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As filed with the Securities and Exchange Commission
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on November 14, 2003
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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 September 30, 2003
Commission File Number 0-17440
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
Federally chartered instrumentality
of the United States 52-1578738
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
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 9(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 Ex9change Act).
Yes [X] No [ ]
As of November 1, 2003, there were 1,030,780 shares of Class A Voting
Common Stock, 500,301 shares of Class B Voting Common Stock and 10,271,188
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 September 30, 2003 and
December 31, 2002.................................................. 3
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 2003 and 2002...................... 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002.................................. 5
Notes to Condensed Consolidated Financial Statements................. 6
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2003 2002
------------------ ------------------
(unaudited) (audited)
Assets:
Cash and cash equivalents $ 513,370 $ 723,800
Investment securities 1,083,477 830,409
Farmer Mac Guaranteed Securities 1,521,167 1,608,507
Loans 979,643 966,123
Allowance for loan losses (6,171) (2,662)
---------------- ------------------
Loans, net 973,472 963,461
Real estate owned, net of valuation allowance of
$1.0 million and $0.6 million 16,413 5,031
Financial derivatives 2,816 317
Interest receivable 42,290 65,276
Guarantee and commitment fees receivable 14,729 5,938
Deferred tax asset 10,408 9,666
Prepaid expenses and other assets 18,229 10,510
---------------- ------------------
Total Assets $ 4,196,371 $ 4,222,915
---------------- ------------------
Liabilities and Stockholders' Equity:
Liabilities:
Notes payable:
Due within one year $ 2,763,811 $ 2,895,746
Due after one year 1,074,070 985,318
---------------- ------------------
Total notes payable 3,837,881 3,881,064
Financial derivatives 82,112 94,314
Accrued interest payable 29,782 29,756
Guarantee and commitment obligation 15,659 -
Accounts payable and accrued expenses 16,279 17,453
Reserve for losses 10,592 16,757
---------------- ------------------
Total Liabilities 3,992,305 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,
10,264,780 and 10,106,903 shares issued and outstanding
as of September 30, 2003 and December 31, 2002 10,265 10,107
Additional paid-in capital 84,655 82,527
Accumulated other comprehensive income (loss) (2,336) (407)
Retained earnings 74,951 54,813
---------------- ------------------
Total Stockholders' Equity 204,066 183,571
---------------- ------------------
Total Liabilities and Stockholders' Equity $ 4,196,371 $ 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 Nine Months Ended
------------------------------------ -----------------------------------
Sept. 30, 2003 Sept. 30, 2002 Sept. 30, 2003 Sept. 30, 2002
----------------- ----------------- ----------------- -----------------
(unaudited) (unaudited)
Interest income:
Investments and cash equivalents $ 7,994 $ 10,658 $ 26,490 $ 32,528
Farmer Mac Guaranteed Securities 17,783 22,793 55,984 68,353
Loans 13,543 12,734 39,679 26,926
----------------- ----------------- ----------------- -----------------
Total interest income 39,320 46,185 122,153 127,807
Interest expense 30,402 35,096 93,995 98,213
----------------- ----------------- ----------------- -----------------
Net interest income 8,918 11,089 28,158 29,594
Provision for loan losses (3,391) - (6,015) -
----------------- ----------------- ----------------- -----------------
Net interest income after provision
for loan losses 5,527 11,089 22,143 29,594
Guarantee and commitment fees 5,056 4,874 15,261 14,164
Gains/(Losses) on financial derivatives
and trading assets (3,348) (2,563) 3,653 (4,754)
Gain on the repurchase of debt - - 3,389
Miscellaneous income 354 458 743 1,218
----------------- ----------------- ----------------- -----------------
Total revenues 7,589 13,858 41,800 43,611
----------------- ----------------- ----------------- -----------------
Expenses:
Compensation and employee benefits 1,582 1,325 4,488 3,904
General and administrative 1,550 2,168 3,949 4,765
Regulatory fees 383 397 1,148 790
Provision for losses (1,269) 2,037 323 6,075
----------------- ----------------- ----------------- -----------------
Total operating expenses 2,246 5,927 9,908 15,534
Income before income taxes 5,343 7,931 31,892 28,077
Income tax expense 1,438 2,341 10,073 8,663
----------------- ----------------- ----------------- -----------------
Net income $ 3,905 $ 5,590 $ 21,819 $ 19,414
----------------- ----------------- ----------------- -----------------
Preferred stock dividends (560) (560) (1,680) (896)
----------------- ----------------- ----------------- -----------------
Net income available to common stockholders $ 3,345 $ 5,030 $ 20,139 $ 18,518
----------------- ----------------- ----------------- -----------------
Earnings per common share:
Basic earnings per common share $ 0.28 $ 0.43 $ 1.72 $ 1.60
Diluted earnings per common share $ 0.28 $ 0.42 $ 1.68 $ 1.54
See accompanying notes to condensed consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
-------------------------------------
Sept. 30, 2003 Sept. 30, 2002
------------------ ------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 21,819 $ 19,414
Adjustments to reconcile net income to net cash provided by
operating activities:
Net amortization of investment premiums and discounts (75) 536
Amortization of debt premiums, discounts and issuance costs 26,716 34,383
Proceeds from repayment of trading investment securities (5,207) (31,530)
Net change in fair value of trading securities and derivatives (4,144) 1,460
Amortization of settled financial derivatives contracts 1,297 768
Gain on the repurchase of debt - 2,203
Total provision for losses 6,338 6,075
Decrease in interest receivable 22,986 8,399
Decrease (increase) in guarantee and commitment fees receivable (8,791) 1,636
Increase in other assets (22,433) (12,354)
Increase in accrued interest payable 26 5,445
Increase (decrease) in other liabilities 9,233 (4,863)
------------------ ------------------
Net cash provided by operating activities 47,765 31,572
Cash flows from investing activities:
Purchases of available for sale investment securities (635,165) (179,146)
Purchases of Farmer Mac II Guaranteed Securities and
AgVantage bonds (251,387) (161,739)
Purchases of loans (243,034) (724,027)
Proceeds from repayment of investment securities 391,093 295,789
Proceeds from repayment of Farmer Mac Guaranteed Securities 317,085 211,642
Proceeds from repayment of loans 154,275 52,654
Proceeds from sale of loans and
Farmer Mac Guaranteed Securities 78,254 29,342
Settlement of financial derivatives (1,485) (4,314)
Purchases of office equipment (87) (138)
------------------ ------------------
Net cash used in investing activities (190,451) (479,937)
Cash flows from financing activities:
Proceeds from issuance of discount notes 47,811,390 53,832,987
Proceeds from issuance of medium-term notes 264,027 286,428
Payments to redeem discount notes (48,036,827) (53,524,678)
Payments to redeem medium-term notes (106,940) (126,654)
Net proceeds from preferred stock issuance - 34,667
Proceeds from common stock issuance 2,286 1,882
Preferred stock dividends (1,680) (896)
------------------ ------------------
Net cash provided by (used in) financing activities (67,744) 503,736
------------------ ------------------
Net increase (decrease) in cash and cash equivalents (210,430) 55,371
Cash and cash equivalents at beginning of period 723,800 437,831
------------------ ------------------
Cash and cash equivalents at end of period $ 513,370 $ 493,202
------------------ ------------------
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 nine
months ended September 30, 2003 and 2002.
Nine Months Ended
September 30,
-------------------------
2003 2002
----------- -----------
(in thousands)
Cash paid for:
Interest $ 44,008 $ 44,118
Income taxes 10,500 9,200
Non-cash activity:
Real estate owned acquired through foreclosure 24,350 6,566
Loans acquired and securitized as Farmer Mac
Guaranteed Securities 78,254 29,342
Loans acquired from on-balance sheet Farmer Mac
Guaranteed Securities 35,516 15,022
Loans previously under LTSPCs
exchanged for Farmer Mac Guaranteed Securities 722,315 -
(b) Loans
As of September 30, 2003, loans held by Farmer Mac included $30.5 million
held for sale and $949.1 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 September 30, 2003, Farmer Mac maintained a $22.7 million allowance
and contingent obligation for probable losses ("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 3 for a
description of LTSPCs.) The allowance for losses 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. The establishment of and
periodic adjustments to the REO valuation allowance are charged against income
as a portion of the provision for losses charged to operating expense.
Farmer Mac estimates probable losses 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"). The Model draws upon
historical information from a data set of agricultural mortgage loans recorded
over a longer period of time than Farmer Mac's own experience to date, screened
to include only those loans with credit characteristics similar to those on
which Farmer Mac has assumed credit risk. The results generated by the Model are
subject to modification 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.
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.
Farmer Mac expects its methodology for determining its allowance for losses
will migrate over time away from the Model and be based on Farmer Mac's own
historical portfolio loss experience. Until that time, 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 allowance for losses.
The table below summarizes the components of Farmer Mac's allowance for
losses, which includes its contingent obligation for probable losses, as of
September 30, 2003 and December 31, 2002.
September 30, December 31,
2003 2002
---------------- -----------------
(in thousands)
Allowance for loan losses $ 6,171 $ 2,662
Real estate owned valuation allowance 1,040 592
Reserve for losses:
On-balance sheet Farmer Mac I Guaranteed Securities 2,906 4,036
Off-balance sheet Farmer Mac I Guaranteed Securities 810 1,280
LTSPCs 6,876 11,441
Contingent obligation for probable losses 4,940 -
---------------- -----------------
Total allowance and contingent obligation $ 22,743 $ 20,011
for probable losses ---------------- -----------------
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 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.
(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 decrease to earnings under SFAS 133 during third quarter
2003 totaled $2.2 million, and the net after-tax increase to other comprehensive
income totaled $11.5 million. Substantially all of the decrease in earnings
under SFAS 133 resulted from decreases in the fair values of callable interest
rate contracts. Substantially all of the increase 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 September 30, 2003,
Farmer Mac had approximately $56.5 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 $1.3 million of the amount currently reported in accumulated
other comprehensive income (loss) will be reclassified into earnings. For the
quarter ended September 30, 2003, any ineffectiveness related to Farmer Mac's
designated hedges was insignificant.
(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 and nine months ended
September 30, 2003 and 2002:
September 30, 2003 September 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 $ 3,345 $ 3,345 $ 5,030 $ 5,030
common stockholders
Weighted average shares 11,793 301 12,094 11,629 330 11,959
Earnings per common share $ 0.28 $ 0.28 $ 0.43 $ 0.42
Nine Months Ended:
Net income available to $ 20,139 $ 20,139 $ 18,518 $ 18,518
common stockholders
Weighted average shares 11,710 296 12,006 11,605 454 12,059
Earnings per common share $ 1.72 $ 1.68 $ 1.60 $ 1.54
(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 August 7, 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 July 1, 2003
to September 30, 2003. The dividend, in the amount of $560,000, was paid on
September 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 third quarter 2003 or
third 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 nine months
ended September 30, 2003 and 2002 would have been reduced to the pro forma
amounts indicated in the following table:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2003 2002 2003 2002
----------- ----------- ------------ -----------
(in thousands, except per share amounts)
Net income available to common
stockholders, as reported $ 3,345 $ 5,030 $20,139 $18,518
Add back: Restricted stock
compensation expense included in
reported net income, net of taxes 19 154 301 453
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method
for all awards, net of tax (19) (295) (2,656) (2,733)
----------- ----------- ------------ -----------
Pro forma net income available to
common stockholders $ 3,345 $ 4,889 $17,784 $16,238
----------- ----------- ------------ -----------
Earnings per common share:
Basic - as reported $ 0.28 $ 0.43 $ 1.72 $ 1.60
Basic - pro forma $ 0.28 $ 0.42 $ 1.52 $ 1.40
Diluted - as reported $ 0.28 $ 0.42 $ 1.68 $ 1.54
Diluted - pro forma $ 0.28 $ 0.41 $ 1.48 $ 1.35
The following table summarizes stock option activity for the three and nine
months ended September 30, 2003 and 2002:
September 30, 2003 September 30, 2002
------------------------------- -----------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
-------------- --------------- -------------- -------------
Three Months Ended:
Outstanding, beginning of period 1,817,049 $ 20.86 1,619,329 $ 19.36
Granted - - 18,477 26.46
Exercised (4,666) 15.13 - -
Canceled - - - -
-------------- --------------- -------------- -------------
Outstanding, end of period 1,812,383 $ 20.87 1,637,806 $ 19.45
-------------- --------------- -------------- -------------
Nine Months Ended:
Outstanding, beginning of period 1,637,111 $ 19.45 1,416,426 $ 17.61
Granted 343,104 22.40 262,900 28.97
Exercised (164,500) 9.66 (38,541) 16.30
Canceled (3,332) 29.10 (2,979) 31.24
-------------- --------------- -------------- -------------
Outstanding, end of period 1,812,383 $ 20.87 1,637,806 $ 19.45
-------------- --------------- -------------- -------------
Options exercisable at end of period 1,502,311 1,366,563
-------------- --------------
(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 nine months ended
September 30, 2003. Farmer Mac's condensed consolidated financial statements as
of and for the three and nine months ended September 30, 2002 reflected debt
extinguishments or repurchases as extraordinary items.
On January 1, 2003, Farmer Mac adopted the liability recognition provisions
of 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 3 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. See Note 1(c) for information on the portion of the fair
value of this obligation that represents inherent probable losses that are
included as part of Farmer Mac's allowance for losses.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivatives embedded in other contracts, and for hedging activities under SFAS
133. SFAS 149 was effective for contracts entered into or modified after June
30, 2003, with some exceptions. The implementation of SFAS 149 did not have a
material impact on the accounting or reporting of Farmer Mac's derivatives.
During third quarter 2003, the Chief Accountant at the U.S. Securities and
Exchange Commission provided additional guidance to all registrants regarding
the classification on the statement of operations of realized gains and losses
resulting from financial derivatives that are not in fair value or cash flow
hedge relationships. All registrants were requested to comply with this guidance
in future filings and to reclassify this activity for all prior periods
presented. As a result of the application of this additional guidance, the net
interest income and expense realized on financial derivatives that are not in
fair value or cash flow hedge relationships have been reclassified from net
interest income into gains and losses on financial derivatives and trading
assets. For the nine months ended September 30, 2003 and 2002, this
reclassification resulted in increases of net interest income and offsetting
decreases in gains and losses on financial derivatives and trading assets of
$0.5 million and $3.3 million, respectively.
Note 2. Farmer Mac Guaranteed Securities
Farmer Mac creates Farmer Mac Guaranteed Securities through the transfer of
agricultural mortgage loans into trusts that are used as vehicles for the
securitization of the transferred assets. The beneficial interests that are
securitized are either retained or sold to third party investors. Farmer Mac
records the beneficial interests that it has retained on its balance sheet as
Farmer Mac Guaranteed Securities. As of September 30, 2003 and December 31,
2002, retained Farmer Mac Guaranteed Securities included the following:
September 30, 2003 December 31, 2002
------------------------------------ ------------------------------------
Available- Held-to- Available- Held-to-
for-Sale Maturity Total for-Sale Maturity Total
----------- ----------- ------------ ----------- ----------- ------------
(in thousands)
Farmer Mac I $ 806,874 $ 49,753 $ 856,627 $ 969,233 $ 60,520 $ 1,029,753
Farmer Mac II - 664,540 664,540 - 578,754 578,754
----------- ----------- ------------ ----------- ----------- ------------
Total $ 806,874 $ 714,293 $ 1,521,167 $ 969,233 $ 639,274 $ 1,608,507
----------- ----------- ------------ ----------- ----------- ------------
Amortized cost $ 738,446 $ 714,293 $ 1,452,739 $ 883,118 $ 639,274 $ 1,522,392
Unrealized gains 68,428 24,203 92,631 86,115 24,375 110,490
Unrealized losses - - - - - -
----------- ----------- ------------ ----------- ----------- ------------
Fair value $ 806,874 $ 738,496 $ 1,545,370 $ 969,233 $ 663,649 $ 1,632,882
----------- ----------- ------------ ----------- ----------- ------------
The table below presents a sensitivity analysis for Farmer Mac's retained
Farmer Mac Guaranteed Securities as of September 30, 2003.
September 30, 2003
---------------------
(dollars in thousands)
Fair value of beneficial interests retained
in Farmer Mac Guaranteed Securities $ 1,545,370
Weighted-average remaining life 4.9 years
Weighted-average prepayment speed (annual rate) 10.1%
Effect on fair value of a 10% adverse change $ (1,272)
Effect on fair value of a 20% adverse change $ (2,424)
Weighted-average discount rate 4.8%
Effect on fair value of a 10% adverse change $ (19,798)
Effect on fair value of a 20% adverse change $ (39,393)
These sensitivities are hypothetical and should be viewed as such. As the
figures indicate, changes in fair value based on a 10 percent variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumptions to the change in fair value may not be linear. Also, in
this table the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption. In fact, changes in one factor may result in changes in another (for
example, increases in market interest rates may result in lower prepayments),
which might amplify or counteract the sensitivities.
Farmer Mac securitizes two types of assets: agricultural mortgage loans and
USDA-guaranteed portions. Farmer Mac manages the credit risk of its securitized
agricultural mortgage loans, both on- and off-balance sheet, together with its
on-balance sheet agricultural mortgage loans and the agricultural mortgage loans
underlying its off-balance sheet LTSPCs. Due to the differing interest rate and
funding risk characteristics of on- and off-balance sheet asset classes, Farmer
Mac manages its on-balance sheet agricultural mortgage loans held and
securitized differently from its off-balance sheet securitized agricultural
mortgage loans and off-balance sheet agricultural mortgage loans underlying
LTSPCs.
Farmer Mac separately manages its securitized USDA-guaranteed portions and
manages those held on its balance sheet differently from those that are
off-balance sheet - also due to their differing interest rate and funding risk
characteristics.
As part of fulfilling its guarantee obligations for Farmer Mac I Guaranteed
Securities and 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, and records the
purchased loans as such on its balance sheet.
The table below presents the outstanding principal balances, 90-day
delinquencies and net credit losses as of and for the periods indicated for each
managed asset class, both on- and off-balance sheet.
Outstanding Principal 90-Day
Amount Delinquencies (1) Net Credit Losses
--------------------------- --------------------------- ---------------------------
As of As of As of As of For the Nine Months Ended
September 30, December 31, September 30, December 31, September 30,
------------- ------------ ------------- ------------ ---------------------------
2003 2002 2003 2002 2003 2002
------------- ------------ ------------- ------------ ------------- -------------
(in thousands)
On-balance sheet assets:
Farmer Mac I:
Loans $ 967,141 $ 949,378 $ 45,009 $ 54,679 $ 3,426 $ 2,639
Guaranteed Securities 790,227 946,014 - - 180 184
Farmer Mac II:
Guaranteed Securities 664,078 578,681 - - - -
------------- ------------ ------------- ------------ ------------- -------------
Total $2,421,446 $2,474,073 $ 45,009 $ 54,679 $ 3,606 $ 2,823
------------- ------------ ------------- ------------ ------------- -------------
Off-balance sheet assets:
Farmer Mac I:
LTSPCs $2,174,182 $2,681,240 $ 2,132 $ 3,535 $ - $ -
Guaranteed Securities 972,541 299,940 - - - -
Farmer Mac II:
Guaranteed Securities 56,506 67,109 - - - -
------------- ------------ ------------- ------------ ------------- -------------
Total $3,203,229 $3,048,289 $ 2,132 $ 3,535 $ - $ -
------------- ------------ ------------- ------------ ------------- -------------
Total $5,624,675 $5,522,362 $ 47,141 $ 58,214 $ 3,606 $ 2,823
------------- ------------ ------------- ------------ ------------- -------------
(1) Includes loans and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities that are 90 days or more past due, in foreclosure, restructured
after delinquency, and in bankruptcy excluding loans performing under
either their original loan terms or a court-approved bankruptcy plan.
Note 3. 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.
For a loan to be eligible for the Farmer Mac I program, whether the loan
underlies a Farmer Mac Guaranteed Security or an LTSPC, it must meet Farmer
Mac's credit underwriting, appraisal and documentation standards.
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.
During third quarter 2003, at the request of Farm Credit West, A.C.A., of
which one of Farmer Mac's directors is President, Farmer Mac converted a $722.3
million LTSPC that had been established prior to January 1, 2003 into a Farmer
Mac I Guaranteed Security. To achieve this result, the program participant
transferred a pool of agricultural loans to Farmer Mac, Farmer Mac transferred
the loans to a trust, and the trust issued Farmer Mac I Guaranteed Securities
that were transferred by Farmer Mac to the program participant. Because Farmer
Mac received no proceeds other than the beneficial interests in the transferred
assets, the transfer between Farmer Mac and the trust does not qualify as either
a sale or a financing; therefore, no gain or loss was recognized in Farmer Mac's
financial statements. Additionally, the trust met the requirements to be
classified as a qualifying special purpose entity; therefore, it was not
consolidated into Farmer Mac's 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. Except as noted below, when a loan
underlying a Farmer Mac I Guaranteed Security becomes 90 days or more
past due, Farmer Mac, in its sole discretion, may repurchase the loan
from the trust and generally does repurchase such loans, thereby
reducing the principal balance of the outstanding Farmer Mac I
Guaranteed Security. In the case of Farmer Mac I Guaranteed Securities
issued in exchange for loans underlying LTSPCs, the past due period is
four months and the majority of the security holders have the
discretion to require Farmer Mac to repurchase such loans. If Farmer
Mac repurchases 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 September 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
- ------------------------------------------------------------------------------
September 30, December 31,
2003 2002
----------------- ---------------
(in thousands)
Farmer Mac I Guaranteed Securities $ 972,541 $ 299,940
Farmer Mac II Guaranteed Securities 56,506 67,109
----------------- ---------------
Total Farmer Mac I and II $ 1,029,047 $ 367,049
----------------- ---------------
As of September 30, 2003, the weighted-average remaining maturity of all
loans underlying off-balance sheet Farmer Mac Guaranteed Securities was 16.5
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 $0.8 million as of September 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
September 30, 2003, this liability approximated $7.5 million and is reported in
the guarantee and commitment obligation on the condensed consolidated balance
sheet.
Long-Term Standby Purchase Commitments (LTSPCs)
An LTSPC is a commitment by Farmer Mac to purchase eligible loans, either
for cash or in exchange for Farmer Mac I Guaranteed Securities, 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 based on the outstanding balance of those loans in monthly
installments.
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 at least 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 I Guaranteed Securities.
The mark-to-market price would be based on either the sale of Farmer Mac I
Guaranteed Securities in the capital markets or the funding obtained by Farmer
Mac through the issuance of debt in the capital markets.
As of September 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 $2.2 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. For all LTSPC transactions to date,
Farmer Mac has incurred a charge-off on one loan.
As of September 30, 2003, the weighted-average remaining maturity of all
loans underlying LTSPCs was 14.5 years. For the LTSPCs that were executed on or
before December 31, 2002, Farmer Mac has recorded an allowance for probable
losses that was $6.9 million as of September 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 September 30, 2003, this
liability approximated $8.2 million and was included in the guarantee and
commitment obligation on the condensed consolidated balance sheet.
Note 4. 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 nine months ended September 30, 2003 and 2002. The changes in unrealized
gains on securities available-for-sale are net of the related deferred taxes of
$7.4 million and $4.4 million for the three and nine months ended September 30,
2003, respectively, and $13.2 million and $19.6 million for the three and nine
months ended September 30, 2002, respectively. The changes in the fair value of
the financial derivatives classified as cash flow hedges for the three and nine
months ended September 30, 2003 are net of deferred taxes of $6.2 million and
$3.3 million, respectively, and $10.2 million and $16.3 million for the three
and nine months ended September 30, 2002, respectively.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(in thousands)
Net income $ 3,905 $ 5,590 $ 21,819 $ 19,414
Other comprehensive income (loss):
Available-for-sale securities:
Change in unrealized gains (21,015) 37,685 (12,477) 55,863
Tax effect 7,355 (13,190) 4,367 (19,552)
------------ ------------ ------------ ------------
Net change from available-for-sale securities (13,660) 24,495 (8,110) 36,311
Cash flow hedges:
Change in fair value, net of
reclassification adjustments 17,734 (29,262) 9,509 (46,614)
Tax effect (6,207) 10,242 (3,328) 16,315
------------ ------------ ------------ ------------
Net change from cash flow hedges 11,527 (19,020) 6,181 (30,299)
------------ ------------ ------------ ------------
Other comprehensive income (loss) (2,133) 5,475 (1,929) 6,012
------------ ------------ ------------ ------------
Comprehensive income $ 1,772 $ 11,065 $ 19,890 $ 25,426
------------ ------------ ------------ ------------
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
government-sponsored enterprises 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 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 competitive pressures in the 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 as follows 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";
o an allowance for losses on loans underlying Post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs entered into or modified after
January 1, 2003, which is included in the balance sheet as a portion
of the amount reported as "Guarantee and commitment obligation"; and
o an allowance for losses on loans underlying Post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs entered into prior to January 1,
2003, 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, 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 for losses 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. The establishment of and periodic adjustments to the
REO valuation allowance are charged against income as a portion of the provision
for losses charged to operating expense. Charge-offs represent losses on the
outstanding principal balance, any interest payments previously accrued or
advanced and expected costs of liquidation.
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.
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 third quarter
2003 was $3.3 million or $0.28 per diluted common share, compared to $5.0
million or $0.42 per diluted common share for third quarter 2002.
Farmer Mac's growth continued in third quarter 2003, with outstanding
guarantee and commitment volume as of September 30, 2003 more than $441 million
higher than at the close of third quarter 2002. During third quarter 2003,
Farmer Mac:
o added $199.6 million of Farmer Mac I eligible loans under LTSPCs;
o purchased $45.2 million of newly originated Farmer Mac I eligible
loans; and
o purchased $106.7 million of Farmer Mac II guaranteed portions of loans
guaranteed by USDA.
USDA is currently forecasting national farm cash receipts to increase to
$205.5 billion in 2003 from the $192.9 billion forecasted level in 2002. Prices
available to farmers have been rising as a result of strong domestic and foreign
demand. Forecasted net cash income on farms for 2003 is $60.2 billion, up 22.6
percent from 2002 forecasted levels of $49.1 billion. The forecasted net cash
income on farms for 2003 includes government payments of $19.6 billion, as
compared to $11.0 billion in 2002. The increase in government payments in 2003
vs. 2002 is due to the timing of the payments resulting from the 2002 Farm Bill
and not a fundamental structural change. Farm real estate debt is expected to
reach $116.4 billion in 2003, up 4.5 percent from the $111.4 billion forecasted
level in 2002.
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 $8.9 million for third quarter
2003 and $28.2 million for the nine months ended September 30, 2003, compared to
$11.1 million and $29.6 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 93 basis points for the
nine months ended September 30, 2003, compared to 107 basis points for the nine
months ended September 30, 2002. The effect of the adoption of SFAS 140 was a
reclassification of approximately $3.3 million (11 basis points) of guarantee
fee income as interest income for the nine months ended September 30, 2003,
compared to $1.7 million (6 basis points) for the nine months ended September
30, 2002.
During third quarter 2003, the Chief Accountant at the U.S. Securities and
Exchange Commission provided additional guidance to all registrants regarding
the classification on the statement of operations of realized gains and losses
resulting from financial derivatives that are not in fair value or cash flow
hedge relationships. All registrants were requested to comply with this guidance
in future filings and to reclassify this activity for all prior periods
presented. As a result of the application of this additional guidance, the net
interest income and expense realized on financial derivatives that are not in
fair value or cash flow hedge relationships have been reclassified from net
interest income into gains and losses on financial derivatives and trading
assets. For the nine months ended September 30, 2003 and 2002, this
reclassification resulted in the increase of the net interest yield of one basis
point and an increase of 12 basis points, respectively.
The net interest yields for the nine months ended September 30, 2003 and
2002 included the benefits of yield maintenance payments received of 12 basis
points and 10 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. For
the nine months ended September 30, 2003 and 2002, the effects of yield
maintenance payments on net income and diluted earnings per share were $3.6
million or $0.20 per diluted share and $2.7 million or $0.14 per diluted share,
respectively.
The following table provides information regarding the average balances and
rates of interest-earning assets and funding for the nine months ended September
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 (71.7 percent of investments and 64.5 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.
Nine Months Ended September 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 $ 713,838 $ 6,631 1.24% $ 524,593 $ 7,677 1.95%
Investments 894,322 19,858 2.96% 923,986 24,851 3.59%
Loans and Farmer Mac Guaranteed Securities 2,420,310 95,664 5.27% 2,238,503 95,279 5.68%
--------------- -------------- ------------- -------------- -------------- ----------
Total interest earning assets 4,028,470 122,153 4.04% 3,687,082 127,807 4.62%
--------------- -------------- -------------- --------------
Funding:
Notes payable due within one year 2,737,923 46,766 2.28% 2,462,176 46,423 2.51%
Notes payable due after one year 1,148,251 47,229 5.48% 1,094,387 51,790 6.31%
Total interest-bearing liabilities --------------- -------------- ------------- -------------- -------------- ----------
Net non-interest-bearing funding 3,886,174 93,995 3.22% 3,556,563 98,213 3.68%
Total funding 142,296 - - 130,519 - -
--------------- -------------- ------------- -------------- -------------- ----------
Net interest income/yield $ 4,028,470 93,995 3.11% $3,687,082 98,213 3.55%
--------------- -------------- ------------- -------------- -------------- ----------
$ 28,158 0.93% $ 29,594 1.07%
-------------- ------------- -------------- ----------
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.
Nine Months Ended September 30, 2003
Compared to Nine Months Ended
September 30, 2002
--------------------------------------------
Increase/(Decrease) Due to
--------------------------------------------
Rate Volume Total
--------------- -------------- -------------
(in thousands)
Income from interest-earning assets
Cash and cash equivalents $ (2,384) $ 1,338 $ (1,046)
Investments (4,217) (776) (4,993)
Loans and Farmer Mac Guaranteed Securities (4,647) 5,032 385
--------------- -------------- -------------
Total (11,248) 5,594 (5,654)
Expense from interest-bearing liabilities (8,793) 4,575 (4,218)
--------------- -------------- -------------
Change in net interest income $ (2,455) $ 1,019 $ (1,436)
--------------- -------------- -------------
Guarantee and Commitment Fees. Guarantee and commitment fees were $5.1
million for third quarter 2003, compared to $4.9 million for third 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 $1.0 million,
respectively, of guarantee fee income as interest income for third quarter 2003
and third quarter 2002, guarantee and commitment fees for third quarter 2003 and
third quarter 2002 would have been $6.2 million and $5.9 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. Miscellaneous income decreased to $0.4 million for
third quarter 2003 from $0.5 million for third quarter 2002 due to a reduction
in late fees received.
Expenses. Compensation and employee benefits for third quarter 2003 were
$1.6 million, compared to $1.3 million for third quarter 2002. The increase was
due, in large part, to increased staffing levels for administrative activities
and compliance with regulatory requirements, including those of the
Sarbanes-Oxley Act of 2002. General and administrative expenses for third
quarter 2003 were $1.6 million, compared to $2.2 million for third quarter 2002.
Regulatory fees assessed by Farmer Mac's federal regulator, the Farm Credit
Administration ("FCA"), for third quarter 2003 and 2002 were $0.4 million. The
FCA has advised Farmer Mac that its estimated assessment level for the year
ending September 30, 2004 will be $1.7 million, up from its $1.4 million
estimated assessment level for the year ended September 30, 2003. After the end
of a federal government fiscal year, FCA may revise its prior year estimated
assessments to reflect actual costs incurred, and has issued both additional
assessments and refunds in the past.
Farmer Mac's provision for losses was $2.1 million for third quarter 2003,
compared to $2.0 million for third 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 September 30, 2003, Farmer Mac's total allowance for
losses totaled $22.7 million, or 0.47 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. During 2002, Farmer Mac recognized gains of
$3.4 million on the repurchase of $62.7 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, those gains were
presented as net after-tax extraordinary gains of $2.2 million. Those debt
securities were replaced with new fixed-rate funding to the same maturity date
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 2003.
Gains on Financial Derivatives and Trading Assets. For third quarter 2003,
the loss on financial derivatives and trading assets was $3.3 million, compared
to a loss of $2.6 million for third quarter 2002. The losses in third quarter
2003 and second quarter 2002 resulted primarily from decreases 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. Farmer Mac uses these non-GAAP performance
measures 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 nine
months ended September 30, 2003 were $5.5 million and $17.2 million,
respectively, compared to $5.9 million and $17.0 million for the three and nine
months ended September 30, 2002. The reconciliation of GAAP net income available
to common stockholders to core earnings is presented in the following table:
Reconciliation of GAAP Net Income Available to Common Stockholders to Core Earnings
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
---------------------------------- -----------------------------------
Sept. 30, 2003 Sept. 30, 2002 Sept. 30, 2003 Sept. 30, 2002
---------------- ---------------- ----------------- ----------------
(in thousands)
GAAP net income available
to common stockholders $ 3,345 $ 5,030 $ 20,139 $ 18,518
Less the effects of SFAS 133:
Unrealized gains/(losses)
on financial derivatives and
trading assets, net of tax (2,269) (943) 2,695 (947)
Benefit from non-amortization
of premium payments
on financial derivatives,
net of tax 76 92 238 294
Less gains on the repurchase of
debt previously reported as
extraordinary items - - - 2,203
---------------- ---------------- ----------------- ----------------
Core earnings $ 5,538 $ 5,881 $ 17,206 $ 16,968
---------------- ---------------- ----------------- ----------------
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 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. 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 Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
2003 2002 2003 2002
-------------- ------------- ------------- ---------------
(in thousands)
Loan purchase and guarantee and
commitment activity:
Farmer Mac I:
Loans $ 45,180 $ 58,475 $ 169,849 $ 685,040
LTSPCs 199,646 140,157 545,245 759,882
Farmer Mac II Guaranteed Securities 106,729 37,374 226,258 99,058
-------------- ------------- ------------- ---------------
Total purchases, guarantees
and commitments $ 351,555 $ 236,006 $ 941,352 $ 1,543,980
-------------- ------------- ------------- ---------------
Farmer Mac I Guaranteed Securities issuances:
Retained $ - $ - $ - $ -
Sold (1) 43,082 - 78,254 29,342
Loans previously under LTSPCs
exchanged for Farmer
Mac Guaranteed Securities 722,315 - 722,315 -
-------------- ------------- ------------- ---------------
Total $ 765,397 $ - $ 800,569 $ 29,342
-------------- ------------- ------------- ---------------
(1) Includes $40.7 million sold to Zions First National Bank or its affiliates,
a related party, during the three months ended September 30, 2003.
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 Nine Months Ended
September 30, September 30,
----------------------------- ---------------------------
2003 2002 2003 2002
-------------- ------------- ------------- ------------
(in thousands)
Farmer Mac I newly originated
and current seasoned loan purchases $ 45,180 $ 58,475 $ 169,849 $ 685,040
Defaulted loans purchased from
off-balance sheet Farmer Mac I
Guaranteed Securities 9,549 2,363 33,550 22,682
Defaulted loans transferred from
on-balance sheet Farmer Mac I
Guaranteed Securities 13,103 8,025 35,516 15,022
Defaulted loans purchased
from LTSPCs 1,021 1,086 4,119 1,283
-------------- ------------- ------------- ------------
Total loan purchases $ 68,853 $ 69,949 $ 243,034 $ 724,027
-------------- ------------- ------------- ------------
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 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 repurchase
the defaulted loans underlying Farmer Mac I Guaranteed Securities (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
may 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 third quarter 2003 and third quarter 2002 was
less than one month and four months, respectively. Of the Farmer Mac I newly
originated and current seasoned loans purchased during third quarter 2003 and
third quarter 2002, 54 percent and 71 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 15.0
years and 14.6 years, respectively. The weighted-average age of delinquent loans
purchased out of securitized pools and LTSPCs during third quarter 2003 and
third quarter 2002 was 4.2 years and 3.8 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 September 30, 2003, outstanding commitments to purchase Farmer Mac I loans
totaled $6.5 million, compared to $12.0 million as of September 30, 2002. Of the
total Farmer Mac I commitments outstanding as of September 30, 2003 and 2002,
$2.1 million and $9.7 million, respectively, were mandatory commitments. Loans
submitted for approval or approved but not yet committed to purchase totaled
$45.9 million as of September 30, 2003, compared to $69.0 million as of
September 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 September 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 nine 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
agricultural mortgage lenders, including payments received by farmers
under the 2002 Farm Bill and lower short-term interest rates, that
have resulted in reduced borrower inclination to finance their real
estate assets, particularly at long-term fixed rates;
o diminished expansion in the capital intensive livestock and permanent
crop sectors that have, in the past, been significant sources of new
business for Farmer Mac; and
o adverse publicity about and increased regulatory pressure on
government-sponsored enterprises, including Farmer Mac.
Nonetheless, lender interest in Farmer Mac produced a consistent stream of new
volume in the form of Farmer Mac I and II individual loan purchases and
additions to existing LTSPC arrangements during the first nine months 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. Thus, the outlook for fourth quarter
2003 is for new volume to continue at the level of recent quarters. Looking to
2004, management believes the recent release of the October 2003 GAO Report on
Farmer Mac has cleared the way for significant new marketing opportunities.
As of September 30, 2003, there were 135 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. As of June 30, 2003, there were 124 approved sellers in the Farmer
Mac I program. 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 September
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 September 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 September 30, 2003, there were
193 active sellers in the Farmer Mac II program, compared to 143 as of December
31, 2002 and 141 as of September 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 September 30, 2003.
Balance Sheet Review
During the nine months ended September 30, 2003, total assets decreased by
$26.5 million from December 31, 2002, with decreases in program assets (Farmer
Mac Guaranteed Securities and loans) of $77.3 million 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 decrease in total assets during the period, total
liabilities decreased by $47.0 million from December 31, 2002 to September 30,
2003.
During the nine months ended September 30, 2003, accumulated other
comprehensive income (loss) decreased $1.9 million, which is the net effect of a
$8.1 million decrease in unrealized gains on securities available for sale and a
$6.2 million increase 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 September 30, 2003, Farmer Mac's core capital totaled $206.4 million,
compared to $184.0 million as of December 31, 2002. As of September 30, 2003,
core capital exceeded Farmer Mac's statutory minimum capital requirement of
$137.7 million by $68.7 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 September 30, 2003. As of September 30, 2003, the
risk-based capital stress test generated a regulatory capital requirement of
$45.5 million. Farmer Mac's regulatory capital of $229.1 million exceeded that
amount by approximately $183.6 million. The decrease in the risk-based capital
requirement from December 31, 2002 ($73.4 million) to September 30, 2003 ($45.5
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 3 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 on-balance sheet 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 September 30,
2003, 55 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 third quarter 2003, 15 percent had yield
maintenance or another form of prepayment protection (including 13 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 $513.4 million of cash and cash equivalents as of September
30, 2003 mature within three months and are match-funded with discount notes
having similar maturities. Investment securities of $1.083 billion as of
September 30, 2003 consist of $759.0 million (71.7 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
September 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 September 30, December 31,
Scenario 2003 2002
--------------- ---------------- -----------------
+ 300 bp 0.2% 15.6%
+ 200 bp 0.6% 11.0%
+ 100 bp 0.7% 5.9%
- 100 bp -1.5% -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 third 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 third quarter 2003 through ongoing
asset/liability rebalancing activities. As of September 30, 2003, Farmer Mac's
effective duration gap, another standard measure of interest rate risk, was
minus 0.7 months, compared to minus 3.6 months as of December 31, 2002, as a
result of the rebalancing activities conducted during third quarter 2003. As of
both September 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 decreases in interest rates.
As of September 30, 2003, a uniform or "parallel" increase of 100 basis
points would have increased NII, a shorter-term measure of interest rate risk,
by 2.3 percent, while a parallel decrease of 100 basis points would have
decreased NII by 4.7 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 September 30, 2003, Farmer Mac had $1.23 billion combined notional amount
of interest rate swaps with terms ranging from two months to 15 years. Of those
interest rate swaps, $695.4 million were floating-to-fixed rate interest rate
swaps, $323.9 million were basis swaps and $210.0 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 September 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.
September 30, December 31,
2003 2002
---------------- ----------------
(in thousands)
Farmer Mac I:
Post-1996 Act $ 4,895,957 $ 4,850,234
Pre-1996 Act 25,588 31,960
Farmer Mac II:
USDA-guaranteed portions 720,584 645,790
---------------- ----------------
$ 5,642,129 $ 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. Farmer Mac also has a loan product for
borrowers with high credit scores whose loans are secured by collateral with low
loan-to-value ratios. For these borrowers, loan processing has been simplified
and documentation of the credit ratios described above is not necessary.
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
underwriting ratios on a pro forma basis (that is, giving effect to the new
loan):
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 those loans:
o 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 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 not demonstrated a significantly
different rate of default than that of loans that conformed to all of the
standard credit ratios. As of September 30, 2003, a total of $1.5 billion (30.4
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 third quarter 2003, $87.1 million (35.9 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 as follows 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";
o an allowance for losses on loans underlying Post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs entered into or modified after
January 1, 2003, which is included in the balance sheet as a portion
of the amount reported as "Guarantee and commitment obligation"; and
o an allowance for losses on loans underlying Post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs entered into prior to January 1,
2003, 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 estimated probable
losses on Farmer Mac's loans held for investment; and
o a "Provision for losses," which represents estimated probable losses
on loans underlying Post-1996 Act Farmer Mac I Guaranteed Securities
and LTSPCs and real estate owned.
Farmer Mac estimates probable losses 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"). The Model draws upon
historical information from a data set of agricultural mortgage loans recorded
over a longer period of time than Farmer Mac's own experience to date, screened
to include only those loans with credit characteristics similar to those on
which Farmer Mac has assumed credit risk. The results generated by the Model are
subject to modification 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.
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.
Farmer Mac expects its methodology for determining its allowance for losses
will migrate over time away from the Model and be based on Farmer Mac's own
historical portfolio loss experience. Until that time, 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 allowance for losses.
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 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 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 and considers
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, all 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 loan
losses that are charged against net interest income and provisions for losses
charged to operating expense and reduced by charge-offs for actual losses, net
of recoveries that are recognized if liquidation proceeds exceed previous
estimates. The establishment of and periodic adjustments to the REO valuation
allowance are charged against income as a portion of the provision for losses
charged to operating expense. 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 nine months ended September 30,
2003 and 2002:
September 30, 2003
-------------------------------------------------------------------------
Contingent
Allowance REO Obligation Total
for Loan Valuation Reserve for Probable Allowance
Losses Allowance for Losses Losses for Losses
-------------- -------------- ------------- -------------- -------------
(in thousands)
Three Months Ended:
Beginning balance $ 3,102 $ 592 $ 18,169 $ - $ 21,863
Provision for losses 3,391 1,368 (7,577) 4,940 2,122
Net charge-offs (322) (920) - - (1,242)
-------------- -------------- ------------- -------------- -------------
Ending balance $ 6,171 $ 1,040 $ 10,592 $ 4,940 $ 22,743
-------------- -------------- ------------- -------------- -------------
Nine Months Ended:
Beginning balance $ 2,662 $ 592 $ 16,757 $ - $ 20,011
Provision for losses 6,015 1,368 (5,985) 4,940 6,338
Net charge-offs (2,506) (920) (180) - (3,606)
-------------- -------------- ------------- -------------- -------------
Ending balance $ 6,171 $ 1,040 $ 10,592 $ 4,940 $ 22,743
-------------- -------------- ------------- -------------- -------------
September 30, 2002
-------------------------------------------------------------------------
Contingent
Allowance REO Obligation Total
for Loan Valuation Reserve for Probable Allowance
Losses Allowance for Losses Losses for Losses
-------------- -------------- ------------- -------------- -------------
(in thousands)
Three Months Ended:
Beginning balance $ 4,672 $ - $ 13,655 $ - $ 18,327
Provision for losses - 1,297 740 - 2,037
Net allocation of
allowance 708 - (708) - -
Net charge-offs (1,152) (161) 85 - (1,228)
-------------- -------------- ------------- -------------- -------------
Ending balance $ 4,228 $ 1,136 $ 13,772 $ - $ 19,136
-------------- -------------- ------------- -------------- -------------
Nine Months Ended:
Beginning balance $ 1,352 $ - $ 14,532 $ - $ 15,884
Provision for losses - 1,307 4,768 - 6,075
Net allocation of
allowance 5,344 - (5,344) - -
Net charge-offs (2,468) (171) (184) - (2,823)
-------------- -------------- ------------- -------------- -------------
Ending balance $ 4,228 $ 1,136 $ 13,772 $ - $ 19,136
-------------- -------------- ------------- -------------- -------------
During third quarter 2003, at the request of a program participant (1),
Farmer Mac converted a $722.3 million LTSPC that had been established prior to
January 1, 2003 into a Farmer Mac I Guaranteed Security. In accordance with FIN
45, Farmer Mac recorded the fair value of its obligation to stand ready to
perform under the new Farmer Mac Guaranteed Security. The fair value of this
obligation includes Farmer Mac's estimate of the losses that are anticipated
over the life of each contractual obligation. The change in accounting for this
obligation, from a probable loss model to a fair value model, has resulted in a
reduction in the reserve for losses of approximately $4.9 million. Since Farmer
Mac believes that these losses remain probable, they have been included in the
determination of the fair value of the contractual obligation and therefore
there was no reduction in the total allowance for losses.
_______________________________
1 Farm Credit West, A.C.A., of which Farmer Mac director Kenneth A. Graff is
President.
When certain criteria are met, such as the default of the borrower, Farmer
Mac may repurchase the defaulted loans underlying Farmer Mac Guaranteed
Securities and 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 third quarter
2003, compared to $2.0 million for third quarter 2002. During third quarter
2003, Farmer Mac charged off $1.3 million in losses against the allowance for
losses and had $0.1 million in recoveries, for net charge-offs of $1.2 million.
During third quarter 2002, Farmer Mac charged off $1.5 million in losses against
the allowance for losses and recovered $0.3 million from previously charged off
losses, for net charge-offs of $1.2 million. The net charge-offs for third
quarter 2003 and 2002 included zero and $0.4 million, respectively, related to
previously accrued or advanced interest on loans and Farmer Mac I Guaranteed
Securities. As of September 30, 2003, Farmer Mac's allowance for losses totaled
$22.7 million, or 47 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 September 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 $84.6 million and represented 1.74 percent of the principal balance of
all loans held and loans underlying Post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs, compared to $91.3 million (2.03 percent) as of September
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 September 30, 2003, Farmer Mac's 90-day delinquencies totaled
$47.1 million and represented 0.98 percent of the principal balance of all loans
held and loans underlying Post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs, compared to $79.8 million (1.77 percent) as of September 30, 2002. From
quarter to quarter, Farmer Mac anticipates that 90-day delinquencies and
non-performing assets 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:
September 30, 2003 $ 4,871,756 $ 84,583 1.74% $ 37,442 $ 47,141 0.98%
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%
As of September 30, 2003, approximately $1.8 billion (36.1 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 $1.8 billion (39.0 percent) of such loans as of
September 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 September 30, 2003, Farmer Mac's loan-by-loan analysis of its $84.6
million of non-performing assets and their updated appraisals or management's
estimates of discounted collateral values indicated that $68.0 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 $16.6 million had insufficient collateral
to cover the loan balance, accrued interest and expenses. Farmer Mac has
specifically allocated $3.4 million of allowances to those under-collateralized
loans. As of September 30, 2003, after the allocation of specific allowances to
under-collateralized loans, Farmer Mac had remaining non-specific or general
allowances and contingent obligations for inherent probable losses of $19.3
million relating to inherent probable loss in the portfolio, bringing the total
allowance for losses to $22.7 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 September 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 $ 16,021 $ 505 $ 17,600 $ 238
Loans in foreclosure 14,639 705 16,856 519
Loans in bankruptcy * 35,056 1,185 35,229 687
Real estate owned 18,867 1,041 5,623 592
------------------- --------------- ------------------- --------------
Total $ 84,583 $ 3,436 $ 75,308 $ 2,036
------------------- --------------- ------------------- --------------
Allowance Allowance
for Losses for Losses
--------------- --------------
Specific allowance for losses $ 3,436 $ 2,036
General allowance for losses 19,308 17,975
--------------- --------------
Total allowance for losses $ 22,744 $ 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 September 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 56 percent.
The following table summarizes the Post-1996 Act non-performing assets by
original loan-to-value ("LTV") 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 September 30, 2003
- ----------------------------------------------------
(dollars in thousands)
Post-1996 Act
Non-performing
Original LTV Ratio Assets Percentage
- -------------------- ---------------- ------------
0.00% to 40.00% $ 9,851 12%
40.01% to 50.00% 13,341 16%
50.01% to 60.00% 28,944 34%
60.01% to 70.00% 30,659 36%
70.01% to 80.00% 1,615 2%
80.01% + 173 0%
---------------- ------------
Total $ 84,583 100%
---------------- ------------
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 September 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% $ 644,370 $ 3,458 0.54% $ -
1994 3% 160,693 863 0.54% -
1995 3% 148,735 2,486 1.67% 225
1996 7% 349,162 10,714 3.07% 435
1997 8% 407,445 16,767 4.12% 74
1998 13% 652,097 16,358 2.51% 1,065
1999 14% 688,388 16,855 2.45% 200
2000 8% 400,111 10,061 2.51% 862
2001 12% 584,977 5,943 1.02% 575
2002 12% 593,717 916 0.15% -
2003 5% 242,061 162 0.07% -
------------------- ------------------ ---------------- ---------------- --------------
Total 100% $ 4,871,756 $ 84,583 1.74% $ 3,436
------------------- ------------------ ---------------- ---------------- --------------
By geographic region (2):
Northwest 22% $ 1,093,191 $ 44,657 4.09% $ 957
Southwest 46% 2,244,836 26,596 1.18% 1,339
Mid-North 14% 679,443 6,228 0.92% 30
Mid-South 5% 260,966 5,249 2.01% 1,060
Northeast 6% 285,598 1,212 0.42% 50
Southeast 6% 307,722 641 0.21% -
------------------- ------------------ ---------------- ---------------- --------------
Total 100% $ 4,871,756 $ 84,583 1.74% $ 3,436
------------------- ------------------ ---------------- ---------------- --------------
By commodity:
Crops 45% $ 2,167,947 $ 33,090 1.53% $ 1,060
Permanent plantings 27% 1,303,033 34,343 2.64% 1,689
Livestock 21% 1,006,382 14,732 1.46% 637
Part-time farm 7% 359,372 2,272 0.63% 50
Other 1% 35,022 146.00 0.42% -
------------------- ------------------ ---------------- ---------------- --------------
Total 100% $ 4,871,756 $ 84,583 1.74% $ 3,436
------------------- ------------------ ---------------- ---------------- --------------
(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 $ - $ 1,914,756 0.00% $ - 0.00%
1994 - 347,993 0.00% - 0.00%
1995 302 310,387 0.10% 225 0.17%
1996 1,546 609,300 0.25% 435 0.33%
1997 3,332 694,923 0.48% 74 0.49%
1998 2,414 1,033,109 0.23% 1,065 0.34%
1999 1,372 1,036,539 0.13% 200 0.15%
2000 1,236 630,898 0.20% 862 0.33%
2001 10 821,081 0.00% 575 0.07%
2002 - 863,682 0.00% - 0.00%
2003 - 161,060 0.00% - 0.00%
---------------- ---------------- ----------------- ----------------- -----------------
Total $ 10,212 $ 8,423,728 0.12% $ 3,436 0.16%
---------------- ---------------- -----------------
By geographic region (1):
Northwest $ 4,887 $ 1,972,565 0.25% $ 957 0.30%
Southwest 5,237 3,653,464 0.14% 1,339 0.18%
Mid-North - 1,097,294 0.00% 30 0.00%
Mid-South - 405,533 0.00% 1,060 0.26%
Northeast - 585,340 0.00% 50 0.01%
Southeast 88 709,532 0.01% - 0.01%
---------------- ---------------- ----------------- ----------------- -----------------
Total $ 10,212 $ 8,423,728 0.12% $ 3,436 0.16%
---------------- ---------------- -----------------
By commodity:
Crops $ 1,374 $ 3,648,405 0.04% $ 1,060 0.07%
Permanent plantings 7,500 2,166,081 0.35% 1,689 0.42%
Livestock 975 1,836,146 0.05% 637 0.09%
Part-time farm 363 678,271 0.05% 50 0.06%
Other - 94,825 0.00% - 0.00%
---------------- ---------------- ----------------- ----------------- -----------------
Total $ 10,212 $ 8,423,728 0.12% $ 3,436 0.16%
---------------- ---------------- -----------------
(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 commodities 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 $3.8 billion was
outstanding as of September 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;
o principal and interest payments received from investment securities;
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, issuer concentration and credit quality
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 September 30, 2003, Farmer Mac was in compliance with the dollar, issuer
concentration and credit quality 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 September
30, 2003, Farmer Mac's cash and cash equivalents and investment securities
totaled $513.4 million and $1.1 billion, respectively, a combined 38.1 percent
of total assets. For third 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 66 days.
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:
September 30, 2003 $ 45,180 $ 199,646 $ 106,729 $ 351,555
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 LTSPCs Pre-1996 Act Farmer Mac II Total
---------------- ---------------- ---------------- ---------------- ----------------
(in thousands)
As of:
September 30, 2003 (2) $ 2,721,775 $ 2,174,182 $ 25,588 $ 720,584 $ 5,642,129
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
(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) The Loans and Guaranteed Securities and LTSPCs amounts reflect the
conversion of $722.3 million of existing LTSPCs to Guaranteed Securities
during third quarter 2003 at the request of a program participant, Farm
Credit West, ACA, of which Farmer Mac director Kenneth A. Graff is
President.
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:
September 30, 2003 $ 865,817 $ 1,037,168 $ 535,915 $ 2,438,900
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
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) to 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 September
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 September 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 July 1, 2003, Farmer Mac issued an
aggregate of 842 shares of its Class C Non-Voting Common Stock, at an
issue price of $22.35 per share, to the twelve Directors who elected
to receive such stock in lieu of their cash retainers.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
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
(Form 10-Q filed May 15, 2003).
* 4.2 - Specimen Certificate for Farmer Mac Class B Voting Common Stock
(Form 10-Q filed May 15, 2003).
* 4.3 - Specimen Certificate for Farmer Mac Class C Non-Voting Common
Stock (Form 10-Q filed May 15, 2003).
* 4.4 - Certificate of Designation of Terms and Conditions of Farmer
Mac 6.40% Cumulative Preferred Stock, Series A (Form 10-Q
filed May 15, 2003).
+* 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.
+* 10.2 - Employment Agreement dated May 5, 1989 between Henry D. Edelman
and the Registrant (Previously filed as Exhibit 10.4 to Form 10-K
filed February 14, 1990).
+* 10.2.1 - Amendment No. 1 dated as of January 10, 1991 to Employment
Contract between Henry D. Edelman and the Registrant
(Previously filed as Exhibit 10.4 to Form 10-K filed April 1,
1991).
__________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 10.2.2 - Amendment to Employment Contract dated as of June 1, 1993 between
Henry D. Edelman and the Registrant (Previously filed as Exhibit
10.5 to Form 10-Q filed November 15, 1993).
+* 10.2.3 - Amendment No. 3 dated as of June 1, 1994 to Employment Contract
between Henry D. Edelman and the Registrant (Previously filed as
Exhibit 10.6 to Form 10-Q filed August 15, 1994).
+* 10.2.4 - Amendment No. 4 dated as of February 8, 1996 to Employment
Contract between Henry D. Edelman and the Registrant (Form 10-K
filed March 29, 1996).
+* 10.2.5 - Amendment No. 5 dated as of June 13, 1996 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 1996).
+* 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 (Form 10-Q filed
August 14, 2003).
__________________
* 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 - Employment Agreement dated May 11, 1989 between Nancy E. Corsiglia
and the Registrant (Previously filed as Exhibit 10.5 to Form 10-K
filed February 14, 1990).
+* 10.3.1 - Amendment dated December 14, 1989 to Employment Agreement
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.5 to Form 10-K filed February 14, 1990).
+* 10.3.2 - Amendment No. 2 dated February 14, 1991 to Employment Agreement
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.7 to Form 10-K filed April 1, 1991).
+* 10.3.3 - Amendment to Employment Contract dated as of June 1, 1993 between
Nancy E. Corsiglia and the Registrant (Previously filed as
Exhibit 10.9 to Form 10-Q filed November 15, 1993).
+* 10.3.4 - Amendment No. 4 dated June 1, 1993 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Previously filed
as Exhibit 10.10 to Form 10-K filed March 31, 1994).
+* 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
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).
__________________
* 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.
+* 10.3.10 - Amendment No. 10 dated as of June 4, 1998 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 1998).
+* 10.3.11 - Amendment No. 11 dated as of June 3, 1999 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 12, 1999).
+* 10.3.12 - Amendment No. 12 dated as of June 1, 2000 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 2000).
+* 10.3.13 - Amendment No. 13 dated as of June 7, 2001 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 2001).
+* 10.3.14 - Amendment No. 14 dated as of June 6, 2002 to Employment Contract
between Nancy E. Corsiglia and the Registrant (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 (Form 10-Q filed
August 14, 2003).
+* 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).
__________________
* 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.
+* 10.4.5 - 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 (Form 10-Q filed
August 14, 2003).
+* 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 (Form 10-Q filed
August 14, 2003).
+* 10.6 - Employment Contract dated June 5, 2003 between Timothy L. Buzby
and the Registrant (Form 10-Q filed August 14, 2003).
* 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).
* 10.9 - 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).
__________________
* 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.
*# 10.10 - 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).
*# 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
September 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.
** 31.2 - Certification of Chief Financial Officer relating to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 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 September 30, 2003, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On July 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 second quarter 2003.
On August 12, 2003, Farmer Mac filed with the Securities and Exchange
Commission a Current Report on Form 8-K announcing that, on August 7, 2003, the
Board of Directors of Farmer Mac had declared a quarterly dividend on the
Corporation's 6.40% Cumulative Preferred Stock, Series A.
__________________
* 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
November 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 SEPTEMBER 30, 2003
EXHIBIT INDEX
Exhibit No. Description
10.1.3 Amended and Restated 1997 Incentive Plan.
31.1 Certification of Chief Executive Officer relating to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 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 September 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 September 30, 2003, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 10.1.3
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
AMENDED AND RESTATED 1997 INCENTIVE PLAN
1. Purpose of the Plan
The purposes of this Amended and Restated 1997 Incentive Plan (the "Plan")
are to encourage stock ownership by directors, officers, and key employees of
the Federal Agricultural Mortgage Corporation (the "Company") and its
subsidiaries, to provide an incentive for such individuals to expand and improve
the profits and prosperity of the Company and its subsidiaries, and to assist
the Company and its subsidiaries in attracting and retaining directors and key
personnel through the grant of Options (as defined herein) to purchase shares of
the Company's Class C nonvoting common stock, par value $1.00 per share (the
"Common Stock").
2. Persons Eligible Under Plan
Any person who is an officer or employee of the Company or any subsidiary
(as defined in Sections 424(f) and 424(g) of the Internal Revenue Code of 1986,
as amended (a "Subsidiary"), shall be eligible for awards under the Plan (a
"Participant"). Any member of the Board of Directors (the "Board") of the
Company (a "Director") who is not also an employee of the Company shall be
eligible to receive any awards only under Section 15 of the Plan ("Director
Options").
3. Stock Subject to Plan
Subject to Section 10, the maximum number of shares that may be the subject
of awards under the Plan shall be 3,750,000 shares of the Company's Common
Stock, which shall be made available either from authorized but unissued Common
Stock or from Common Stock reacquired by the Company, including shares purchased
in the open market. If any award granted under the Plan is canceled, forfeited,
or otherwise terminates or expires for any reason without having been exercised
in full, the shares of Common Stock allocable to the unexercised portion of such
award may again be the subject of grants under the Plan.
4. Administration of Plan
(a) Except for the provisions of Section 15 (which to the maximum extent
feasible shall be self-effectuating), the Plan shall be administered by (i) the
Board of Directors for any purpose under the Plan, (ii) a committee of the Board
consisting of two or more Directors, each of whom is a "Non-Employee Director"
under Securities Exchange Act Rule 16b-3, for any purpose under the Plan, or
(iii) a committee of the Board consisting of two or more Directors (whether or
not any such Director is a "Non-Employee Director") for purposes of any award
under the Plan to an employee other than an officer subject to Section 16 of the
Securities Exchange Act of 1934 (it being understood and agreed that references
herein to the "Committee" shall mean the Board or either committee referred to
above, as the case may be).
(b) Subject to the express provisions of the Plan, the Committee shall be
authorized and empowered to do all things necessary or desirable in connection
with the administration of the Plan, including, without limitation, the
following:
(i) interpret and construe the Plan and the terms and conditions of
any award hereunder;
(ii) adopt, amend, and rescind rules and regulations for the
administration of the Plan;
(iii) determine which persons meet the eligibility requirements of
Section 2 hereof and to which of such eligible persons, if any, awards will
be granted hereunder;
(iv) grant awards to eligible persons and determine the terms and
conditions thereof, including, but not limited to, the number of shares of
Common Stock issuable pursuant thereto, the time not more than 10 years
after the date of an award at which time the award shall expire or (if not
vested) terminate, and the conditions upon which awards become exercisable
or vest or shall expire or terminate, and the consideration, if any, to be
paid upon receipt, exercise or vesting of awards;
(v) determine whether, and the extent to which, adjustments are
required pursuant to Section 10 hereof;
(vi) determine the circumstances under which, consistent with the
provisions of Section 11, any outstanding award may be amended;
(vii) exercise its discretion with respect to the powers and rights
granted to it as set forth in the Plan; and
(viii) generally, exercise such powers and perform such acts as deemed
necessary or advisable to promote the best interests of the Company with
respect to the Plan.
(c) Any action taken by, or inaction of the Company, the Board, or the
Committee relating or pursuant to the Plan, shall be within the absolute
discretion of that entity or body and shall be conclusive and binding upon all
persons. No member of the Board or officer of the Company shall be liable for
any such action or inaction of: (i) the entity or body; (ii) another person; or
(iii) except in circumstances involving bad faith, himself or herself. In making
any determination or in taking or not taking any action under the Plan, the
Board and the Committee may obtain and may rely upon the advice of experts,
including professional advisors to the Company.
(d) The Committee may delegate ministerial, non-discretionary functions to
individuals who are officers or other employees of the Company.
5. Awards
(a) Awards under the Plan shall consist of options ("Options") to purchase
the Common Stock of the Company and shall be evidenced by agreements (the "Award
Agreements") in such form as the Committee shall approve.
(b) The exercise price per share shall be 100% of the Fair Market Value of
one share of Common Stock on the date the Option is granted (the "Exercise
Price"), subject to adjustment only as provided in Section 10 of the Plan. As
used in the Plan, the term "Fair Market Value" shall mean the composite closing
price of the Company's Common Stock as reported on the National Association of
Securities Dealers Automated Quotations system ("NASDAQ"), or such other market
on which the Common Stock may be listed or traded, as determined by the
Committee. If there is not a composite closing price quotation for the date as
of which Fair Market Value is to be determined, then the Fair Market Value shall
be determined by reference to the composite closing price quotation for the next
preceding day on which a composite closing price quotation is available.
(c) In connection with establishing the level of Option awards under the
Plan, the value of an Option shall be calculated by an independent third party
acceptable to the Committee (the "Compensation Consultant") and shall be based
on the "Black-Scholes" method of option valuation, as determined by the
Compensation Consultant. In calculating the Black-Scholes value of an Option,
the average of the composite closing prices of the Company's Common Stock as
reported by NASDAQ, or such other market on which the Common Stock may be listed
or traded, as determined by the Committee, for the 90-day period preceding such
calculation shall be the used by the Compensation Consultant as the "current
market price" and "exercise price" inputs to such Black-Scholes calculation,
irrespective of the Fair Market Value of a share of Common Stock on the date of
calculation. Notwithstanding the foregoing, the Exercise Price of any Option
awarded under the Plan shall be the Fair Market Value of one share of Common
Stock on the date the Option is granted, as provided in subsection (b) above.
6. Exercise of Options
(a) Options may be exercised in whole or in part at such time or times as
shall be determined by the Committee and set forth in the applicable Award
Agreement. A Participant electing to exercise an Option shall give written
notice to the Company of such election and of the number of shares he or she has
elected to purchase, and shall at the time of exercise tender the full Exercise
Price for those shares.
(b) The Exercise Price shall be payable in cash or by check; provided,
however, that to the extent provided in the applicable Award Agreement, the
Participant may pay the Exercise Price in whole or in part (i) by delivering to
the Company shares of the Common Stock owned by him and having a Fair Market
Value on the date of exercise equal to the Exercise Price of the Option or (ii)
by reducing the number of shares of Common Stock issuable or payable upon the
exercise of an Option by the number of shares of Common Stock having a Fair
Market Value on the date of exercise equal to the Exercise Price of the Option.
In addition, the Options may be exercised through a registered broker-dealer
pursuant to such cashless exercise procedures (other than share withholding)
that are, from time to time, deemed acceptable. No fractional shares of Common
Stock shall be issued upon exercise of an Option and the number of shares of
Common Stock that may be purchased upon exercise shall be rounded to the nearest
number of whole shares.
(c) At such times as a Participant recognizes taxable income in connection
with the receipt of shares of Common Stock hereunder (a "Taxable Event"), the
Participant shall pay to the Company the amount of taxes required by law to be
withheld by the Company in connection with the Taxable Event (the "Withholding
Taxes") prior to the issuance of such shares. In satisfaction of the obligation
to pay the Withholding Taxes to the Company, the Participant may make a written
election (the "Tax Election"), which may be accepted or rejected in the
discretion of the Committee, to have withheld a portion of the shares of Common
Stock then issuable to him or her having an aggregate Fair Market Value equal to
the Withholding Taxes.
7. Right of First Refusal
The Committee may, in its discretion, include in any Award Agreement
relating to an Option granted under the Plan a condition that the Participant
shall agree to grant the Company a Right of First Refusal, which, if so
included, shall have the following terms and conditions:
(a) The Participant shall give the Company written notice (the "Offer
Notice") of the Participant's intention to sell any shares of Common Stock
acquired (or to be acquired) upon exercise of an Option (the "Offered Shares").
The Company shall have three business days (the "Exercise Period") following
receipt of the Offer Notice to determine whether to exercise its Right of First
Refusal, which may be exercised either as to all or as to none of the Offered
Shares. By the end of the Exercise Period, the Company shall have given written
notice to the Participant of its election to exercise (the "Acceptance notice")
or not to exercise (the "Rejection Notice") its Right of First Refusal. The
Participant shall tender the Offered Shares to the Company within 10 business
days after receipt of an Acceptance Notice. Upon receipt of a Rejection Notice,
the Participant may sell the Offered Shares free and clear of such Right of
First Refusal.
(b) The price to be paid by the Company for the Offered Shares shall be the
average of the closing price of the Company's Common Stock as reported on NASDAQ
(or such other market on which the Common Stock may be listed or traded, as
determined by the Committee) for the three business days immediately preceding
the date of the Company's receipt of the Offer Notice or, if no such
transactions occurred on those days, the average of the bid and asked prices for
the Common Stock on such days.
8. Transfer Restrictions
(a) Unless otherwise permitted in the applicable Award Agreement, any
Option granted under the Plan shall not be transferable other than by will or
the laws of descent and distribution or pursuant to a domestic relations order,
and during a Participant's lifetime shall be exercisable only by the Participant
or his or her guardian or legal representative. The terms of such Option shall
be final, binding and conclusive upon the legal representatives, heirs and
successors of the Participant.
(b) Notwithstanding the foregoing, the Committee may, in its discretion,
authorize all or a portion of the Options to be granted to an Optionee to be
transferred to: (i) the spouse, siblings, parents, children or grandchildren of
the Optionee ("Immediate Family Members"); (ii) a trust or trusts for the
exclusive benefit of such Immediate Family Members; or (iii) a partnership in
which such Immediate Family Members are the only partners; provided, however,
that (x) there may be no consideration for any such transfer, (y) the Award
Agreement pursuant to which the Options are granted must expressly provide for
transferability in a manner consistent with this Section 8 and (z) subsequent
transfers of transferred Options shall be prohibited, except those in accordance
with the subsection (a) above. Following transfer, any such Options shall
continue to be subject to the same terms and conditions as were applicable
immediately prior to transfer, provided that the term "Optionee" shall be deemed
to refer to the transferee.
9. Termination of Employment
(a) Except as provided in the Award Agreement and as provided in Sections
9(b), (c) or (d) below, if a Participant ceases for any reason to be employed by
the Company or any of its Subsidiaries (unless such termination of employment
was for "Cause"), the Participant may, at any time within 90 days after the
effective date of such termination of employment, exercise his or her Options to
the extent that he or she would be entitled to exercise them on such date, but
in no event shall any Option be exercisable more than 10 years from the date it
was granted; provided, however, that the Committee shall have the discretion to
determine whether Options not yet exercisable at the date of termination of
employment shall become immediately exercisable for 90 days thereafter. The
Committee shall determine, subject to applicable law, whether a leave of absence
shall constitute a termination of service.
(b) If a Participant ceases to be employed by the Company or any of its
Subsidiaries for "Cause," the Participant's unexercised Options shall terminate
immediately. For purposes of this Section 9, "Cause" shall be defined as in the
employment agreement, if any, between the Company and such Participant, or, if
there is no employment agreement, shall mean (i) the willful failure of the
Participant substantially to perform his or her duties, other than any such
failure resulting from incapacity due to physical or mental illness or (ii) the
willful engagement by the Participant in activities contrary to the best
interests of the Company.
(c) Unless otherwise provided in the Award Agreement, if a Participant dies
while employed by the Company or any of its Subsidiaries, or within 90 days
after having retired with the consent of the Company, the shares which the
Participant was entitled to exercise on the date of the Participant's death
under an Option or Options granted under the Plan may be exercised at any time
after the Participant's death by the Participant's beneficiary; provided,
however, that no Option may be exercised after the earlier of (i) one (1) year
after the Participant's death or (ii) the expiration date specified for the
particular Option in the Award Agreement; and provided, further, that any
unvested Option or Options shall immediately vest upon the death of a
Participant while employed by the Company and may be exercised as provided in
this Section 9(c).
(d) Unless otherwise provided in the Award Agreement, if a Participant
terminates employment by reason of Disability (as defined below), any
unexercised Option held by the Participant shall, if unvested, immediately vest
and shall expire one (1) year after the Participant has a termination of
employment because of such "Disability" and such Option may only be exercised by
the Participant or his or her beneficiary to the extent that the Option was
exercisable on the date of termination of employment because of such
"Disability;" provided, however, no Option may be exercised after the expiration
date specified for the particular Option in the Award Agreement. "Disability"
shall mean (a) in the case of a Participant whose employment with the Company or
a Subsidiary is subject to the terms of an employment agreement between such
Participant and the Company or Subsidiary, which employment agreement includes a
definition of "Disability", the term "Disability" as used in this Plan or any
Award Agreement shall have the meaning set forth in such employment agreement
during the period that such employment agreement remains in effect; and (b) in
all other cases, the term "Disability" as used in this Plan or any Award
Agreement shall mean a condition that (in the opinion of an independent medical
consultant) has rendered the Participant mentally or physically incapable of
performing the services required to be performed by the Participant and has
resulted in the termination of the directorship or employment relationship, as
the case may be.
10. Adjustments
(a) In the event of a Change in Capitalization (as defined below) of the
Company, the Committee shall conclusively make equitable and appropriate
adjustments, if any, to (i) the maximum number and class of shares of Common
Stock or other stock or securities with respect to which Options may be granted
under the Plan, (ii) the maximum number and class of shares of Common Stock or
other stock or securities with respect to which Options may be granted to any
Participant during the term of the Plan, (iii) the number and class of shares of
Common Stock or other stock or securities which are subject to outstanding
Options granted under the Plan and the purchase price therefor, if applicable
and (iv) the number and class of shares of Common Stock or other securities in
respect of which Director Options are to be granted under Section 15 hereof.
(b) If, by reason of a Change in Capitalization, a Participant shall be
entitled to exercise an Option with respect to new, additional or different
shares of stock or securities, such new, additional or different shares shall
thereupon be subject to all of the conditions, restrictions and performance
criteria which were applicable to the shares of Common Stock subject to the
Option prior to such Change in Capitalization.
(c) No adjustment of the number of shares of Common Stock available under
the Plan or to which any Option relates that would otherwise be required under
this Section 10 shall be made unless and until such adjustment either by itself
or with other adjustments not previously made under this Section 10 would
require an increase or decrease of at least 1% in the number of shares of Common
Stock available under the Plan or to which any Option relates immediately prior
to the making of such adjustment (the "Minimum Adjustment"). Any adjustment
representing a change of less than such minimum amount shall be carried forward
and made as soon as such adjustment together with other adjustments required by
this Section 10 and not previously made would result in a Minimum Adjustment.
Notwithstanding the foregoing, any adjustment required by this Section 10 which
otherwise would not result in a Minimum Adjustment shall be made with respect to
shares of Common Stock relating to any Option immediately prior to exercise of
such Option. No fractional shares of Common Stock or units of other securities
shall be issued pursuant to any such adjustment, and any fractions resulting
from any such adjustment shall be eliminated in each case by rounding downward
to the nearest whole share.
(d) "Change in Capitalization" means any increase or reduction in the
number of shares of Common Stock, or any change (including, but not limited to,
a change in value) in the shares of Common Stock or exchange of shares of Common
Stock for a different number or kind of shares or other securities of the
Company or another corporation, by reason of a reclassification,
recapitalization, merger, consolidation, reorganization, spin-off, split-up,
issuance of warrants or rights or debentures, stock dividend, stock split or
reverse stock split, cash dividend in excess of earnings, property dividend,
combination or exchange of shares, change in corporate structure or other
substantially similar event.
11. Amendment and Termination of Plan
The Board or the Committee, by resolution, may terminate, amend, or revise
the Plan with respect to any shares as to which Options have not been granted.
Neither the Board nor the Committee may, without the consent of a Participant,
alter or impair any award previously granted under the Plan, except as
authorized herein. To the extent necessary under applicable law, no amendment
shall be effective unless approved by the stockholders of the Company in
accordance with applicable law. Unless sooner terminated, the Plan shall remain
in effect for a period of 10 years from the date of the Plan's adoption by the
Board. Termination of the Plan shall not affect any Option previously granted.
12. Effective Date of Plan
This Plan shall be effective on the date upon which it is approved by the
Board.
13. Governing Law
(a) Except as to matters of federal law, the Plan and the rights of all
persons claiming hereunder shall be construed and determined in accordance with
the laws of the District of Columbia, without giving effect to conflicts of laws
principles thereof.
(b) The obligation of the Company to sell or deliver the shares of Common
Stock with respect to Options granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Committee.
(c) Each Option is subject to the requirement that, if at any time the
Committee determines, in its discretion, that the listing, registration or
qualification of the shares of Common Stock issuable pursuant to the Plan is
required by any securities exchange or under any state or federal law, or the
consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the grant of an Option or
the issuance of the shares of Common Stock, no Options shall be granted or
payment made or shares issued, in whole or in part, unless listing,
registration, qualification, consent or approval has been effected or obtained
free of any conditions as acceptable to the Committee.
14. Multiple Agreements
The terms of each Option may differ from other Options granted under the
Plan at the same time, or at some other time. The Committee may also grant more
than one Option to a given Participant during the term of the Plan, either in
addition to, or in substitution for, one or more Options previously granted to
that individual.
15. Director Options
(a) Awards relating to the Common Stock authorized under the Plan shall be
made under this section only to Directors.
(b) Annually, on the date of the Annual Meeting of Stockholders, commencing
with the Annual Meeting in 1998, there shall be granted automatically (without
any action by the Committee or the Board) a Director Option to each Director
then elected to office to purchase 2,000 shares of Common Stock.
(c) The Exercise Price for shares under each Director Option shall be equal
to 100% of the Fair Market Value of a share of Common Stock on the date the
Director Option is granted, determined in accordance with Section 5(b) hereof.
The Exercise Price of any Director Option granted shall be paid in full at the
time of each purchase (a) in cash and/or (b)(i) by delivering to the Company
shares of the Common Stock owned by the Director and having a Fair Market Value
on the date of exercise equal to the Exercise Price of the Director Option, or
(ii) by reducing the number of Shares of Common Stock issuable or payable upon
the exercise of a Director Option by the number of shares of Common Stock having
a Fair Market Value on the date of exercise equal to the Exercise Price of the
Director Option. In addition, the Options may be exercised through a registered
broker-dealer pursuant to such cashless exercise procedures (other than share
withholding) that are, from time to time, deemed acceptable. No fractional
shares of Common Stock shall be issued upon exercise of an Option and the number
of shares of Common Stock that may be purchased upon exercise shall be rounded
to the nearest number of whole shares. Each Director Option shall be subject to
the Right of First Refusal, as set forth in Section 7.
(d) At such times as a Director recognizes taxable income in connection
with the receipt of shares of Common Stock hereunder (a "Taxable Event"), the
Director shall pay to the Company the amount of taxes required by law to be
withheld by the Company in connection with the Taxable Event (the "Withholding
Taxes") prior to the issuance of such shares. In satisfaction of the obligation
to pay the Withholding Taxes to the Company, the Director may make a written
election (the "Tax Election"), which may be accepted or rejected in the
discretion of the Committee, to have withheld a portion of the shares of Common
Stock then issuable to him or her having an aggregate Fair Market Value equal to
the Withholding Taxes.
(e) An annual Director Option grant under Section 15(b) shall become fully
vested and exercisable at the rate of one third of the Shares (rounded down to
the nearest whole share number) on May 31 of each of the three years following
the date of grant if the Director who is an optionee under the Director Option
continues to serve as a Director as of such date.
(f) Each Director Option shall terminate on the date which is the fifth
anniversary of the date of grant (the "Option Termination Date"), unless
terminated earlier as follows:
(i) If a Director's service as a member of the Board terminates for
any reason other than death or Cause (as defined below), the Director may
for a period of up to two years after such termination (but not later than
the Option Termination Date) exercise his or her Option to the extent, and
only to the extent, that such Option was vested and exercisable as of the
date the Director's service as a member of the Board terminated, after
which time the Option shall automatically terminate in full.
(ii) If a Director's service as a member of the Board terminates for
Cause, the Option granted to the Director hereunder shall immediately
terminate in full and no rights thereunder may be exercised. For purposes
of this Section 15, "Cause" shall mean (i) fraud or intentional
misrepresentation, (ii) embezzlement, misappropriation or conversion of
assets or opportunities of the Company, (iii) conviction of a felony or
(iv) willful engagement by the Director in activities contrary to the bests
interests of the Company.
(iii) If a Director dies while a member of the Board or within 24
months after termination of service as a Director as described in clause
(i) of this Section 15(f), the Option granted to the Director may be
exercised at any time within twelve (12) months after the Director's death
(but not later than the Option Termination Date) by the person or persons
to whom such rights under the Option shall pass by will, or by the laws of
descent or distribution, after which time the Option shall terminate in
full; provided, however, that an Option may be exercised to the extent, and
only to the extent, that the Option was exercisable on the date of death or
earlier termination of the Director's service as a member of the Board; and
provided, further, that any unvested Option or Options shall immediately
vest upon the death of a Director while a member of the Board.
(g) If there shall occur any event described in Section 10, then in
addition to the matters contemplated thereby, the Director Options then
outstanding and future grants thereof shall be automatically adjusted as
contemplated by Section 10.
(h) The provisions of Sections 1, 2, 3, 7, 8, 10, 11, 12 and 13 are
incorporated herein by this reference. Unless the context otherwise requires,
the provisions of this Section 15 shall be construed as a separate plan.
Originally adopted: February 13, 1997
First Amendment: June 12, 1997
Second Amendment: August 7, 1997
Third Amendment: February 5, 1998
Fourth Amendment: June 4, 1998
Fifth Amendment: April 12, 1999
Sixth Amendment: August 2, 1999
Seventh Amendment: August 6, 2003 (Section 15(e))
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: November 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: November 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 September 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: November 14, 2003