effective upon
notice to you (or your legal representative) if you die or are
incapacitated or disabled by accident, sickness or otherwise so as to
render you (in the opinion of an independent medical consultant on the
full-time faculty of Georgetown University School of Medicine)
mentally or physically incapable of performing the services required
to be performed by you under the terms of this Agreement for a period
of at least sixty (60) consecutive days, or for sixty (60) days
(whether consecutive or not) during any six-month period.
(2) Farmer Mac may terminate your employment effective upon
notice to you at any time for "cause." For the purposes of this
subsection, "cause" will mean only: (A) your willful failure to
perform substantially your duties hereunder, other than any such
failure resulting from your incapacity due to physical or mental
illness; or (B) your willful engagement in activities contrary to the
best interests of Farmer Mac. For purposes of this subsection, no act,
or failure to act on your part, shall be considered "willful" unless
done, or omitted to be done, by you not in good faith and without
reasonable belief that your action or omission was in the best
interests of Farmer Mac.
(3) Farmer Mac may terminate your employment without "cause" at
any time. Such termination shall become effective June 1, 2007.
(4) Notwithstanding the provisions of subsection 7(a)(3) above,
Farmer Mac may terminate your employment at any time after the passage
by the Board of Directors of Farmer Mac of a resolution authorizing
the dissolution of Farmer Mac. Such termination of your employment
shall become effective on the later of twelve (12) months after notice
of termination or the date that such dissolution of Farmer Mac becomes
final as a matter of law, provided, however, that neither of the
following shall be deemed to be a dissolution for the purposes of this
Agreement: (i) dissolution of Farmer Mac which becomes final as a
matter of law more than twelve (12) months after adoption of the
resolution of dissolution; or (ii) incorporation, organization or
reorganization of a corporation or other business entity which is
substantially similar to Farmer Mac and which uses substantially the
same assets or equity as Farmer Mac, within twelve (12) months after
adoption of the resolution of dissolution. As used herein, the term
"reorganization" shall have the same meaning as in Section 368(a) of
the Internal Revenue Code of 1986.
(b) Payment of Accrued Compensation.
(1) Upon termination of this Agreement pursuant to preceding
subsection (a), you (or your estate or heirs, as the case may be) will
be entitled to receive all Base Salary, Incentive Compensation,
expense reimbursements, vacation pay, and similar amounts accrued and
unpaid as of the date of such termination. The obligations of Farmer
Mac under this subsection (b) will survive any termination of this
Agreement.
(2) In the event of your voluntary termination of employment
hereunder, Farmer Mac will not be obligated to make any further
compensation payments to you beyond those accrued prior to the
effective date of such termination.
(c) Disability Pay. Upon termination of this Agreement pursuant to the
preceding subsection (a)(1), Farmer Mac, in its discretion, will either:
(1) continue to pay you (or your estate or heirs, as the case may
be) for the lesser of two (2) years or the balance of the Term the
difference between your current Base Salary and the amount of
disability insurance payments received by you under insurance policies
provided by Farmer Mac in accordance with this Agreement; or
(2) pay you (or your estate or heirs, as the case may be) the
present value of the payments described in preceding subsection
(c)(1), discounted at a rate equal to the yield then available for
two-year U.S. Treasury Notes, plus 50 basis points (0.50%).
(d) Severance Pay. Upon termination of this Agreement pursuant to preceding
subsection 7(a)(3) or 7(a)(4), Farmer Mac will pay you within thirty (30) days
after such termination an aggregate amount in cash equal to one hundred percent
(100%) of all Base Salary scheduled to be paid and not yet paid to you under
this Agreement for the balance of the Term.
In the event of Farmer Mac's severance of your employment pursuant
to preceding subsection 7(a)(1), (3), or (4), the amount to be paid by Farmer
Mac to you hereunder will not be mitigated by any subsequent earnings by you
from any source.
(e) Constructive Termination. You may, at your option, deem this Agreement
to have been terminated by Farmer Mac in the event of its breach, including
prospective breach, of any term hereof unremedied for thirty (30) days after
notice thereof to Farmer Mac. Upon notice to Farmer Mac of your exercise of this
option, you will have the same rights under such a constructive termination as
if Farmer Mac had terminated your employment pursuant to preceding subsection
(a)(3).
8. Agreement Not to Compete with Farmer Mac.
Notwithstanding anything in this Agreement to the contrary, in the event of
the termination of your employment, for a period of two years thereafter, you
shall not, without the prior written consent of Farmer Mac, directly or
indirectly, engage in any business or activity, whether as principal, agent,
officer, director, partner, employee, independent contractor, consultant,
stockholder or otherwise, alone or in association with any other person, firm,
corporation or other business organization, that directly or indirectly competes
with any of the businesses of Farmer Mac in any manner, including without
limitation, the acquisition and securitization (for capital market sale) of
agricultural mortgage loans or USDA "guaranteed portions" (hereinafter referred
to as "Farmer Mac Qualified Loans"); provided, however, that such prohibited
activity shall not include the ownership of up to 20% of the common stock in a
public company.
9. Agreement Not to Use Confidential or Proprietary Information.
Farmer Mac and you both recognize that you have access to and acquire, and
may assist in developing, confidential and proprietary information relating to
the business and operations of Farmer Mac as a result of your employment or
association with Farmer Mac. You hereby covenant and agree that you will retain
all "Confidential Information" (as defined below) in trust for the sole benefit
of Farmer Mac and its successors and assigns. You hereby covenant further that,
in addition to your fiduciary responsibilities as an officer not to disclose
certain information of or relating to Farmer Mac, you will not, at any time
during or after the term of this Agreement, without the prior written consent of
Farmer Mac, directly or indirectly communicate or divulge any such Confidential
Information to any person, firm, corporation or other business organization, or
use any such Confidential Information for your own account or for the account of
any other person, except as required in connection with the performance of your
services hereunder. The term "Confidential Information" shall mean any trade
secret, data or other confidential or proprietary information related to the
business and activities of Farmer Mac. Notwithstanding the foregoing,
Confidential Information shall not include any information that is or becomes a
part of the public domain or generally available to the public (unless such
availability occurs as a result of any breach by you of this Section 11), or
becomes available to you on a non-confidential basis from a source (other than
Farmer Mac) that is not bound by a confidentiality agreement and does not breach
his or her fiduciary responsibilities. The provisions of this Section 9 shall
survive the termination of this Agreement and the termination of your employment
hereunder.
10. Agreement Not to Solicit Farmer Mac Employees.
For a period of two years after the termination of your employment
hereunder, you shall not, directly or indirectly, induce any employee of Farmer
Mac who is a "member of management" (as defined below) or is directly involved
in the acquisition and securitization (for capital market sale) of Farmer Mac
Qualified Loans to engage in any activity in which you are prohibited from
engaging in under this Agreement, or to terminate such person's employment with
Farmer Mac. You shall not directly or indirectly, either individually or as
owner, agent, employee, consultant or otherwise, employ, offer employment to,
lure, entice away or assist others in recruiting or hiring any person who is or
was employed by Farmer Mac unless such person shall have ceased to be employed
by Farmer Mac for a period of at least six months and is not subject to any
non-compete covenants substantially similar in nature to those contained in
Section 8 hereof. "Member of management" means the President, any Vice
President, the Controller of Farmer Mac or attorney or paralegal in the employ
of Farmer Mac.
11. Notices. Any notice given under this Agreement will be sufficient if in
writing and either: (a) mailed postage prepaid by registered or certified mail,
return receipt requested; or (b) delivered by hand to, in the case of Farmer
Mac, 919 18th Street, N.W., Washington, D.C. 20006, attention President or, in
the case of the Employee, 18505 Rolling Acres Way, Olney, MD 20832 (or to such
other addresses as may be from time to time designated by notice from the
recipient party to the other). Any such notice will be effective upon actual
receipt or refusal thereof.
12. Miscellaneous.
(a) Governing Law. This Agreement will be governed by, and interpreted
and enforced in accordance with, the laws of the District of Columbia.
(b) Waiver. The waiver by any party of a breach of any provision of
this Agreement will not operate as a waiver of any other breach of any
provision of this Agreement by any party.
(c) Entire Agreement. This Agreement sets forth the entire
understanding of the parties concerning the subject matter hereof, and may
not be changed or modified except by a written instrument duly executed by
or on behalf of the parties hereto.
(d) Successors and Assigns. This Agreement will inure to the benefit
of and be binding upon the parties hereto and their respective successors,
heirs, personal representatives and assigns. This subsection is not to be
construed to permit you to assign your obligation to perform the duties of
your employment hereunder. This subsection permits Farmer Mac the right to
assign this Agreement to a successor entity.
(e) Severability. If any term, condition, or provision of this
Agreement or the application thereof to any party or circumstances will, at
any time or to any extent be invalid or unenforceable, the remainder of
this Agreement, or the application of such term, condition or provision to
parties or circumstances other than those to which it is held invalid or
unenforceable, will not be affected thereby, and each term, condition and
provision of this Agreement will be valid and enforceable to the fullest
extent permitted by law.
(f) Action by Farmer Mac. Except as expressly provided otherwise in
this Agreement, reference to actions, decisions, determinations or similar
occurrences by Farmer Mac (other than the execution of this Agreement and
any modifications hereto or notices given hereunder) will mean the action,
decision or determination of the Board of Directors or the President of
Farmer Mac.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
/s/ Henry D. Edelman
- -------------------------------------
By: Henry D. Edelman
President and Chief Executive Officer
EMPLOYEE
/s/ Timothy L. Buzby
- ----------------------------
Timothy L. Buzby
Exhibit 31.1
CERTIFICATION
I, Henry D. Edelman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Federal
Agricultural Mortgage Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 14, 2003
/s/ Henry D. Edelman
-------------------------
Henry D. Edelman
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Nancy E. Corsiglia, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Federal
Agricultural Mortgage Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 14, 2003
/s/ Nancy E. Corsiglia
-------------------------
Nancy E. Corsiglia
Chief Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of the Federal
Agricultural Mortgage Corporation (the "Corporation") for the quarterly period
ended June 30, 2003 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), the undersigned, Henry D. Edelman, Chief Executive
Officer of the Corporation, and Nancy E. Corsiglia, Chief Financial Officer of
the Corporation, each hereby certifies pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his
or her knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Corporation.
/s/Henry D. Edelman
- ------------------------
Henry D. Edelman
Chief Executive Officer
/s/ Nancy E. Corsiglia
- -------------------------
Nancy E. Corsiglia
Chief Financial Officer
Date: August 14, 2003