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As filed with the Securities and Exchange Commission on
March 15, 2004
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number 0-17440
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FEDERAL AGRICULTURAL MORTGAGE CORPORATION
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(Exact name of registrant as specified in its charter)
Federally chartered
instrumentality
of the United States 52-1578738
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(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
1133 21st Street, N.W., Suite 600,
Washington, D.C. 20036
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(Address of principal executive offices) (Zip code)
(202) 872-7700
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Exchange on Which Registered
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Class A voting common stock New York Stock Exchange
Class C non-voting common stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Class B voting
common stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (17 C.F.R. ss.229.405) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
The aggregate market values of the Class A voting common stock and Class C
non-voting common stock held by non-affiliates of the registrant were
$17,214,026 and $229,287,264 respectively as of the last business day of the
registrant's most recently completed second fiscal quarter, based upon the
closing prices for the respective classes on June 30, 2003 reported by the New
York Stock Exchange. The aggregate market value of the Class B voting common
stock is not ascertainable due to the absence of publicly available quotations
or prices for the Class B voting common stock as a result of the limited market
for, and infrequency of trades in, Class B voting common stock and the fact that
any such trades are privately negotiated transactions.
As of March 1, 2004, the registrant had outstanding 1,030,780 shares of
Class A voting common stock, 500,301 shares of Class B voting common stock and
10,539,131 shares of Class C non-voting common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement to be filed on or about April 19, 2004 in connection with
the Annual Meeting of Stockholders to be held on June 3, 2004 (portions of which
are incorporated by reference into Part II and Part III of this Annual Report on
Form 10-K).
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Table of Contents
PART I.......................................................................5
Item 1. Business.........................................................5
General..........................................................5
FARMER MAC PROGRAMS..............................................7
Farmer Mac I.....................................................7
Loan Eligibility..............................................7
Purchases.....................................................8
Off-Balance Sheet Guarantees and Commitments..................9
Underwriting and Appraisal Standards.........................10
Sellers......................................................13
Servicing....................................................13
Farmer Mac I Guaranteed Securities...........................13
Farmer Mac I Transactions....................................15
Funding of Guarantee and Purchase Commitment Obligations.....16
Portfolio Diversification....................................16
Farmer Mac II...................................................17
General......................................................17
United States Department of Agriculture Guaranteed
Loan Programs............................................17
Farmer Mac II Guaranteed Securities..........................18
Farmer Mac II Transactions...................................18
Financing.......................................................19
Debt Issuance................................................19
Equity Issuance..............................................20
Farmer Mac's Authority to Borrow from the U.S. Treasury.........21
Government Regulation of Farmer Mac.............................21
Item 2. Properties.....................................................24
Item 3. Legal Proceedings...............................................25
Item 4. Submission of Matters to a Vote of Security Holders.............25
PART II.....................................................................26
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................26
Item 6. Selected Financial Data.........................................27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................28
Forward-Looking Statements......................................28
Critical Accounting Policy and Estimates........................29
Results of Operations...........................................31
Balance Sheet Review............................................45
Risk Management.................................................47
Liquidity and Capital Resources.................................63
Other Matters...................................................70
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......70
Item 8. Financial Statements............................................71
Reports of Independent Auditors.................................71.
Consolidated Balance Sheets.....................................73
Consolidated Statements OF Operations...........................74
Consolidated Statements OF Changes in Stockholders' Equity......75
Consolidated Statements OF Cash Flows...........................76
Notes in Consolidated Financial Statements......................77
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.......................................117
Item 9A. Controls and Procedures........................................117
PART III...................................................................119
Item 10. Directors and Executive Officers of the Registrant.............119
Item 11. Executive Compensation.........................................119
Item 12. Security Ownership of Certain Beneficial Owners and Management.119
Item 13. Certain Relationships and Related Transactions.................119
Item 14. Principal Accounting Fees and Services.........................119
PART IV....................................................................120
Item 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................120
PART I
Item 1. Business
General
The Federal Agricultural Mortgage Corporation ("Farmer Mac" or the
"Corporation") was chartered by the U.S. Congress in the Agricultural Credit Act
of 1987 (12 U.S.C. ss.ss. 2279aa et seq.), which amended the Farm Credit Act of
1971 (collectively, as amended, the "Act"). Farmer Mac is a stockholder-owned
instrumentality of the United States that was created to establish a secondary
market for agricultural real estate and rural housing mortgage loans and to
increase the availability of long-term credit at stable interest rates to
American farmers, ranchers and rural homeowners. The Farmer Mac secondary market
for agricultural mortgage loans accomplishes that mission by providing liquidity
and lending capacity to agricultural mortgage lenders by:
o purchasing newly originated and pre-existing ("seasoned") eligible
mortgage loans directly from lenders through its "cash window" and
seasoned eligible mortgage loans from lenders and other third parties
in negotiated transactions;
o exchanging newly issued agricultural mortgage-backed securities
guaranteed by Farmer Mac ("Farmer Mac Guaranteed Securities") for
newly originated and seasoned eligible mortgage loans that back those
securities in "swap" transactions;
o issuing long-term standby purchase commitments ("LTSPCs") for newly
originated and seasoned eligible mortgage loans; and
o purchasing and guaranteeing mortgage-backed bonds secured by eligible
mortgage loans, which are referred to as AgVantage bonds.
Farmer Mac conducts these activities through two programs--Farmer Mac I and
Farmer Mac II. Under the Farmer Mac I program, Farmer Mac:
o purchases eligible mortgage loans;
o securitizes eligible mortgage loans purchased and guarantees the
timely payment of principal and interest on the agricultural
mortgage-backed securities backed by such loans; and
o commits to purchase eligible mortgage loans under LTSPCs for such
loans.
To be eligible for the Farmer Mac I program, loans must meet Farmer Mac's
underwriting, appraisal, documentation and other specified standards that are
discussed in "Business--Farmer Mac Programs--Farmer Mac I."
Under the Farmer Mac II program, Farmer Mac purchases the guaranteed
portions of loans guaranteed by the United States Department of Agriculture (the
"USDA-guaranteed portions") pursuant to the Consolidated Farm and Rural
Development Act (7 U.S.C. ss.ss. 1921 et seq.) and guarantees securities backed
by those USDA-guaranteed portions purchased by Farmer Mac.
Farmer Mac may retain Farmer Mac Guaranteed Securities in its portfolio or
sell them to third parties.
As of December 31, 2003, outstanding loans held by Farmer Mac and loans
that either back Farmer Mac Guaranteed Securities or are subject to LTSPCs
totaled $5.8 billion. For more information about Farmer Mac's securities and its
financial performance, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Farmer Mac's two principal sources of revenue are:
o fees received in connection with outstanding Farmer Mac Guaranteed
Securities and LTSPCs; and
o net interest income earned on its portfolio of Farmer Mac Guaranteed
Securities, mortgage loans, AgVantage bonds and investments.
Farmer Mac funds its program purchases primarily by issuing debt
obligations of various maturities. As of December 31, 2003, Farmer Mac had
outstanding $2.6 billion of discount notes and $1.3 billion of medium-term
notes. During 2003, the Corporation continued its strategy of regularly issuing
debt to increase its presence in the capital markets in order to reduce the
rates it pays on its debt, which allows Farmer Mac to accept lower rates on
mortgages it purchases from lenders to farmers, ranchers and rural homeowners.
To the extent the proceeds of the debt issuances exceed Farmer Mac's need to
fund program assets, those proceeds are invested in high quality non-program
assets.
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.
The Farm Credit Administration ("FCA"), acting through its Office of
Secondary Market Oversight, has general regulatory and enforcement authority
over Farmer Mac, including the authority to promulgate rules and regulations
governing the activities of Farmer Mac and to apply FCA's general enforcement
powers to Farmer Mac and its activities. For a discussion of Farmer Mac's
statutory capital requirements and its capital levels, see "Business--Government
Regulation of Farmer Mac--Regulation--Capital Standards" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Balance Sheet Review--Capital" and "--Liquidity and Capital
Resources--Capital Requirements."
Farmer Mac has three classes of common stock outstanding--Class A voting,
Class B voting and Class C non-voting. See "Market for Registrant's Common
Equity and Related Stockholder Matters" for information regarding Farmer Mac's
common stock. Farmer Mac has one class of preferred stock. See "Farmer Mac
Programs--Financing--Equity Issuance."
As of December 31, 2003, Farmer Mac employed 36 persons, located primarily
at its principal executive offices at 1133 Twenty-First Street, N.W., Suite 600,
Washington, D.C. 20036. Farmer Mac's main telephone number is (202) 872-7700.
Farmer Mac makes available free of charge on its Internet website at
www.farmermac.com (in the "Investors" section) copies of materials it files
with, or furnishes to, the U.S. Securities and Exchange Commission ("SEC"),
including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to those reports, as soon as reasonably
practicable after electronically filing of such materials with, or furnishing
to, the SEC. Please note that all references to www.farmermac.com in this report
are inactive textual references only and that the information contained on
Farmer Mac's website is not incorporated by reference into this report.
FARMER MAC PROGRAMS
Farmer Mac I
Loan Eligibility
Under the Farmer Mac I program, Farmer Mac purchases, or commits to
purchase, eligible mortgage loans and guarantees the timely payment of principal
and interest on securities backed by, or representing interests in, eligible
mortgage loans. A loan is eligible for the Farmer Mac I program if it is:
o secured by a fee simple mortgage or a long-term leasehold mortgage,
with status as a first lien on agricultural real estate or rural
housing (as defined below) located within the United States;
o an obligation of a citizen or national of the United States, an alien
lawfully admitted for permanent residence in the United States or a
private corporation or partnership that is majority-owned by U.S.
citizens, nationals or legal resident aliens;
o an obligation of a person, corporation or partnership having training
or farming experience that is sufficient to ensure a reasonable
likelihood that the loan will be repaid according to its terms; and
o in conformance with Farmer Mac's underwriting, appraisal,
documentation and other specified standards to be eligible for
participation in the Farmer Mac I program. See "--Underwriting and
Appraisal Standards" and "--Sellers" for a description of these
standards.
For purposes of the Farmer Mac I program, agricultural real estate is one
or more parcels of land, which may be improved by permanently affixed buildings
or other structures, that:
o is used for the production of one or more agricultural commodities or
products; and
o consists of a minimum of five acres or generates minimum annual
receipts of $5,000.
Currently, the maximum principal amount of an eligible loan secured by
agricultural real estate is $5.0 million, as adjusted annually for inflation,
for loans secured by more than 1,000 acres of land and $12.0 million for loans
secured by 1,000 acres or less.
For purposes of the Farmer Mac I program, rural housing is a one- to
four-family, owner-occupied, moderately priced principal residence located in a
community with a population of 2,500 or less. Since October 2003, the maximum
purchase price or current appraised value for a dwelling, excluding the land to
which the dwelling is affixed, that secures a rural housing loan has been
$197,807, as adjusted for inflation. In addition to the dwelling itself, an
eligible rural housing loan can be secured by land associated with the dwelling
having an appraised value of no more than 50 percent of the total appraised
value of the combined property. To date, loans meeting the eligibility criteria
under the rural housing segment of Farmer Mac's requirements have not
represented a significant part of Farmer Mac's business.
Purchases
Loan Purchases. Farmer Mac offers credit products that are intended to
increase the secondary market liquidity of agricultural mortgage loans and the
lending capacity of financial institutions that originate agricultural mortgage
loans, while permitting Farmer Mac to efficiently securitize eligible mortgage
loans acquired through its secondary market activities. Farmer Mac enters into
mandatory and optional delivery commitments to purchase loans and prices such
commitments daily through its cash window. Because the securitization process
requires the grouping of loans into uniform pools, Farmer Mac emphasizes the
importance of conformity to its program requirements, including the interest
rate, amortization, maturity and payment frequency specifications. Farmer Mac
also purchases portfolios of newly originated and seasoned loans on a negotiated
basis through its cash window. Farmer Mac purchases fixed- and adjustable-rate
loans primarily, but also may purchase other types of loans, including
convertible mortgage loans. Loans purchased by Farmer Mac have a variety of
maturities and often include balloon payments. Loans purchased or subject to
purchase commitments also may include provisions that require a yield
maintenance payment or some other form of prepayment penalty in the event a
borrower prepays a loan (depending upon the level of interest rates at the time
of prepayment).
During 2003, Farmer Mac purchased $192.6 million of loans through its cash
window. Of the loans purchased during 2003, 74 percent included balloon payments
and 11 percent included yield maintenance prepayment protection. By comparison,
during 2002, Farmer Mac purchased $747.9 million of loans through its cash
window, including a $489.5 million loan portfolio in second quarter 2002. Of the
loans purchased during 2002, 76 percent included balloon payments and 54 percent
included yield maintenance prepayment protection. During 2003, Farmer Mac's top
ten sellers generated 80.8 percent of the total Farmer Mac I cash window loan
purchase volume, of which Zions First National Bank, Farmer Mac's largest
combined Class A and Class C stockholder, accounted for 38.7 percent. Including
the second quarter loan portfolio purchase transaction, the top ten sellers in
2002 generated 90.0 percent of the total Farmer Mac I cash window loan purchase
volume, of which Zions First National Bank accounted for 10.3 percent. For more
information regarding loan volume, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--Business
Volume."
Mortgage-Backed Bond Purchases. Farmer Mac purchases and guarantees timely
payment of principal and interest on mortgage-backed bonds, referred to as
AgVantage bonds, issued by institutions approved by Farmer Mac. Farmer Mac
assesses an institution's agricultural loan underwriting and servicing
capabilities as well as its creditworthiness in approving an institution for
AgVantage bond sales to Farmer Mac.
Each AgVantage bond is a general obligation of the issuing institution and
is secured by eligible collateral in an amount ranging from 120 percent to 150
percent of the bond's outstanding principal amount. Eligible collateral consists
of loans that meet the same loan eligibility criteria applied by Farmer Mac in
its loan purchases and commitments and have an outstanding aggregate principal
balance equal to at least 100 percent of the bond's outstanding principal amount
plus cash or securities issued by the U.S. Treasury or guaranteed by an agency
or instrumentality of the United States that make up any remaining required
collateral. During 2003, Farmer Mac purchased six AgVantage bonds with
maturities ranging from one month to five years from five institutions resulting
in Farmer Mac guarantees of $13.1 million. As of December 31, 2003, the
outstanding principal amount of AgVantage bonds was $25.2 million. To date,
Farmer Mac has experienced no losses, nor has it been called upon to make a
guarantee payment, on any of its AgVantage bonds.
Off-Balance Sheet Guarantees and Commitments
Farmer Mac offers two Farmer Mac I credit enhancement alternatives that
allow approved agricultural and rural residential mortgage lenders both to
retain the cash flow benefits of their loans and increase their liquidity and
lending capacity. These alternatives are:
o a swap transaction, in which Farmer Mac acquires eligible loans from
sellers in exchange for Farmer Mac Guaranteed Securities backed by
those loans. As consideration for its assumption of the credit risk on
loans underlying the Farmer Mac Guaranteed Securities, Farmer Mac
receives guarantee fees payable in arrears out of the periodic loan
interest payments and based on the outstanding balance of the Farmer
Mac Guaranteed Securities.
o an LTSPC, which is not a guarantee of loans or securities, but a
Farmer Mac commitment to purchase loans from a segregated pool of
loans on one or more undetermined future dates. As consideration for
its assumption of the credit risk on loans underlying an LTSPC, Farmer
Mac receives commitment fees payable monthly in arrears, in an amount
approximating what would have been the guarantee fees if the
transaction were structured as a swap transaction.
A swap transaction or an LTSPC may involve loans with payment, maturity and
interest rate characteristics that differ from those purchased through the cash
window. A swap transaction or an LTSPC permits a seller to nominate from its
portfolio a segregated pool of loans, subject to review by Farmer Mac for
conformance with its underwriting and appraisal standards. Upon Farmer Mac's
acceptance of the eligible loans, whether under a swap transaction or an LTSPC,
the seller effectively transfers the credit risk on those loans to Farmer Mac,
thereby reducing the seller's credit and concentration risk exposures and,
consequently, its regulatory capital and its loss reserve requirements. Only the
LTSPC structure permits the seller to retain the segregated loan pool in its
portfolio until such time, if ever, as the seller delivers some or all of the
segregated loans to Farmer Mac for purchase under the LTSPC. An LTSPC commits
Farmer Mac to a future purchase of loans that met Farmer Mac's underwriting
standards at the time the loans first became subject to the LTSPC and Farmer Mac
assumed the credit risk on loans.
Farmer Mac generally purchases loans subject to an LTSPC:
o At par plus accrued interest, if the loans become four months
delinquent;
o At a mark-to-market price, if the loans are not delinquent and are
standard Farmer Mac cash window loan products; or in exchange for
Farmer Mac I Guaranteed Securities.
o If the loans are not four months delinquent, either at a
mark-to-market negotiated price for all (but not some) loans in the
pool, based on the sale of Farmer Mac I Guaranteed Securities in the
capital markets or the funding obtained by Farmer Mac through the
issuance of matching debt in the capital markets; or in exchange for
Farmer Mac I Guaranteed Securities.
In 2003, Farmer Mac entered into $763.3 million of LTSPCs, compared to $1.2
billion in 2002. During 2003, LTSPCs continued as the preferred credit
enhancement alternative for new non-cash transactions and were a significant
portion of the Farmer Mac I program. However, during third quarter 2003, Farm
Credit West, ACA, a related party program participant, exercised the conversion
feature incorporated in all existing LTSPCs and Farmer Mac converted that
participant's $722.3 million LTSPC into a Farmer Mac I Guaranteed Security in a
swap transaction. No similar transactions took place in 2002. Net of this
transaction, as of December 31, 2003, Farmer Mac had committed to purchase under
LTSPCs a cumulative total of 12,771 eligible mortgage loans with an aggregate
principal balance of $2.3 billion. As of December 31, 2003, off-balance sheet
Farmer Mac I Guaranteed Securities included 1,623 mortgage loans and totaled
$952.1 million. For more information regarding guarantee and LTSPC volume, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Business Volume."
Underwriting and Appraisal Standards
Farmer Mac has established underwriting and appraisal standards for
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 mortgaged property relative to the
amount of the mortgage loan. Farmer Mac requires sellers to make representations
and warranties regarding the conformity of eligible mortgage loans to these
standards and other requirements it may impose from time to time.
Farmer Mac I credit underwriting standards require that the loan-to-value
ratio ("LTV") for any loan not exceed 70 percent, except that a loan secured by
a livestock facility and supported by a contract with an integrator may have an
LTV of up to 75 percent, a part-time farm loan supported by private mortgage
insurance may have an LTV of up to 85 percent and a rural housing loan supported
by private mortgage insurance may have an LTV 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 LTVs. For those 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,
facility, low-documentation, 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 (i.e.,
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,
when those loans:
o exceed minimum requirements for 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 were approved on the basis of
conformance with all of the standard credit ratios. As of December 31, 2003, a
total of $1.8 billion (36 percent) of the outstanding balance of loans held and
loans underlying LTSPCs and Farmer Mac I Guaranteed Securities issued after the
enactment of the Farm Credit System Reform Act of 1996 (the "1996 Act") were
approved based upon compensating strengths ($63.4 million of which had original
loan-to-value ratios of greater than 70 percent). The original loan-to-value
ratio is 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. During 2003, $351.0 million (37 percent) of
the loans purchased or added under LTSPCs were approved based upon compensating
strengths ($14.9 million of which had original loan-to-value ratios of greater
than 70 percent).
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 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 set forth in the preceding paragraphs;
o confirmation that loan file data conform to database information;
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 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 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 personnel include experienced agricultural credit underwriters,
appraisers and servicers who perform those functions with respect to many loans
that come into the Farmer Mac I program. In addition, those personnel oversee
the activities of several servicing centers to which Farmer Mac outsources a
significant amount of its underwriting function in order to access the expertise
and specialized knowledge of several industry-recognized third-party service
providers throughout the country. The outsourcing agreements afford Farmer Mac
the benefits of those servicing centers at fees based upon marginal costs, which
allows Farmer Mac to avoid the fixed costs associated with such operations.
Farmer Mac supervises and monitors the performance of the outsourced functions.
Farmer Mac believes that the combined expertise of those third-party service
providers and its own internal staff provides the Corporation with access to
adequate resources for performing the necessary underwriting, appraisal and
servicing functions.
Sellers
As of December 31, 2003, there were 142 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,
of which 81 were active participants in the program. As of December 31, 2002,
there were 219 approved sellers in the Farmer Mac I program, of which 79 were
active participants in the 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
December 31, 2003, more than 75 lenders were participating in those networks,
bringing the total Farmer Mac I program participants to more than 200 as of
December 31, 2003.
To be considered for approval as a Farmer Mac I seller, a financial
institution must meet the criteria that Farmer Mac establishes, 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.
Servicing
Farmer Mac generally does not directly service loans held in its portfolio,
although it does act as "master servicer" for pools of loans and loans
underlying Farmer Mac Guaranteed Securities and may assume direct servicing for
certain impaired loans. Farmer Mac's loans and the loans underlying its Farmer
Mac Guaranteed Securities are serviced only by Farmer Mac-approved entities
designated as "central servicers" that have entered into central servicing
contracts with Farmer Mac. Sellers of eligible mortgage loans sold into the
Farmer Mac I program have a right to retain certain "field servicing" functions
(typically direct borrower contacts) and may enter into contracts with Farmer
Mac's central servicers that specify such servicing functions.
Farmer Mac I Guaranteed Securities
Farmer Mac guarantees the timely payment of principal and interest on
Farmer Mac Guaranteed Securities. Farmer Mac Guaranteed Securities backed by
mortgage loans eligible for the Farmer Mac I program are referred to as "Farmer
Mac I Guaranteed Securities."
By statute, public offerings of Farmer Mac Guaranteed Securities are
required to be registered with the SEC under the federal securities laws.
Accordingly, Farmer Mac, through its subsidiary Farmer Mac Mortgage Securities
Corporation, maintains a shelf registration statement with the SEC through which
Farmer Mac Guaranteed Securities may be publicly offered from time to time.
Farmer Mac also may offer Farmer Mac Guaranteed Securities in private,
unregistered offerings. U.S. Bank National Association, a national banking
association based in Minneapolis, Minnesota, or Farmer Mac serves as trustee for
the trusts that acquire eligible loans and issue Farmer Mac Guaranteed
Securities.
Farmer Mac I Guaranteed Securities are agricultural mortgage pass-through
certificates guaranteed by Farmer Mac that represent beneficial interests in
pools of loans or in obligations backed by pools of loans. All Farmer Mac I
Guaranteed Securities issued during and since 1996 have been single class or
multiclass "grantor trust" pass-through certificates. These securities entitle
each investor in a class of securities to receive a portion of the payments of
principal and interest on the related underlying pool of loans equal to the
investor's proportionate interest in the pool. These securities also may support
other Farmer Mac I Guaranteed Securities, including real estate mortgage
investment conduit securities, commonly referred to as REMICs, and other
agricultural mortgage-backed securities. Farmer Mac I Guaranteed Securities
issued prior to the enactment of changes to Farmer Mac's statutory charter in
1996 are supported by unguaranteed first-loss subordinated interests that
represented ten percent of the balance of the loans underlying the securities at
issuance.
Farmer Mac I Guaranteed Securities are not assets of Farmer Mac, except
when acquired for investment purposes, nor are Farmer Mac I Guaranteed
Securities recorded as liabilities on Farmer Mac's consolidated financial
statements. Farmer Mac, however, is liable under its guarantee on the securities
to make timely payments to investors of principal (including balloon payments)
and interest based on the scheduled payments on the underlying loans, regardless
of whether the grantor trust has actually received such scheduled payments.
Because it guarantees timely payments on Farmer Mac I Guaranteed Securities,
Farmer Mac assumes the ultimate credit risk of borrower defaults on the
underlying loans, which are subject to Farmer Mac's Underwriting Standards
described above in "--Underwriting and Appraisal Standards." See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Management--Credit Risk - Loans."
Farmer Mac receives guarantee fees in return for its guarantee obligations
on Farmer Mac I Guaranteed Securities. These fees are collected as installment
payments are made on the underlying loans until those loans have been repaid or
otherwise liquidated (generally as a result of default). The aggregate amount of
guarantee fees received on Farmer Mac I Guaranteed Securities depends upon the
amount of such securities outstanding and on the guarantee fee rate, which is
capped by statute at 50 basis points (0.50 percent) per annum. The Farmer Mac I
guarantee fee rate typically ranges from 40 to 50 basis points (0.40 to 0.50
percent) per annum, depending on the credit quality of and other criteria
regarding the loans. The amount of Farmer Mac I Guaranteed Securities
outstanding is influenced by the repayment rates on the underlying loans and by
the rate at which Farmer Mac issues new Farmer Mac I Guaranteed Securities. In
general, when the level of interest rates declines significantly below the
interest rates on loans underlying Farmer Mac I Guaranteed Securities, the rate
of prepayments is likely to increase; conversely, when interest rates rise above
the interest rates on the loans underlying Farmer Mac I Guaranteed Securities,
the rate of prepayments is likely to decrease. In addition to changes in
interest rates, the rate of principal payments on Farmer Mac I Guaranteed
Securities is also influenced by a variety of economic, demographic and other
considerations, including yield maintenance provisions that are associated with
many of the loans underlying Farmer Mac I Guaranteed Securities. For more
information regarding yield maintenance provisions, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Risk
Management--Interest Rate Risk."
For each of the years ended December 31, 2003 and 2002, Farmer Mac sold
SEC-registered Farmer Mac Guaranteed Securities at no gain or loss in the amount
of $78.3 million and $47.7 million, respectively, principally to a related
party. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Business Volume."
Farmer Mac I Transactions
During the year ended December 31, 2003, Farmer Mac purchased or placed
under guarantee or LTSPC $1.0 billion of loans under the Farmer Mac I program.
As of December 31, 2003, loans held and loans underlying Farmer Mac I Guaranteed
Securities and LTSPCs totaled $5.0 billion. The 1996 Act revised Farmer Mac's
statutory charter to eliminate the requirement of a first-loss subordinated
interest in Farmer Mac I Guaranteed Securities. As of December 31, 2003, $24.7
million of Farmer Mac I Guaranteed Securities issued prior to the 1996 Act
remained outstanding.
The following table summarizes loans purchased or newly placed under
guarantees or LTSPCs under the Farmer Mac I program for each of the years ended
December 31, 2003, 2002 and 2001.
For the Year Ended December 31,
----------------------------------------------
2003 2002 2001
--------------- -------------- ---------------
(in thousands)
Loans and Guaranteed Securities $ 192,577 $ 747,881 $ 272,127
LTSPCs 763,342 1,155,479 1,032,967
--------------- -------------- ---------------
Total $ 955,919 $1,903,360 $1,305,094
--------------- -------------- ---------------
The following table presents the outstanding balances of Farmer Mac I loans
and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs as of the
dates indicated:
Outstanding Balances
as of December 31,
---------------------------------------
2003 2002
------------------- ------------------
(in thousands)
Post-1996 Act:
Loans and Guaranteed Securities $ 2,696,530 $ 2,168,994
LTSPCs 2,348,702 2,681,240
Pre-1996 Act 24,734 31,960
------------------- ------------------
Total Farmer Mac I program $ 5,069,966 $ 4,882,194
------------------- ------------------
Funding of Guarantee and Purchase Commitment Obligations
The principal sources of funding for the payment of Farmer Mac's
obligations under its guarantees and LTSPCs are the fees for its guarantees and
commitments, net interest income and the proceeds of debt issuance. Farmer Mac
satisfies its guarantee and purchase commitment obligations by purchasing
defaulted loans out of LTSPCs and from the related trusts for Farmer Mac
Guaranteed Securities. 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. Ultimate losses
arising from Farmer Mac's guarantees and commitments are reflected in the
Corporation's charge-offs against its allowance for losses and gains and losses
on the sale of real estate owned. During 2003, Farmer Mac's net charge-offs were
$5.2 million, compared to $4.1 million in net charge-offs during 2002. Gains on
the sale of real estate owned were $0.2 million and $0.1 million for each of the
years ended December 31, 2003 and 2002, respectively. The Act requires Farmer
Mac to set aside, as an allowance for losses in a reserve account, a portion of
the guarantee fees it receives from its guarantee activities. Among other
things, that reserve account must be exhausted before Farmer Mac may issue
obligations to the Secretary of the Treasury against the $1.5 billion Farmer Mac
is statutorily authorized to borrow from the Secretary of the Treasury to
fulfill its guarantee obligations. That borrowing authority is not intended to
be a routine funding source and has never been used.
Although total outstanding guarantees exceed the amount held as an
allowance for losses and the amount it may borrow from the U.S. Treasury, Farmer
Mac does not expect its obligations under the guarantees to exceed amounts
available to satisfy those obligations. For information regarding the allowance
for losses, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Management--Credit Risk - Loans," Note 2(j) and Note
8 to the consolidated financial statements. For a more detailed discussion of
Farmer Mac's borrowing authority from the Treasury, see "Farmer Mac's Authority
to Borrow from the U.S. Treasury."
Portfolio Diversification
It is Farmer Mac's policy to diversify its portfolio of loans held and
loans underlying Farmer Mac Guaranteed Securities and LTSPCs, both
geographically and by commodity. Farmer Mac directs its marketing efforts toward
agricultural lenders throughout the nation to achieve commodity and geographic
diversification in its exposure to credit risk. Farmer Mac measures its credit
exposure in particular geographic regions and commodities as a percentage of the
total principal amount of all loans outstanding, adjusted for the credit quality
of the loans in that particular geographic region or commodity group based on
the loan-to-value, debt service coverage, equity-to-asset and working
capital-to-current asset ratios of the loans.
Farmer Mac is not obligated to buy every loan submitted to it by eligible
sellers that meets its underwriting and appraisal standards. Farmer Mac
considers other factors such as its overall portfolio diversification, commodity
and farming forecasts and risk management objectives in deciding whether to
accept the loans into the Farmer Mac I program. For example, if industry
forecasts indicate possible weakness in a geographic area or commodity, Farmer
Mac may decide not to purchase or commit to purchase an affected loan as part of
managing its overall portfolio exposure to areas of possible heightened risk
exposure. Because Farmer Mac effectively assumes the credit risk on all loans
under an LTSPC, Farmer Mac's commodity and geographic diversification
disclosures reflect all loans under LTSPCs and any loans that have been
purchased out of LTSPC pools. For information regarding the diversification of
Farmer Mac's existing portfolio, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Management--Credit Risk -
Loans" and Note 8 to the consolidated financial statements.
Farmer Mac II
General
The Farmer Mac II program was initiated in 1992 and is authorized under
sections 8.0(3) and 8.0(9)(B) of Farmer Mac's statutory charter (12 U.S.C.
ss.ss. 2279aa(3) and 2279aa(9)(B)), which provide that:
o USDA-guaranteed portions are statutorily included in the definition of
loans eligible for Farmer Mac's secondary market programs;
o USDA-guaranteed portions are exempted from the underwriting, appraisal
and repayment standards that all other loans must meet to be eligible
for Farmer Mac programs, and are exempted from any diversification and
internal credit enhancement that may be required of pools of other
loans eligible for Farmer Mac programs; and
o Farmer Mac is authorized to pool and issue Farmer Mac Guaranteed
Securities backed by USDA-guaranteed portions.
United States Department of Agriculture Guaranteed Loan Programs
The USDA, acting through its various agencies, currently administers the
federal rural credit programs first developed in the mid-1930s. The USDA makes
direct loans and guarantees portions of loans made and serviced by
USDA-qualified lenders for various purposes. The USDA's guarantee is supported
by the full faith and credit of the United States. USDA-guaranteed portions
represent up to 95 percent of the principal amount of guaranteed loans.
Through its Farmer Mac II program, Farmer Mac is one of several competing
purchasers of USDA-guaranteed portions of farm ownership loans, farm operating
loans, business and industry loans and other loans that are fully guaranteed as
to principal and interest by the USDA (collectively, the "guaranteed loans").
USDA Guarantees. Each USDA guarantee is a full faith and credit obligation
of the United States and 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:
o 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
o 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.
If the lender does not repurchase the USDA-guaranteed portion as provided
above, the USDA is required to purchase the unpaid principal balance of the
USDA-guaranteed portion together with accrued interest (including any loan
subsidy) to the date of purchase, less the servicing fee, within 30 days after
written demand upon the USDA by the owner. While the USDA guarantee will not
cover the note interest to the owner on USDA-guaranteed portions accruing after
90 days from the date of the original demand letter of the owner to the lender
requesting repurchase, Farmer Mac has established procedures to require prompt
tendering of USDA-guaranteed portions.
If, in the opinion of the lender (with the concurrence of the USDA) or in
the opinion of the USDA, repurchase of the USDA-guaranteed portion is necessary
to service the related guaranteed loan adequately, the owner will sell the
USDA-guaranteed portion to the lender or USDA for an amount equal to the unpaid
principal balance and accrued interest (including any loan subsidy) on such
USDA-guaranteed portion less the lender's servicing fee. Federal regulations
prohibit the lender from repurchasing USDA-guaranteed portions for arbitrage
purposes.
Lenders. Any lender authorized by the USDA to obtain a USDA guarantee on a
loan may sell loans to Farmer Mac through the Farmer Mac II program. As of
December 31, 2003, there were 150 active lenders in the Farmer Mac II program,
consisting mostly of community and regional banks, an increase of 7 active
lenders from December 31, 2002.
Loan Servicing. The lender on each guaranteed loan is required by
regulation to retain the unguaranteed portion of the guaranteed loan, to service
the entire underlying guaranteed loan, including the USDA-guaranteed portion,
and to remain mortgagee and/or secured party of record. The USDA-guaranteed
portion and the unguaranteed portion of the underlying guaranteed loan are to be
secured by the same security with equal lien priority. The USDA-guaranteed
portion cannot be paid later than or in any way be subordinated to the related
unguaranteed portion.
Farmer Mac II Guaranteed Securities
Farmer Mac guarantees the timely payment of principal and interest on
Farmer Mac II Guaranteed Securities backed by USDA-guaranteed portions. Farmer
Mac does not guarantee the repayment of the USDA-guaranteed portions, only the
Farmer Mac II Guaranteed Securities that are backed by USDA-guaranteed portions.
In addition to purchasing USDA-guaranteed portions for retention in its
portfolio, Farmer Mac offers Farmer Mac II Guaranteed Securities to lenders in
swap transactions or to other investors for cash.
Farmer Mac II Transactions
During the years ended December 31, 2003 and 2002, Farmer Mac issued $271.2
million and $173.0 million of Farmer Mac II Guaranteed Securities, respectively.
As of December 31, 2003, $729.5 million Farmer Mac II Guaranteed Securities were
outstanding. See Note 5 and Note 12 to the consolidated financial statements.
The following table presents Farmer Mac II Guaranteed Securities issued for each
of the years indicated:
For the Year Ended December 31,
----------------------------------------------
2003 2002 2001
--------------- -------------- ---------------
(in thousands)
Purchased and retained $ 270,727 $ 173,011 $ 186,679
Swaps (issued to third parties) 502 - 11,492
--------------- -------------- ---------------
Total $ 271,229 $ 173,011 $ 198,171
--------------- -------------- ---------------
The following table presents the outstanding balance of Farmer Mac II
Guaranteed Securities as of the dates indicated:
Outstanding Balance of
Farmer Mac II Guaranteed Securites
as of December 31,
-----------------------------------------
2003 2002
------------------ -------------------
(in thousands)
On-balance sheet $ 678,229 $ 578,681
Off-balance sheet 51,241 67,109
------------------ -------------------
Total $ 729,470 $ 645,790
------------------ -------------------
To date, Farmer Mac has experienced no credit losses on any of its Farmer Mac II
transactions. As of December 31, 2003 and 2002, Farmer Mac had outstanding $1.2
million of principal and interest advances, respectively, on Farmer Mac II
Guaranteed Securities.
Financing
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 purchases primarily by issuing debt obligations,
consisting of discount notes and medium-term notes of various maturities, in the
public capital markets. Farmer Mac also issues discount notes and medium-term
notes to obtain monies to finance its investments, transaction costs and
guarantee and LTSPC payments.
The Corporation's discount notes and medium-term notes are obligations of
Farmer Mac only, are not rated by a nationally recognized statistical rating
organization and the interest and principal thereon are not guaranteed by and do
not constitute debts or obligations of the Farm Credit Administration or the
United States or any agency or instrumentality of the United States other than
Farmer Mac. Farmer Mac is an institution of the Farm Credit System, 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 to the purchaser of a Farmer Mac discount note or medium-term
note is not exempt 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 outstanding of discount notes and medium-term notes, subject to periodic
review of the adequacy of that level relative to Farmer Mac's borrowing
requirements. Farmer Mac invests in loans, Farmer Mac Guaranteed Securities and
non-program investment assets in accordance with policies established by its
board of directors. The current policies authorize 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 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.
For more information about Farmer Mac's outstanding investments and
indebtedness, see Note 4 and Note 7 to the consolidated financial statements.
Equity Issuance
The Act authorizes Farmer Mac to issue voting common stock, non-voting
common stock and non-voting preferred stock. Only banks, other financial
entities, insurance companies and institutions of the Farm Credit System
eligible to participate in one or more of the Farmer Mac programs may hold
voting common stock. No holder of Class A voting common stock may directly or
indirectly be a beneficial owner of more than 33 percent of the outstanding
shares of Class A voting common stock. There are no ownership restrictions
applicable to Class C non-voting common stock or preferred stock.
The Class C non-voting common stock and the preferred stock are freely
transferable. Upon liquidation, dissolution or winding up of the business of
Farmer Mac, after payment and provision for payment of outstanding debt of the
Corporation, the holders of preferred stock would be paid in full at par value,
plus all accrued dividends, before the holders of shares of common stock
received any payment. To date, Farmer Mac has not paid any dividends on its
common stock, nor does it expect to pay such dividends in the foreseeable
future. Farmer Mac's ability to declare and pay common stock dividends could be
restricted if it were to fail to comply with its regulatory capital
requirements. See Note 9 to the consolidated financial statements and
"Business--Government Regulation of Farmer Mac--Regulation--Capital
Standards--Enforcement levels."
As of December 31, 2003, 1,030,780 shares of Class A common stock, 500,301
shares of Class B common stock, 10,522,513 shares of Class C non-voting common
stock and 700,000 shares of 6.40 percent non-voting Cumulative Preferred Stock,
Series A were outstanding. Farmer Mac may obtain additional capital from future
issuances of voting and non-voting common stock and non-voting preferred stock.
Farmer Mac has no present intention to issue any additional shares of common
stock, except pursuant to programs in which employees, members of management or
the board of directors may be granted or may purchase Class C non-voting common
stock, or exercise options to purchase Class C non-voting common stock granted
as part of their compensation arrangements.
The Cumulative Preferred Stock, Series A has a redemption price and
liquidation preference of $50.00 per share, plus accrued and unpaid dividends.
The preferred stock does not have a maturity date. Beginning on June 30, 2012,
Farmer Mac has the option to redeem the 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. The costs of issuing the
preferred stock were charged to additional paid-in capital. Farmer Mac pays
cumulative dividends on the preferred stock quarterly in arrears, when and if
declared by the board of directors. Farmer Mac's ability to declare and pay a
dividend could be restricted if it failed to comply with regulatory capital
requirements. The following table presents the dividends declared on the
preferred stock during and subsequent to 2003:
Date Per For For
Dividend Share Period Period Date
Declared Amount Beginning Ending Paid
- ------------------------ ------------ ---------------------- ----------------------- ----------------------
February 6, 2003 $ 0.80 January 1, 2003 March 31, 2003 March 31, 2003
June 5, 2003 0.80 April 1, 2003 June 30, 2003 June 30, 2003
August 7, 2003 0.80 July 1, 2003 September 30, 2003 September 30, 2003
December 4, 2003 0.80 October 1, 2003 December 31, 2003 December 31, 2003
February 5, 2004 0.80 January 1, 2004 March 31, 2004 *
* The dividend declared on February 5, 2004 is scheduled to be paid on March 31, 2004.
FARMER MAC'S AUTHORITY TO BORROW FROM THE U.S. TREASURY
Farmer Mac may, in extreme circumstances, issue obligations to the U.S.
Treasury in a cumulative amount not to exceed $1.5 billion. The proceeds of such
obligations may be used solely for the purpose of fulfilling Farmer Mac's
guarantee commitments under the Farmer Mac I and Farmer Mac II programs. The Act
provides that the U.S. Treasury is required to purchase such obligations of
Farmer Mac if Farmer Mac certifies that:
o a portion of the guarantee fees assessed by Farmer Mac has been set
aside as a reserve against losses arising out of Farmer Mac's
guarantee activities in an amount determined by Farmer Mac's board of
directors to be necessary and such reserve has been exhausted; and
o the proceeds of such obligations are needed to fulfill Farmer Mac's
guarantee obligations.
Such obligations would bear interest at a rate determined by the U.S. Treasury,
taking into consideration the average rate on outstanding marketable obligations
of the United States as of the last day of the last calendar month ending before
the date of the purchase of the obligations from Farmer Mac, and would be
required to be repurchased from the U.S. Treasury by Farmer Mac within a
"reasonable time."
The United States government does not guarantee payments due on Farmer Mac
Guaranteed Securities, funds invested in the equity or debt securities of Farmer
Mac, any dividend payments on shares of Farmer Mac stock or the profitability of
Farmer Mac.
GOVERNMENT REGULATION OF FARMER MAC
General
Public offerings of Farmer Mac Guaranteed Securities must be registered
with the SEC under the federal securities laws. Farmer Mac also is required to
file reports with the SEC pursuant to the SEC's periodic reporting requirements.
Regulation
Office of Secondary Market Oversight
As an institution of the Farm Credit System, Farmer Mac is subject to the
regulatory authority of FCA. FCA, acting through its Office of Secondary Market
Oversight, has general regulatory and enforcement authority over Farmer Mac,
including the authority to promulgate rules and regulations governing the
activities of Farmer Mac and to apply its general enforcement powers to Farmer
Mac and its activities. The Director of the Office of Secondary Market
Oversight, who is selected by and reports to the FCA board, is responsible for
the examination of Farmer Mac and the general supervision of the safe and sound
performance by Farmer Mac of the powers and duties vested in it by the Act. The
Act requires an annual examination of the financial transactions of Farmer Mac
and authorizes FCA to assess Farmer Mac for the cost of its regulatory
activities, including the cost of any examination. Farmer Mac is required to
file quarterly reports of condition with FCA.
Department of the Treasury
In connection with the passage of the 1996 Act, the Chairmen of the House
and Senate Agriculture Committees requested FCA, in a cooperative effort with
the Department of the Treasury, to "monitor and review the operations and
financial condition of Farmer Mac and to report in writing to the appropriate
subcommittees of the House Agriculture Committee, the House Financial Services
Committee and the Senate Agriculture, Nutrition and Forestry Committee at
six-month intervals during the capital deferral period and beyond, if
necessary." Although the "capital deferral period" expired on January 1, 1999
and the risk-based capital rule went into effect on May 23, 2002, it appears
that the FCA reports are ongoing.
Comptroller General/General Accounting Office
The Act permits the Comptroller General of the United States, head of the
General Accounting Office (GAO), to perform reviews of the actuarial soundness
and reasonableness of the guarantee fees established by Farmer Mac. A review of
Farmer Mac was performed by GAO at the request of the Senate Committee on
Committee on Agriculture, Nutrition, and Forestry and GAO's findings were
published in a report dated October 16, 2003 (the "Report"). The Report made
recommendations to Farmer Mac for enhancement of its risk management and
corporate governance practices, many of which were already being implemented, or
have since been implemented, by Farmer Mac as part of its commitment to ensure
that best practices are being applied in its risk management operations. The
Report, No. GAO-04-116, may be obtained directly from GAO.
Capital Standards
General. The Act, as amended by the 1996 Act, establishes three capital
standards for Farmer Mac:
o Minimum capital - Farmer Mac's minimum capital level is an amount of
core capital equal to the sum of 2.75 percent of Farmer Mac's
aggregate on-balance sheet assets, as calculated for regulatory
purposes, plus 0.75 percent of the aggregate off-balance sheet
obligations of Farmer Mac, specifically including:
o the unpaid principal balance of outstanding Farmer Mac Guaranteed
Securities;
o instruments issued or guaranteed by Farmer Mac that are
substantially equivalent to Farmer Mac Guaranteed Securities,
including LTSPCs; and
o other off-balance sheet obligations of Farmer Mac.
o Critical capital - Farmer Mac's critical capital level is an amount of
core capital equal to 50 percent of the total minimum capital
requirement at that time.
o Risk-based capital - The Act directs FCA to establish a risk-based
capital stress test for Farmer Mac, using specified stress-test
parameters. While the Act does not specify the required level of
risk-based capital, that level is permitted to exceed the statutory
minimum capital requirement applicable to Farmer Mac, if so indicated
by the risk-based capital stress test.
Farmer Mac is required to comply with the higher of the minimum capital
requirement or the risk-based capital requirement.
FCA issued its final risk-based capital regulation for Farmer Mac on April
12, 2001 and the Corporation was required to meet the risk-based capital
standards beginning on May 23, 2002. 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 annual 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.
As of December 31, 2003, Farmer Mac's minimum and critical capital
requirements were $142.0 million and $71.0 million, respectively, and its actual
core capital level was $215.5 million, $73.5 million above the minimum capital
requirement and $144.5 million above the critical capital requirement. Based on
the risk-based capital stress test, Farmer Mac's risk-based capital requirement
as of December 31, 2003 was $38.8 million and Farmer Mac's regulatory capital of
$237.6 million exceeded that amount by approximately $198.8 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Capital Requirements" for a
presentation of Farmer Mac's current regulatory capital position.
Enforcement levels. The Act directs FCA to classify Farmer Mac within one
of four enforcement levels for purposes of determining compliance with capital
standards. At December 31, 2003, Farmer Mac was classified as within level
I--the highest compliance level.
Failure to comply with the applicable required capital level in the Act
would result in Farmer Mac being classified as within level II (below the
applicable risk-based capital level, but above the minimum capital level), level
III (below the minimum, but above the critical capital level) or level IV (below
the critical capital level). In the event that Farmer Mac were classified as
within level II, III or IV, the Act requires the Director of the Office of
Secondary Market Oversight to take a number of mandatory supervisory measures
and provides the Director with discretionary authority to take various optional
supervisory measures depending on the level in which Farmer Mac is classified.
The mandatory measures applicable to level II include:
o requiring Farmer Mac to submit and comply with a capital restoration
plan;
o prohibiting the payment of dividends if such payment would result in
Farmer Mac being reclassified as within level III or IV, and requiring
the pre-approval of any dividend payment even if such payment would
not result in reclassification as within level IV; and
o reclassifying Farmer Mac as within level III if it does not submit a
capital restoration plan that is approved by the Director, or the
Director determines that Farmer Mac has failed to make, in good faith,
reasonable efforts to comply with such a plan and fulfill the schedule
for the plan approved by the Director.
The mandatory measures applicable to level III include:
o requiring Farmer Mac to submit (and comply with) a capital restoration
plan;
o prohibiting the payment of dividends if such payment would result in
Farmer Mac being reclassified as within level IV and requiring the
pre-approval of any dividend payment even if such payment would not
result in reclassification as within level IV; and
o reclassifying Farmer Mac as within a lower level if it does not submit
a capital restoration plan that is approved by the Director or the
Director determines that Farmer Mac has failed to make, in good faith,
reasonable efforts to comply with such a plan and fulfill the schedule
for the plan approved by the Director.
If Farmer Mac were classified as within level III, then, in addition to the
foregoing mandatory supervisory measures, the Director of the Office of
Secondary Market Oversight could take any of the following discretionary
supervisory measures:
o imposing limits on any increase in, or ordering the reduction of, any
obligations of Farmer Mac, including off-balance sheet obligations;
o limiting or prohibiting asset growth or requiring the reduction of
assets;
o requiring the acquisition of new capital in an amount sufficient to
provide for reclassification as within a higher level;
o terminating, reducing or modifying any activity the Director
determines creates excessive risk to Farmer Mac; or
o appointing a conservator or a receiver for Farmer Mac.
The Act does not specify any supervisory measures, either mandatory or
discretionary, to be taken by the Director in the event Farmer Mac were
classified as within level IV.
The Director of the Office of Secondary Market Oversight has the
discretionary authority to reclassify Farmer Mac to a level that is one level
below its then current level (for example, from level I to level II) if the
Director determines that Farmer Mac is engaging in any action not approved by
the Director that could result in a rapid depletion of core capital or if the
value of property subject to mortgages backing Farmer Mac Guaranteed Securities
has decreased significantly.
Item 2. Properties
Farmer Mac currently occupies its principal offices, which are located at
1133 Twenty-First Street, N.W., Suite 600, Washington, D.C. 20036, under the
terms of a lease that expires on November 30, 2011 and covers approximately
13,500 square feet of office space. Farmer Mac's offices are suitable and
adequate for its needs.
Item 3. Legal Proceedings
Farmer Mac is not a party to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Farmer Mac has three classes of common stock outstanding. Ownership of
Class A voting common stock is restricted to banks, insurance companies and
other financial institutions or similar entities that are not institutions of
the Farm Credit System. Ownership of Class B voting common stock is restricted
to institutions of the Farm Credit System. There are no ownership restrictions
on the Class C non-voting common stock. Under the terms of the original public
offering of the Class A and Class B voting common stock, the Corporation
reserved the right to redeem at book value any shares of either class held by an
ineligible holder.
The Class A and Class C common stocks trade on the New York Stock Exchange
under the symbols AGMA and AGM, respectively. The Class B voting common stock,
which has a limited market and trades infrequently, is not listed or quoted on
any exchange or other medium, and Farmer Mac is unaware of any publicly
available quotations or prices for that class.
The information below represents the high and low closing sale prices for
the Class A and Class C common stocks for the periods indicated as reported by
the New York Stock Exchange.
Sales Price
---------------------------------------------------
Class A Stock Class C Stock
------------------------- -------------------------
High Low High Low
------------ ------------ ------------ ------------
(dollars per share)
2004
First quarter (through March 1, 2004) $ 22.85 $ 20.30 $ 31.19 $ 26.01
2003
Fourth quarter 22.90 20.01 32.00 26.68
Third quarter 22.00 16.75 30.49 23.11
Second quarter 17.92 16.70 25.14 21.86
First quarter 22.65 15.50 34.50 20.25
2002
Fourth quarter 26.00 19.90 33.37 25.06
Third quarter 24.30 20.30 30.47 20.80
Second quarter 35.00 22.00 47.20 25.60
First quarter 34.55 28.60 47.80 38.95
As of March 1, 2004, it was estimated that there were 1,406 registered
owners of the Class A voting common stock, 103 registered owners of the Class B
voting common stock and 1,345 registered owners of the Class C non-voting common
stock.
Although the dividend rights of all three classes of its common stock are
the same, to date, Farmer Mac has not paid any dividends on its common stock,
nor does it expect to pay dividends in the foreseeable future. Farmer Mac's
ability to declare and pay dividends could be restricted if it were to fail to
comply with regulatory capital requirements.
Information about securities authorized for issuance under Farmer Mac's
equity compensation plans appears under "Equity Compensation Plans" in Farmer
Mac's Proxy Statement to be filed on or about April 19, 2004. That portion of
the Proxy Statement is incorporated by reference into this report.
Item 6. Selected Financial Data
As of December 31,
-----------------------------------------------------------------------
Summary of Financial Condition: 2003 2002 2001 2000 1999
-------------- -------------- ------------ ------------- ------------
(dollars in thousands)
Cash and cash equivalents $ 623,674 $ 723,800 $437,831 $537,871 $336,282
Investment securities 1,064,782 830,409 1,007,954 836,757 847,220
Farmer Mac Guaranteed Securities 1,508,134 1,608,507 1,690,376 1,679,993 1,306,223
Loans, net 983,624 963,461 198,003 30,279 38,509
Total assets 4,299,650 4,222,915 3,415,856 3,160,899 2,590,410
Notes payable
Due within one year 2,799,384 2,895,746 2,233,267 2,141,548 1,722,061
Due after one year 1,136,110 985,318 968,463 827,635 750,337
Total liabilities 4,086,396 4,039,344 3,281,419 3,028,238 2,503,267
Stockholders' equity 213,254 183,571 134,437 132,661 87,143
Selected Financial Ratios:
Return on average assets 0.59% 0.56% 0.50% 0.36% 0.31%
Return on average common equity 15.32% 15.00% 12.19% 9.50% 8.24%
Average equity to assets 4.66% 4.16% 4.06% 3.82% 3.71%
For the Year Ended December 31,
-----------------------------------------------------------------------
Summary of Operations: 2003 2002 2001 2000 1999
-------------- -------------- ------------ ------------- ------------
(dollars in thousands, except per share amounts)
Net interest income after provision
for loan losses $ 30,728 $ 37,759 $ 28,666 $ 17,398 $ 14,838
Guarantee and commitment fees 20,685 19,277 15,807 11,677 7,396
Gains/(Losses) on financial derivatives
and trading assets 2,357 (8,433) (3,053) - -
Gains on the repurchase of debt - 1,368 - - -
Gains on the sale of real estate owned 178 24 61 - -
Miscellaneous 812 1,332 560 399 220
-------------- -------------- ------------ ------------- ------------
Total revenues 54,760 51,327 42,041 29,474 22,454
Total operating expenses 15,182 18,767 16,616 13,288 11,863
-------------- -------------- ------------ ------------- ------------
Income before income taxes and
cumulative effect of change in
accounting principles 39,578 32,560 25,425 16,186 10,591
Income tax expense 12,308 9,809 8,419 5,749 3,670
Cumulative effect of change in
accounting principles, net of taxes - - (726) - -
-------------- -------------- ------------ ------------- ------------
Net income 27,270 22,751 16,280 10,437 6,921
Preferred stock dividends (2,240) (1,456) - - -
-------------- -------------- ------------ ------------- ------------
Net income available to common
stockholders $ 25,030 $ 21,295 $ 16,280 $ 10,437 $ 6,921
-------------- -------------- ------------ ------------- ------------
Earnings Per Share:
Basic earnings per share $ 2.13 $ 1.83 $ 1.44 $ 0.94 $ 0.64
Diluted earnings per share $ 2.08 $ 1.77 $ 1.38 $ 0.92 $ 0.62
Earnings per share before cumulative
effect of change in accounting principles
Basic earnings per share $ 2.13 $ 1.83 $ 1.50 $ 0.94 $ 0.64
Diluted earnings per share $ 2.08 $ 1.77 $ 1.45 $ 0.92 $ 0.62
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial information as of and for each of the years ended December 31,
2003, 2002 and 2001 is consolidated to include the accounts of Farmer Mac and
its wholly-owned subsidiary, Farmer Mac Mortgage Securities Corporation. The
following discussion should be read together with Farmer Mac's consolidated
financial statements and is not necessarily indicative of future results.
Forward-Looking Statements
Certain statements made in this Form 10-K are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995
pertaining to management's current expectations as to Farmer Mac's future
financial results, business prospects and business developments. Forward-looking
statements include, without limitation, any statement that may predict,
forecast, indicate or imply future results, performance or achievements, and
typically are accompanied by, and identified with, such terms as "anticipates,"
"believes," "expects," "intends," "should" and similar phrases. The following
management's discussion and analysis includes forward-looking statements
addressing Farmer Mac's:
o prospects for earnings;
o growth in loan purchase, guarantee, securitization and LTSPC volume;
o trends in net interest income;
o trends in provisions for losses;
o changes in capital position; and
o other business and financial matters.
Management's expectations for Farmer Mac's future necessarily involve a number
of assumptions and 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 or constraints on Farmer Mac that could hamper its growth
or diminish its profitability;
o legislative or regulatory developments or interpretations of Farmer
Mac's statutory charter that could adversely affect Farmer Mac or the
ability or motivation of certain lenders to participate in its
programs or the terms of any such participation, or increase the cost
of regulation and related corporate activities;
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 requirement;
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;
o the willingness of investors to invest in agricultural mortgage-backed
securities; or
o the effects on the agricultural economy or the value of agricultural
real estate 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 impact 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 Policy and Estimates
The preparation of the consolidated financial statements in conformity with
accounting principals generally accepted in the United States requires the use
of estimates and assumptions that affect the amounts reported in the
consolidated financial statements and related notes for the periods presented.
Actual results could differ from those estimates. The critical accounting policy
that is both important to the portrayal of Farmer Mac's financial condition and
results of operations and requires complex, subjective judgments is the
accounting policy for the allowance for losses. Farmer Mac's allowance for
losses is presented in four components on its consolidated balance sheet:
o an "Allowance for loan losses" on loans held for investment;
o a valuation allowance on real estate owned, which is included in the
balance sheet under "Real estate owned, net of valuation allowance";
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 provision for losses is presented in two components on the consolidated
statement of operations:
o a "Provision for loan losses," which represents losses on Farmer Mac's
loans held for investment; and
o a "Provision for losses," which represents losses on loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs and real
estate owned.
The purpose of the allowance for losses is to provide for estimated losses
that are probable to have occurred as of the balance sheet date, and not to
predict or account for future potential losses. The determination of the
allowance for losses requires management to make significant estimates based on
information available as of the balance sheet date, including the amounts and
timing of losses and current market and economic conditions. These estimates are
subject to change in future reporting periods if such conditions and information
change. For example, a continued decline in the national or agricultural economy
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 loans held for investment, real estate owned and loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs. 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
modified by the application of management's judgment as required to take key
factors into account, including:
o economic conditions;
o geographic and agricultural commodity concentrations in Farmer Mac's
portfolio;
o the credit profile of Farmer Mac's portfolio;
o delinquency trends of Farmer Mac's portfolio;
o Farmer Mac's experience in the management and sale of real estate
owned; and
o historical charge-off and recovery activities of Farmer Mac's
portfolio.
The 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. Charge-offs represent losses on the outstanding principal
balance, any interest payments previously accrued or advanced and expected costs
of liquidation. The establishment of and periodic adjustments to the valuation
allowance for real estate owned are charged against income as a portion of the
provision for losses charged to operating expense. Gains and losses on the sale
of real estate owned are recorded in income based on the difference between the
recorded investment at the time of sale and liquidation proceeds.
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
"--Risk Management--Credit Risk - Loans."
Results of Operations
Overview. Net income available to common stockholders for 2003 rose to
$25.0 million or $2.08 per diluted common share, compared to $21.3 million or
$1.77 per diluted common share in 2002 and $16.3 million or $1.38 per diluted
common share in 2001.
Farmer Mac's growth continued in 2003, with outstanding guarantee and
LTSPC volume as of December 31, 2003 that was $271.5 million higher than at
December 31, 2002. During 2003, Farmer Mac:
o added $763.3 million of Farmer Mac I eligible loans under LTSPCs;
o purchased $192.6 million of newly originated Farmer Mac I eligible
loans; and
o purchased $271.2 million of Farmer Mac II USDA-guaranteed portions of
loans.
As of December 31, 2003, the percentage of Farmer Mac I loans purchased or
placed under Farmer Mac I Guaranteed Securities or LTSPCs after changes to
Farmer Mac's statutory charter in 1996 that were 90 days or more past due, in
foreclosure, restructured after delinquency, in bankruptcy or classified as real
estate owned, decreased to 1.39 percent, compared to 1.56 percent at the end of
2002.
As Farmer Mac's portfolio of loans held and loans underlying LTSPCs and
post-1996 Act Farmer Mac I Guaranteed Securities has had certain cohort years of
loan originations enter, and now start exiting, their peak default years,
segments of the portfolio are beginning to exhibit characteristics of a mature
portfolio, which includes loans cycling through foreclosure and into the asset
category real estate owned, which completes the involuntary loan liquidation
process. As of December 31, 2003, Farmer Mac had $15.5 million of real estate
owned, net of valuation allowance, compared to $5.0 million as of December 31,
2002 and $2.5 million as of December 31, 2001. During the foreclosure process
Farmer Mac devises a liquidation strategy, based upon economics and local law,
that results in either an immediate sale of the property or retention pending
later sale. The increase in real estate owned is the result of historical
delinquencies in Farmer Mac's portfolio. With the recent downward trend in
delinquencies, management expects real estate owned to trend downward as well in
future years. Farmer Mac's portfolio also has developed a core of loans that,
though the borrowers on those loans have filed for bankruptcy protection, are
current under the original terms of the loans or as modified under a
court-approved bankruptcy plan.
Non-performing assets are loans 90 days or more past due, in foreclosure,
restructured after delinquency, in bankruptcy, or real estate owned. 90-day
delinquencies are loans 90 days or more past due, in foreclosure, restructured
after delinquency, or in bankruptcy, excluding loans performing under either
their original loan terms or a court-approved bankruptcy plan. The difference
between the non-performing asset and 90-day delinquencies measures is the
exclusion of real estate owned and loans performing in bankruptcy from 90-day
delinquencies.
As of December 31,
---------------------------
2003 2002
------------- ------------
(in thousands)
90-day delinquencies (including loans in $30,056 $ 58,214
foreclosure and loans restructured
after delinquency)
Loans performing in bankruptcy 24,192 11,471
Real estate owned 15,716 5,623
------------- ------------
Non-performing assets $69,964 $ 75,308
------------- ------------
The table below presents non-performing assets and 90-day delinquency data
as of the dates indicated:
Outstanding
Post-1996 Act Less:
Loans, Non- REO and
Guarantees and Performing Performing 90-day
LTSPCs Assets Percentage Bankruptcies Delinquencies Percentage
------------------ ----------------- -------------- ---------------- ----------------- ----------------
(dollars in thousands)
December 31, 2003 $ 5,020,032 $ 69,964 1.39% $ 39,908 $ 30,056 0.60%
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%
June 30, 2001 3,089,460 53,139 1.72% 4,274 48,865 1.58%
March 31, 2001 2,562,374 67,134 2.62% 2,154 64,980 2.54%
Farmer Mac experienced $5.2 million in net losses charged against the
allowance for losses in 2003, compared with $4.1 million in net losses for 2002
and $2.2 million in 2001. Through direct charges to earnings, Farmer Mac
provided for $7.3 million in total losses during 2003, compared to $8.2 million
during 2002 and $6.8 million in 2001. Farmer Mac recorded gains on the sale of
real estate owned of $0.2 million, $0.1 million and $0.1 million in 2003, 2002
and 2001, respectively. Farmer Mac's total allowance for losses as of December
31, 2003 was $22.1 million, compared to $20.0 million as of December 31, 2002
and $15.9 million as of December 31, 2001. For further discussion of the
increase in the allowance for losses and provision for losses, see "--Risk
Management--Credit Risk - Loans."
As of December 31, 2003, a significant portion of Farmer Mac's portfolio of
post-1996 Act Farmer Mac I loans and loans underlying LTSPCs and Farmer Mac
Guaranteed Securities were in their peak default years. Accordingly, during 2004
the dollar level of 90-day delinquencies could increase slightly and higher
charge-offs could follow, notwithstanding positive trends in the agricultural
economy.
Outlook for 2004. USDA is currently forecasting:
----------------
o 2004 net cash farm income to be $55.9 billion, $7.1 billion lower than
2003, but only slightly below the 1994-2003 average of $57.0 billion;
o Total direct government payments to be $10.3 billion in 2004, a
decrease from the 2003 estimate of $17.4 billion. Market prices for
crops affect direct government payment rates for government programs,
and USDA anticipates program crop prices to be higher in 2004, with
prices for some crops at levels not seen in years;
o Demand for crop exports to be high, due to tight global supplies and
the decline in the value of the dollar, which lowers the effective
price of U.S. commodities;
o The value of U.S. farm real estate to increase 3.5 percent in 2004 to
$1.13 trillion, up from the 2003 forecast of $1.09 trillion. USDA is
anticipating improvement in the general economy to support further
growth in farmland values, though at a rate slower than the annual
average gain since 1999, which exceeded 4 percent; and
o The value of farm real estate debt to increase by 4.7 percent in 2004
to $116.5 billion, up from $111.3 billion in 2003.
The USDA forecast components referenced above relate to U.S. agriculture
generally, but should be favorable for Farmer Mac's business plans, as they
indicate strong borrower cash flows, greater global demand for U.S. commodities,
and generally increased value of U.S. farm real estate. The last item in
particular increases the mortgageable farm real estate base, the ability of
borrowers to repay real estate debt and Farmer Mac's ability to recover in
foreclosures.
As management evaluates Farmer Mac's business prospects for 2004 and
beyond, certain factors and conditions remain that are likely to constrain
Farmer Mac's progress. As a matter of historical practice, and particularly in
the current low interest rate and steep yield curve environment, many
institutions still prefer to retain agricultural mortgage loans in portfolio
rather than sell them into the secondary market, notwithstanding the corporate
finance and capital planning benefits they might realize through participation
in Farmer Mac's programs, such as greater liquidity, greater lending capacity,
increased return on equity and decreased capital requirements. Some lending
institutions subsidize their agricultural mortgage loan rates out of higher
rates on non-mortgage loans, or by low-return use of equity, both of which
generate uneconomic competition with Farmer Mac's programs. The rate of growth
of Farmer Mac's business with many traditional portfolio lenders has been slowed
by reduced growth rates in the agricultural mortgage market. (See "--Business
Volume" for a description of factors affecting growth rates in the agricultural
mortgage market.) With particular regard to Farm Credit System institutions,
some business prospects have been constrained by increased insurance premiums
assessed on loans held by those institutions, including loans under LTSPCs, by
the Farm Credit System Insurance Corporation ("FCSIC"), an independent U.S.
Government controlled corporation managed by a three-member board of directors
composed of the members of the Farm Credit Administration (FCA) Board with a
different member serving as chairman. In addition, FCSIC has recently indicated
to those institutions that they should be cautious about the risk of doing
business with government-sponsored enterprises, including Farmer Mac, as
counterparties. Moreover, FCSIC has raised objections to Farm Credit
institutions' use of Farmer Mac swaps, which generate Farmer Mac I Guaranteed
Securities that are not subject to the previously mentioned insurance premiums.
Notwithstanding slower growth in 2003 than in 2002, Farmer Mac launched
marketing initiatives in the fourth quarter of 2003 that are generating
promising business opportunities for 2004 and beyond. New and expanded business
relationships (including a strategic alliance with a related party Farm Credit
System institution that will serve community banks), product enhancements, such
as new open prepayment loan structures, and new loan securitization structures,
are all underway. While the continued growth in Farmer Mac's guarantees and
LTSPCs evidences significant progress in developing the secondary market for
agricultural mortgages, Farmer Mac continues to face the challenges of
establishing a new market where none previously existed. Acceptance of Farmer
Mac's programs among lenders is based upon the competitive rates, terms and
products offered, and the advantages Farmer Mac believes its programs provide.
As of December 31, 2003, Farmer Mac's outstanding program volume was $5.8
billion, which represented 13 percent of management's estimate of a $44.5
billion market of eligible agricultural mortgage loans. For Farmer Mac to
succeed in realizing its business development and profitability goals over the
longer term, the use of Farmer Mac's programs and products by agricultural
mortgage lenders, whether traditional or non-traditional, must continue to
expand. 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.
During 2003 and continuing in 2004, Farmer Mac began several initiatives to
validate and enhance its risk management practices, internal controls, and
accounting and financial reporting. These initiatives are the result of ongoing
corporate diligence and a number of regulatory considerations, including the
Sarbanes-Oxley Act of 2002 and FCA requirements, as well as the general
regulatory environment for government-sponsored enterprises.
A detailed presentation of Farmer Mac's financial results for the years
ended December 31, 2003, 2002 and 2001 follows.
Net Interest Income. Net interest income was $37.3 million for 2003, $39.1
million for 2002 and $29.3 million for 2001. The net interest yield, which does
not include guarantee fees for loans purchased prior to April 1, 2001 (the
effective date of Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities ("SFAS 140")), was 93 basis points for the year ended December
31, 2003, compared to 104 basis points for the year ended December 31, 2002 and
91 basis points for the year ended December 31, 2001. The effect of the adoption
of SFAS 140 was a reclassification of approximately $4.4 million (11 basis
points) of guarantee fee income as interest income for the year ended December
31, 2003, compared to $2.7 million (7 basis points) for the year ended December
31, 2002 and $0.4 million (one basis point) for the year ended December 31,
2001.
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 years ended December 31, 2003 and 2002, this reclassification
resulted in a decrease of the net interest yield of one basis point and a
decrease of 11 basis points, respectively.
The net interest yields for the years ended December 31, 2003, 2002 and
2001 included the benefits of yield maintenance payments received of 12 basis
points, 8 basis points and 3 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 years ended December 31, 2003, 2002 and 2001, the
after-tax effects of yield maintenance payments on net income and diluted
earnings per share were $3.0 million or $0.25 per diluted share, $2.1 million or
$0.17 per diluted share and $0.7 million or $0.06 per diluted share,
respectively.
The $1.8 million decrease in net interest income from 2002 to 2003 was due
principally to lower average spreads on cash and cash equivalents and
investments.
The following table provides information regarding interest-earning assets
and funding for the years ended December 31, 2003, 2002 and 2001. 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.
Therefore, as the balance of non-accruing loans increases or decreases, the net
interest yield will increase or decrease, accordingly. Net interest income and
the yield will also fluctuate due to the uncertainty of the timing and size of
yield maintenance payments.
2003 2002 2001
---------------------------------- ---------------------------------- --------------------------------
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------------- ---------- --------- ----------- ----------- ---------- ------------ ---------- --------
(dollars in thousands)
Interest-earning assets:
Cash and cash
equivalents $ 677,075 $ 8,171 1.21% $ 564,614 $ 10,237 1.81% $ 522,227 $21,464 4.11%
Investments 932,738 27,115 2.91% 902,740 32,392 3.59% 922,856 45,070 4.88%
Loans and Farmer Mac
Guaranteed Securities 2,415,466 126,273 5.24% 2,291,887 129,241 5.64% 1,778,601 115,879 6.52%
------------- ---------- --------- ----------- ---------- ---------- ------------ ----------- -------
Total interest-earning
assets $ 4,025,279 161,559 4.02% $ 3,759,241 171,870 4.57% $ 3,223,684 182,413 5.66%
------------- ------------- -------------
Funding:
Notes payable due
within one year $ 2,702,188 60,756 2.26% $ 2,533,762 67,896 2.68% $ 2,175,087 94,274 4.33%
Notes payable due
after one year 1,200,219 63,551 5.29% 1,102,485 64,875 5.88% 926,878 58,873 6.35%
------------- ---------- --------- ------------ ---------- ---------- ------------ ----------- ------
Total interest-bearing
liabilities 3,902,407 124,307 3.19% 3,636,247 132,771 3.65% 3,101,965 153,147 4.94%
Net non-interest-bearing
funding 122,872 - 0.00% 122,994 - 0.00% 121,719 - 0.00%
------------- ---------- --------- ------------- ---------- ---------- ------------ ----------- -------
Total funding $ 4,025,279 124,307 3.10% $ 3,759,241 132,771 3.53% $ 3,223,684 153,147 4.94%
------------- ---------- --------- ------------- ---------- ---------- ------------ ----------- -------
Net interest income/
yield $ 37,252 0.93% $ 39,099 1.04% $29,266 0.91%
----------- ---------- ---------- ----------- ------------ ------
For 2003, the decreases in all of the rates presented above tracked the
general decline in interest rates relative to the prior year. The average rates
for cash and cash equivalents and discount notes reflect that decline in
short-term interest rates during 2003, while the average rates for investments
and loans and Farmer Mac Guaranteed Securities reflect the decline in interest
rates for investments of similar term to the rate reset or maturity date.
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 the
assets or liabilities and the general decreases in market rates described above.
2003 vs. 2002 2002 vs. 2001
------------------------------------- ------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------- ------------------------------------
Rate Volume Total Rate Volume Total
------------ ----------- ------------ ------------ ---------- -----------
(in thousands)
Income from interest-earning assets:
Cash and cash equivalents $ (2,572) $ 506 $ (2,066) $ (13,134) $ 1,907 $ (11,227)
Investments (6,323) 1,046 (5,277) (11,716) (962) (12,678)
Loans and Farmer Mac Guaranteed Securities (9,719) 6,751 (2,968) (11,659) 25,021 13,362
------------ ----------- ------------ ------------ ---------- -----------
Total (18,614) 8,303 (10,311) (36,509) 25,966 (10,543)
Expense from interest-bearing liabilities (17,593) 9,129 (8,464) (50,247) 29,871 (20,376)
------------ ----------- ------------ ------------ ---------- -----------
Change in net interest income $ (1,021) $ (826) $ (1,847) $13,738 $ (3,905) $ 9,833
------------ ----------- ------------ ------------ ---------- -----------
Guarantee and Commitment Fees. Guarantee and commitment fee income, which
compensate Farmer Mac for assuming the credit risk on loans underlying Farmer
Mac Guaranteed Securities and LTSPCs, was $20.7 million for 2003, compared to
$19.3 million for 2002 and $15.8 million for 2001. The increase in guarantee and
commitment fee income reflects an increase in the average balance of outstanding
guarantees and LTSPCs. For 2003, the effect of SFAS 140 reclassified $4.4
million of guarantee fee income as interest income, although management
considers that amount to have been earned in consideration for the assumption of
credit risk. That portion of the difference or "spread" between the cost of
Farmer Mac's debt funding for loans and the yield on post-1996 Act Farmer Mac I
Guaranteed Securities held on its books compensates for credit and interest rate
risk. If a post-1996 Act Farmer Mac I Guaranteed Security is sold to a third
party, Farmer Mac continues to receive the guarantee fee component of that
spread, which continues to compensate Farmer Mac for its assumption of credit
risk. The portion of the spread that compensates for interest rate risk 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.
Gains and Losses on Financial Derivatives and Trading Assets. Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133") requires the change in the fair values of
financial derivatives to be reflected in a company's net income or accumulated
other comprehensive income. SFAS 133 became effective as of January 1, 2001. The
cumulative effect of the change in accounting principles recognized during 2001
was a charge of $0.7 million, net of taxes. The net effect of financial
derivatives that do not qualify for hedge accounting under SFAS 133 and trading
assets recorded in Farmer Mac's consolidated statements of operations was a net
gain of $2.4 million for 2003, a net loss of $8.4 million for 2002 and a net
loss of $3.1 million for 2001. On a net after-tax basis, those gains and losses,
combined with the cumulative effect of the change in accounting principles and
benefits received from the elimination of the amortization of certain premium
payments that resulted from SFAS 133, increased net income available to common
stockholders by $2.0 million for 2003 and reduced net income available to common
stockholders by $1.6 million for 2002.
Gains on the Sale of Real Estate Owned. Farmer Mac has reclassified items
on its consolidated statements of operations to present more clearly the costs
related to carrying its real estate owned and the gains or losses incurred upon
it's the ultimate disposition of real estate owned. Previously, gains and losses
on the sale of real estate owned were reflected as adjustments to the allowance
for losses as either a charge-off or recovery. Those amounts have been
reclassified and are reported separately as gains or losses on the sale of real
estate owned. Prior period amounts have been reclassified to conform to the
current period classification. Gains on the sale of real estate owned were $0.2
million, $0.1 million and $0.1 million for each of the years ended December
2003, 2002 and 2001, respectively.
Miscellaneous Income. Miscellaneous income was $0.8 million for 2003,
compared to $1.3 million for 2002 and $0.6 million for 2001. Both the decrease
in miscellaneous income from 2002 to 2003 and the increase from 2001 to 2002
were primarily a result of the receipt of the high level of late fee income and
processing fees on Farmer Mac II refinance transactions received during 2002.
Expenses. During 2003 and into 2004, Farmer Mac began several initiatives
to validate and enhance its risk management practices, internal controls, and
accounting and financial reporting. These initiatives are the result of ongoing
corporate diligence and a number of regulatory considerations, including
compliance with the Sarbanes-Oxley Act of 2002 and FCA requirements, as well as
the general regulatory environment for government-sponsored enterprises. The
general increases in both compensation and employee benefits and general and
administrative expenses from 2001 to 2003 reflect the costs of those
initiatives. Compensation and employee benefits were $6.1 million, $5.1 million
and $5.6 million for 2003, 2002 and 2001, respectively. General and
administrative expenses were $6.0 million, $5.5 million and $4.1 million for
2003, 2002 and 2001, respectively. For 2002, increased general and
administrative expenses reflected higher legal and consulting fees associated
with external events and publicity; these expenses dissipated somewhat in 2003.
During 2003, the reduction in legal and consulting fees was more than offset by
higher costs of regulatory compliance and the costs of servicing loans nearing
or in foreclosure or bankruptcy. Prospectively, the loan servicing costs are
expected to fluctuate with the level of these categories of non-performing
assets, while the regulatory costs are expected to be ongoing.
Regulatory fees were $2.0 million, $1.2 million and $0.7 million for 2003,
2002 and 2001, respectively. FCA has advised Farmer Mac that its estimated
assessment for 2004 is $1.7 million. The regulatory assessments from the FCA for
each of the examination periods corresponding approximately with each of the
years ended December 31, 2003, 2002 and 2001 include both their originally
estimated assessments and revisions to those estimates that reflect actual costs
incurred. These revisions have resulted in both additional assessments and
refunds in the past.
Real estate owned operating expenses were $0.7 million and operating
revenues were $0.4 million for 2003. Net real estate owned operating costs were
$0.3 million for 2003. These net costs increased from prior years' nominal
amounts as the number of properties owned increased.
Farmer Mac's provision for losses on loans underlying Farmer Mac I
Guaranteed Securities and LTSPCs, which is classified as a component of
operating expenses, was $0.8 million for 2003, $6.9 million for 2002 and $6.2
million in 2001. Farmer Mac also provides for losses on the loans on its balance
sheet through provisions that are charged against net interest income on the
statement of operations and presented as a reduction to the reported loan
balances on Farmer Mac's balance sheet. The total amount provided for Farmer
Mac's allowance for losses for 2003, 2002 and 2001 were $7.3 million, $8.2
million and $6.8 million, respectively. The amount provided for the allowance
for losses in 2003 decreased $0.9 million from the amount provided in 2002 as a
result of lower estimated probable losses during 2003. As of December 31, 2003,
Farmer Mac's allowance for losses for loans underlying Farmer Mac I Guaranteed
Securities and LTSPCs was $15.9 million, compared to $16.8 million as of
December 31, 2002. For further discussion and presentation regarding Farmer
Mac's provisions for losses and allowances for losses in the aggregate, see
"--Risk Management--Credit Risk - Loans"
Income Tax Expense. Income tax expense totaled $12.3 million in 2003,
compared to $9.8 million in 2002 and $8.4 million in 2001. Farmer Mac's
effective tax rates for 2003 and 2002 were approximately 31.1 percent and 30.1
percent, respectively, reflecting the effects of certain tax-advantaged
investments, compared to 33.1 percent for 2001. Farmer Mac expects its effective
tax rate in 2004 to approximate 30 percent. For more information about income
taxes, see Note 10 to the consolidated financial statements.
Gains and Losses on the Repurchase of Debt. During 2003, Farmer Mac did not
repurchase any of its outstanding debt. During 2002, Farmer Mac recognized $1.4
million of net gains on the repurchase of $103.7 million of its outstanding
debt. All of the repurchases were from outstanding Farmer Mac debt that had a
maturity date of October 14, 2011 and an interest rate of 5.4 percent. Those
debt securities were replaced with new fixed-rate funding to the same maturity
dates at more attractive interest rates, which preserves Farmer Mac's
asset-liability match and reduced future interest expense.
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 gauge corporate performance and to set
incentive compensation. As described below, because the Financial Accounting
Standards Board ("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 years ended December
31, 2003, 2002 and 2001 were $23.0 million, $22.9 million and $17.1 million,
respectively. 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
- ---------------------------------------------------------------------------------------------
Year Ended
-----------------------------------------------------
December 31, December 31, December 31,
2003 2002 2001
---------------- ------------------ -----------------
(in thousands)
GAAP net income available
to common stockholders $ 25,030 $ 21,295 $ 16,280
Less the effects of SFAS 133:
Unrealized gains/(losses)
on financial derivatives and
trading assets, net of tax 1,720 (2,834) (469)
Benefit from non-amortization
of premium payments
on financial derivatives,
net of tax 317 382 404
Cumulative effect of the adoption
of SFAS 133 - - (726)
Less gains on the repurchase of
debt previously reported as
extraordinary items - 889 -
---------------- ------------------ -----------------
Core earnings $ 22,993 $ 22,858 $ 17,071
---------------- ------------------ -----------------
Effects of SFAS 133 on Accounting for Callable Interest Rate Swaps. Farmer
Mac enters into financial derivative transactions to protect against risk from
the effects of market price or interest rate movements on the value of assets,
future cash flows and debt issuance, not for trading or speculative purposes.
Farmer Mac enters into interest rate swap contracts 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 and also to derive an overall lower effective
fixed-rate cost of borrowing than would otherwise be available to Farmer Mac in
the conventional debt market. 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.
During 2003, the volume of loans purchased or placed under Farmer Mac
Guaranteed Securities and LTSPCs totaled $1.2 billion, a decrease from 2002
volume of $2.1 billion. That decrease was largely attributable to the purchase
of a $489.5 million loan portfolio in second quarter 2002 and a decrease in
LTSPC volume of $392.1 million in 2003, partially offset by an increase in
Farmer Mac II volume of $98.2 million in 2003. See "Business--Farmer Mac
Programs--Farmer Mac I--Off-Balance Sheet Guarantees and Commitments" and Note
12 to the consolidated financial statements for a description of LTSPCs. The
following table sets forth information regarding the volume of loans purchased
or placed under Farmer Mac Guaranteed Securities or LTSPCs for the periods
indicated:
Farmer Mac Loan Purchases, Guarantees and LTSPCs
- ----------------------------------------------------------------------------------
For the Year Ended December 31,
----------------------------------------------
2003 2002 2001
--------------- -------------- --------------
(in thousands)
Farmer Mac I:
Loans and Guaranteed Securities $ 192,577 $ 747,881 $ 272,127
LTSPCs 763,342 1,155,479 1,032,967
Farmer Mac II 271,229 173,011 198,171
--------------- -------------- --------------
Total $ 1,227,148 $ 2,076,371 $ 1,503,265
--------------- -------------- --------------
The purchase price of newly originated and seasoned eligible loans and
portfolios purchased through the cash window, none of which are 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. The purchase price for loans purchased from
all related parties is determined in the same manner as for loans acquired from
any other third party. See Note 3 to the consolidated financial statements for a
description of related party transactions.
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. 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 as received. The purchase price of a defaulted loan is not
an indicator of the expected loss on that loan; many other factors affect
expected loss, if any, on loans so purchased. See "--Risk Management--Credit
Risk - Loans."
The following table presents Farmer Mac's purchases of newly originated and
current seasoned loans and purchases of defaulted loans underlying Farmer Mac I
Guaranteed Securities and LTSPCs.
For the Year Ended
December 31,
------------------------------
2003 2002
-------------- --------------
(in thousands)
Farmer Mac I newly originated
and current seasoned loan purchases $ 192,577 $ 747,881
Defaulted loans purchased underlying
off-balance sheet Farmer Mac I
Guaranteed Securities 16,276 17,386
Defaulted loans purchased
underlying LTSPCs 4,266 3,386
Defaulted loans underlying
on-balance sheet Farmer Mac I
Guaranteed Securities transferred
to loans 35,100 25,675
The decrease in newly originated and current seasoned loan purchases was
attributable to a decrease in program volume that resulted primarily from the
purchase of a $489.5 million loan portfolio in second quarter 2002, that was not
replicated in 2003. The purchases of defaulted loans from Farmer Mac I
Guaranteed Securities and LTSPCs are pursuant to Farmer Mac's obligations as
guarantor and under its contractual commitments, respectively. With respect to
the transfer of loans from on-balance sheet Farmer Mac I Guaranteed Securities
to loans, when particular criteria are met, such as the default of the borrower,
Farmer Mac becomes entitled to purchase 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 becomes entitled to repurchase
the loans and therefore regains effective control over the transferred loans.
The weighted-average age of the Farmer Mac I newly originated and current
seasoned loans purchased during 2003 and 2002 was less than one year and 3
years, respectively. Of the combined total of Farmer Mac I newly originated and
seasoned loans that were purchased (excluding purchases of defaulted loans)
during 2003 and 2002, 74 percent and 76 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 15.2
years and 11.1 years, respectively. The weighted-average age of delinquent loans
purchased out of securitized pools and LTSPCs during 2003 and 2002 was 4.7 years
and 4.3 years, respectively.
The outstanding principal balance of loans held and loans underlying LTSPCs
and on- and off-balance sheet Farmer Mac Guaranteed Securities increased five
percent to $5.8 billion as of December 31, 2003 from $5.5 billion as of December
31, 2002. The following table sets forth information regarding those outstanding
balances as of the dates indicated:
Outstanding Balance of Farmer Mac Loans and Loans Underlying
Farmer Mac Guaranteed Securities and LTSPCs
- -------------------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
(in thousands)
Farmer Mac I:
Post-1996 Act:
Loans and Guaranteed Securities $2,696,530 $2,168,994 $1,658,716
LTSPCs 2,348,702 2,681,240 1,884,260
Pre-1996 Act 24,734 31,960 48,979
Farmer Mac II 729,470 645,790 595,156
--------------- --------------- ---------------
Total $5,799,436 $5,527,984 $4,187,111
--------------- --------------- ---------------
The following table sets forth information regarding the Farmer Mac I
Guaranteed Securities issued during the periods indicated:
Farmer Mac I Guaranteed Securities Issuances
- --------------------------------------------------------------------------------------------------------
For the Year Ended December 31,
----------------------------------------------
2003 2002 2001
--------------- -------------- --------------
(in thousands)
Retained $ - $ - $ 33,932
Sold 78,254 47,682 77,422
Swap transactions 722,315 - 5,574
--------------- -------------- --------------
Total Farmer Mac Guaranteed Securities Issuances $ 800,569 $ 47,682 $ 116,928
--------------- -------------- --------------
Based on market conditions, Farmer Mac either retains the loans it
purchases or securitizes them and issues Farmer Mac I Guaranteed Securities
backed by those loans. During 2003 and 2002, Farmer Mac securitized and sold
$78.3 million and $47.7 million, respectively ($75.9 million and $47.7 million,
respectively, of such securities were sold to a related party, Zions First
National Bank) of the loans purchased, and issued $722.3 million in the form of
a swap transaction with a related party participant, Farm Credit West, ACA. This
transaction resulted from the participant's exercise of a conversion feature
incorporated in all existing LTSPCs. Farmer Mac's decision to retain the
remainder of the loans it purchased was based on favorable underlying funding
costs that resulted in attractive net interest income over the lives of the
loans and Farmer Mac Guaranteed Securities it holds.
LTSPCs typically involve seasoned loans, while cash purchase transactions
usually represent acquisitions of newly originated loans. The decreased LTSPC
activity in 2003 was a result of reduced growth rates in the agricultural
mortgage market, which have tended to be a function of the interest rate
environment and other factors described two paragraphs below. With particular
regard to Farm Credit System institutions, some business prospects have been
constrained by increased FCSIC insurance premiums assessed on loans held by
those institutions, including loans under LTSPCs. In addition, FCSIC has
recently indicated to those institutions that they should be cautious about the
risk of doing business with government-sponsored enterprises, including Farmer
Mac, as counterparties. Moreover, FCSIC has raised objections to Farm Credit
institutions' use of Farmer Mac swaps, which generate Farmer Mac I Guaranteed
Securities that are not subject to the previously mentioned insurance premiums.
Notwithstanding this, management expects that LTSPCs will continue to
constitute a significant portion of new Farmer Mac I program activity during
2004.
Indicators of future loan purchase and guarantee volume through the cash
window (but not future LTSPC, swap or portfolio purchase volume) in the
immediately succeeding reporting period include outstanding commitments to
purchase loans (other than under LTSPCs) 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
required, Farmer Mac requires the seller to pay a fee to modify, extend or
cancel the commitment. As of December 31, 2003, outstanding commitments to
purchase Farmer Mac I and Farmer Mac II loans totaled $11.2 million, compared to
$26.2 million as of December 31, 2002. Of the total Farmer Mac I and II
commitments outstanding as of December 31, 2003 and 2002, $11.2 million and
$21.7 million, respectively, were mandatory commitments. Loans submitted for
approval or approved but not yet committed to purchase totaled $26.6 million as
of December 31, 2003, compared to $53.4 million as of December 31, 2002. Not all
of such loans are purchased, as some are denied for credit reasons or withdrawn
by the seller.
New business volume was down during 2003 compared to 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;
o adverse publicity about and increased regulatory pressure on
government-sponsored enterprises, including Farmer Mac; and
o increased FCSIC insurance premiums on loans held by Farm Credit System
institutions and FCSIC' indications regarding counterparty risk, as
discussed above.
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 2003. In the fourth quarter of
2003, Farmer Mac launched marketing initiatives that are generating promising
business opportunities for 2004 and beyond. New and expanded business
relationships (including a strategic alliance with a related party Farm Credit
System institution that will serve community banks), product enhancements, such
as new open prepayment loan structures, and new loan securitization structures,
are all underway. 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.
As of December 31, 2003, there were 142 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,
of which 81 were active participants in the program. As of December 31, 2002,
there were 219 approved sellers in the Farmer Mac I program, of which 79 were
active participants in the 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
December 31, 2003, more than 75 lenders were participating in those networks,
bringing the total Farmer Mac I program participants to more than 200 as of
December 31, 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 December 31, 2003, there were
150 active sellers in the Farmer Mac II program, compared to 143 as of December
31, 2002. Sellers in the Farmer Mac II program consist mostly of community and
regional banks.
Thus, in the aggregate, more than 300 lenders were actively participating
either directly or indirectly in one or both of the Farmer Mac I or Farmer Mac
II programs during 2003.
Related Party Transactions. In 2002 and 2003, Farmer Mac conducted business
with entities that are related parties as a result of a member of Farmer Mac's
board of directors being affiliated with the entity in some capacity. These
transactions were conducted in the ordinary course of business, with terms and
conditions comparable to those available to any other third party. For more
information about related party transactions, see Note 3 to the consolidated
financial statements.
Balance Sheet Review
Assets. As of December 31, 2003, total assets were $4.3 billion compared to
$4.2 billion as of December 31, 2002. On-balance sheet program assets (Farmer
Mac Guaranteed Securities and loans), decreased $77.5 million during 2003 to a
total of $2.5 billion, while non-program assets increased $134.2 million to $1.7
billion as of December 31, 2003. The following table presents Farmer Mac's
on-balance sheet program assets based on their repricing frequency.
Outstanding Balance of Loans Held and Loans Underlying
On-Balance Sheet Farmer Mac Guaranteed Securities
- -----------------------------------------------------------------------
As of December 31,
------------------------------------
2003 2002
----------------- ----------------
(in thousands)
Fixed rate (10-yr. wtd. avg. term) $ 860,874 $ 1,003,434
5-to-10 year ARMs and resets 1,045,217 981,548
1-Month-to-3-Year ARMs 542,024 494,713
----------------- ----------------
Total held in portfolio $ 2,448,115 $ 2,479,695
----------------- ----------------
Liabilities. Total liabilities increased to $4.1 billion as of December 31,
2003 from $4.0 billion as of December 31, 2002. The increase in liabilities was
primarily due to growth in notes payable, which corresponded to the growth and
funding of on-balance sheet program assets. For more information about Farmer
Mac's funding and interest rate risk practices and how financial derivatives are
used, see "--Risk Management--Interest Rate Risk." For more information about
Farmer Mac's reserve for losses, see "--Risk Management--Credit Risk - Loans."
Capital. As of December 31, 2003, stockholders' equity totaled $213.3
million, compared to $183.6 million as of December 31, 2002. The increase was
primarily due to net income available to common stockholders of $25.0 million
earned during 2003. That increase was partially offset by a $1.9 million
decrease in accumulated other comprehensive income/(loss) resulting from a net
increase of $17.2 million in the market values of financial derivatives
classified as cash flow hedges and a decrease of $19.1 million in net unrealized
gains on investment securities and Farmer Mac Guaranteed Securities classified
as available for sale. Accumulated other comprehensive income is not a component
of Farmer Mac's core capital or regulatory capital.
Return on average common equity was 15.3 percent for 2003, compared to 15.0
percent for 2002. The effects of SFAS 133 and Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, increased the average return on common equity by 1.1 percent for
2003 and reduced the average return on common equity by 3.9 percent for 2002.
As of December 31, 2003, Farmer Mac's core capital totaled $215.5 million,
compared to $184.0 million as of December 31, 2002. As of December 31, 2003,
Farmer Mac's core capital exceeded its statutory minimum capital requirement of
$142.0 million by $73.5 million. FCA issued its final risk-based capital
regulation for Farmer Mac on April 12, 2001 and the Corporation was required to
meet the risk-based capital standards beginning on May 23, 2002. As of December
31, 2003 the risk-based capital stress test generated a regulatory capital
requirement of $38.8 million. Farmer Mac's regulatory capital of $237.6 million
exceeded that amount by approximately $198.8 million. The Corporation 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. For
further information, see "--Liquidity and Capital Resources--Capital
Requirements."
Off-Balance Sheet Farmer Mac Guaranteed Securities and LTSPCs. Farmer Mac
offers approved agricultural and rural residential mortgage lenders two
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. Both of these alternatives result in off-balance sheet transactions for
Farmer Mac.
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 12 to Farmer
Mac's consolidated financial statements for more detail on the Corporation's
off-balance sheet program activities.
As of December 31, 2003, outstanding off-balance sheet Farmer Mac
Guaranteed Securities and LTSPCs totaled $3.4 billion, compared to $3.0 billion
as of December 31, 2002. The following table presents the balance of outstanding
LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities as of December 31,
2003 and 2002:
Outstanding Balance of LTSPCs and
Off-Balance Sheet Farmer Mac Guaranteed Securities
- ----------------------------------------------------------------------------------
As of December 31,
----------------------------------
2003 2002
----------------- ---------------
(in thousands)
Farmer Mac I:
Post-1996 Act obligations:
Farmer Mac I Guaranteed Securities $ 952,134 $ 299,940
LTSPCs 2,348,702 2,681,240
----------------- ---------------
Total Post-1996 Act obligations 3,300,836 2,981,180
Pre-1996 Act Farmer Mac I
Guaranteed Securities - -
----------------- ---------------
Total Farmer Mac I 3,300,836 2,981,180
Farmer Mac II Guaranteed Securities 51,241 67,109
----------------- ---------------
Total Farmer Mac I and II $ 3,352,077 $ 3,048,289
----------------- ---------------
For more information about off-balance sheet Farmer Mac Guaranteed
Securities, see "--Risk Management--Credit Risk - Loans" and Note 12 to the
consolidated financial statements.
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 risk,
particularly in the case of a defaulted loan where yield maintenance may 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. This provision creates a
disincentive to prepayment and compensates the Corporation for its interest rate
risks to a large degree. As of December 31, 2003, 58 percent of the outstanding
balance of all loans held and loans underlying on-balance sheet Farmer Mac I
Guaranteed Securities (including 92 percent of all loans with fixed interest
rates) were covered by yield maintenance provisions and other prepayment
penalties. As of December 31, 2003, 51 percent of the total outstanding balance
of retained Farmer Mac I loans and Guaranteed Securities had yield maintenance
provisions and 7 percent had other forms of prepayment protection. Of the Farmer
Mac I new and current loans purchased in 2003, 12 percent had yield maintenance
or another form of prepayment protection (including 35 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 interest rate risk management at Farmer Mac is to create and
maintain 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 both callable and
non-callable medium-term notes across a spectrum of maturities. 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 alter
the duration of its assets and liabilities to better match their durations,
thereby reducing overall interest rate sensitivity.
Farmer Mac's $623.7 million of cash and cash equivalents as of December 31,
2003 matures within three months and is match-funded with discount notes having
similar maturities. Investment securities of $1.065 billion as of December 31,
2003 consist of $710.0 million (67 percent) of floating rate securities that all
have rates that adjust within one year. See Note 4 to the consolidated financial
statements for more information on investment securities. These floating rate
investments are funded using (i) a series of discount note issuances in which
each successive discount note is issued and matures on or about the
corresponding repricing date of the related investment; (ii) floating-rate notes
having similar rate reset provisions as the related investment; or iii)
fixed-rate notes swapped to floating rates having similar reset provisions as
the related investment.
Farmer Mac is also subject to interest rate risk on loans, including loans
that Farmer Mac has committed to acquire (other than through LTSPCs) but has not
yet purchased. When Farmer Mac commits to purchase such loans, it is exposed to
interest rate risk between the time it commits to purchase the loans and the
time it either:
o sells Farmer Mac Guaranteed Securities backed by the loans; or
o issues debt to retain the loans in its portfolio (although issuing
debt to fund the loans as investments 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 the purchase of mortgage assets in the ordinary course of business;
o the refunding of existing liabilities; or
o the use of derivatives to alter the characteristics of existing assets
or liabilities.
The most strenuous measure of the long-term interest rate risk of Farmer
Mac's current portfolio is the sensitivity of its Market Value of Equity ("MVE")
to yield curve shocks. MVE represents the present value of all future cash flows
from on- and off-balance sheet assets, liabilities and financial derivatives,
discounted at current interest rates and spreads. The following schedule
summarizes the results of Farmer Mac's MVE sensitivity analysis as of December
31, 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 December 31, December 31,
Scenario 2003 2002
--------------- ---------------------------------------
+ 300 bp -0.4% 15.6%
+ 200 bp 0.2% 11.0%
+ 100 bp 0.4% 5.9%
- 100 bp 0.0% -7.1%
- 200 bp N/A* N/A*
- 300 bp N/A* N/A*
* As of December 31, 2003 and 2002, a -200 bp parallel shift
of the U. S. Treasury yield curve produced negative interest
rates for maturities of 2 years and shorter.
Farmer Mac's long-term interest rate sensitivity decreased during 2003, and
remained relatively stable and at relatively low levels despite the volatile
interest rate environment during the year. Farmer Mac's effective duration gap
was minus 0.1 months as of December 31, 2003, compared to minus 3.6 months as of
December 31, 2002. As interest rates declined during 2003, prepayments of
mortgages without prepayment penalties increased, thereby shortening the
duration of the Corporation's assets relative to the duration of its
liabilities. Throughout the year, Farmer Mac shortened the duration of its
liabilities through various rebalancing strategies. As a result, Farmer Mac was
able to improve its overall risk profile even as interest rates declined to
historic lows.
As of December 31, 2003, a uniform or "parallel" increase of 100 basis
points would have increased NII by 5.6 percent, while a parallel decrease of 100
basis points would have decreased NII by 9.4 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. As of
December 31, 2003, both MVE and NII showed similar sensitivity to non-parallel
shocks as 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,
indicate the effectiveness of Farmer Mac'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
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 transactions 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 December 31, 2003, Farmer Mac had $1.3 billion combined notional amount of
interest rate swaps, of which $674.4 million were floating-to-fixed interest
rate swaps, $25.0 million were floating-to-floating interest rate swaps, $321.9
million were basis swaps and $245.0 million were fixed-to-floating interest rate
swaps, with terms ranging from one to fifteen years.
Farmer Mac uses 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 statement of operations. All
of Farmer Mac's financial derivatives transactions are conducted under standard
collateralized agreements that limit Farmer Mac's potential credit exposure to
any counterparty. As of December 31, 2003, Farmer Mac had no uncollateralized
net exposure to any counterparty.
Credit Risk - Loans. Farmer Mac's primary exposure to credit risk is the
risk of loss resulting from the inability of borrowers to repay their mortgages
in conjunction with a deficiency in the value of the collateral relative to the
amount outstanding on the mortgage and the cost 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, real estate owned
and loans underlying Farmer Mac Guaranteed Securities (including AgVantage
bonds) or LTSPCs is summarized in the table below.
As of December 31,
------------------------------------
2003 2002
------------------- ---------------
(in thousands)
Farmer Mac I:
Post-1996 Act $ 5,045,232 $ 4,850,234
Pre-1996 Act 24,734 31,960
Farmer Mac II:
USDA-guaranteed portions 729,470 645,790
---------------- -----------------
$ 5,799,436 $ 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. Sellers are responsible to Farmer Mac
for breaches of those representations and warranties that result in economic
losses to the Corporation. Pursuant to contracts with Farmer Mac and in
consideration for underwriting and servicing fees, Farmer Mac-approved central
servicers underwrite mortgage loans for Farmer Mac in accordance with those
standards and other requirements, and service those loans in accordance with
Farmer Mac requirements. Central servicers are responsible to Farmer Mac for
serious errors in the underwriting and servicing of those mortgage loans.
Detailed information regarding Farmer Mac's underwriting and appraisal standards
and seller eligibility requirements are presented in "Business--Farmer Mac
Programs--Farmer Mac I--Underwriting and Appraisal Standards" and
"Business--Farmer Mac Programs--Farmer Mac I--Sellers."
Farmer Mac maintains an allowance for losses to cover estimated probable
losses on loans held for investment, 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"), as amended. 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 substantially the same,
i.e., the underlying agricultural mortgage loans all meet the same credit
underwriting and appraisal standards. For accepting the credit risk on loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, Farmer
Mac receives guarantee fees and commitment fees, respectively. For loans held,
Farmer Mac receives interest income that includes a component that correlates to
its guarantee fee, which Farmer Mac views as compensation for accepting credit
risk.
No allowance for losses has been made for loans underlying Farmer Mac I
Guaranteed Securities issued prior to the 1996 Act or Farmer Mac II Guaranteed
Securities. Farmer Mac I Guaranteed Securities issued prior to the 1996 Act are
supported by unguaranteed first-loss subordinated interests, which are expected
to exceed the estimated credit losses on those loans. USDA-guaranteed portions
collateralizing Farmer Mac II Guaranteed Securities are obligations backed by
the full faith and credit of the United States. To date, Farmer Mac has
experienced no credit losses on any pre-1996 Act Farmer Mac I Guaranteed
Securities or on any Farmer Mac II Guaranteed Securities and does not expect to
incur any such losses in the future.
Farmer Mac's allowance for losses is presented in four components on its
consolidated balance sheet:
o an "Allowance for loan losses" on loans held for investment;
o a valuation allowance on real estate owned, which is included in the
balance sheet under "Real estate owned, net of valuation allowance";
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 provision for losses is presented in two components on the consolidated
statement of operations:
o a "Provision for loan losses," which represents losses on Farmer Mac's
loans held for investment; and
o a "Provision for losses," which represents losses on loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs and real
estate owned.
Farmer Mac 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
modified by the application of management's judgment, as required to take key
factors into account, 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's methodology for determining its allowance for losses will migrate
over time away from the Model, to become 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,
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.
For this analysis and the allocation of specific reserves as of December
31, 2003, Farmer Mac expanded the population of loans specifically reviewed to
include:
o 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);
o loans for which Farmer Mac had adjusted the timing of borrowers'
payment schedules within the past three years, but still expects to
collect all amounts due and has not made economic concessions; and
o additional performing loans that have previously been delinquent or
are secured by real estate that produces commodities currently under
stress.
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 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 Farmer Mac's
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 more representative of Farmer
Mac's portfolio and credit underwriting standards; and
o considers the effects of the ageing of the loan portfolio along the
expected loss curves associated with individual 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. Charge-offs represent losses on the outstanding principal balance,
any interest payments previously accrued or advanced and expected costs of
liquidation. The establishment of and periodic adjustments to the valuation
allowance for real estate owned are charged against income as a portion of the
provision for losses charged to operating expense. Gains and losses on the sale
of real estate owned are recorded in income based on the difference between the
recorded investment at the time of sale and liquidation proceeds.
The following table summarizes the changes in the components of Farmer Mac's
allowance for losses for each year in the three-year period ended December 31,
2003:
-------------------------------------------------------------------------
Contingent
Allowance REO Obligation Total
for Loan Valuation Reserve for Probable Allowance
Losses Allowance for Losses Losses for Losses
-------------- -------------- ------------- -------------- -------------
(in thousands)
Balances as of January 1, 2001 $ 420 $ - $ 10,903 $ - $ 11,323
-------------- -------------- ------------- -------------- -------------
Provision for losses 600 - 6,186 - 6,786
Net allocation of
allowance (5) - 5 - -
Net recoveries/(charge-offs) 337 - (2,562) - (2,225)
-------------- -------------- ------------- -------------- -------------
Balances as of December 31, 2001 $ 1,352 $ - $ 14,532 $ - $ 15,884
-------------- -------------- ------------- -------------- -------------
Provision for losses 1,340 - 6,907 - 8,247
Net allocation of
allowance 3,221 1,308 (4,529) - -
Net charge-offs (3,251) (716) (153) - (4,120)
-------------- -------------- ------------- -------------- -------------
Balances as of December 31, 2002 $ 2,662 $ 592 $ 16,757 $ - $ 20,011
-------------- -------------- ------------- -------------- -------------
Provision for losses 6,524 1,230 (3,145) 2,676 7,285
Net charge-offs (3,219) (1,584) (440) - (5,243)
-------------- -------------- ------------- -------------- -------------
Balances as of December 31, 2003 $ 5,967 $ 238 $ 13,172 $ 2,676 $ 22,053
-------------- -------------- ------------- -------------- -------------
During third quarter 2003, Farm Credit West, ACA, a related party program
participant, exercised the conversion feature incorporated in all existing
LTSPCs and Farmer Mac converted that participant's $722.3 million LTSPC into a
Farmer Mac I Guaranteed Security in a swap transaction. 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.
When certain criteria are met, such as the default of the borrower, Farmer
Mac may, in its sole discretion, repurchase the defaulted loans underlying
Farmer Mac Guaranteed Securities and is obligated to purchase those underlying
an LTSPC. These acquisitions are recorded in the consolidated financial
statements at their fair value. Fair value is determined by appraisal or
management's estimate of discounted collateral value. In September 2002, Farmer
Mac adopted EITF issue 02-9, Accounting for Changes That Result in a Transferor
Regaining Control of Financial Assets Sold ("the consensus" or "EITF 02-9"). The
consensus requires that Farmer Mac record, at acquisition, the difference
between each loan's acquisition cost and its fair value, if any, as a charge to
the reserve for losses. Prior to the adoption of the consensus, any specific
allowance that had been established for the off-balance sheet obligation would
have been transferred from the reserve for losses to the allowance for loan
losses (referred to as "net allocation of the allowance" in the table above).
Upon the receipt of each loan's updated appraisal or determination of
management's estimate of discounted collateral value, the difference between the
acquisition cost of the loan and its fair value, if any, was recorded as a
charge to the allowance for loan losses.
Farmer Mac's total provision for losses was $7.3 million for 2003, compared
to $8.2 million for 2002. During 2003, Farmer Mac charged off $5.2 million in
losses against the allowance for losses and recovered $0.2 million on the sale
of real estate owned. During 2002, Farmer Mac charged off $4.1 million in losses
against the allowance for losses and recovered $0.1 million on the sale of real
estate owned. The net charge-offs for 2003 included $0.1 million related to
previously accrued or advanced interest on loans or Farmer Mac I Guaranteed
Securities, compared to $1.3 million for 2002.
As of December 31, 2003, Farmer Mac's allowance for losses totaled $22.1
million, or 44 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. The
year-to-year increase in this ratio is a result of the provisions for probable
losses during 2003 outpacing charge-offs and the growth of the portfolio.
As of December 31, 2003, Farmer Mac's 90-day delinquencies totaled $30.1
million and represented 0.60 percent of the principal balance of all loans held
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs, compared to $58.2 million (1.21 percent) as of December 31, 2002. From
quarter to quarter, Farmer Mac anticipates the 90-day delinquencies will
fluctuate, both in dollars and as a percentage of the outstanding portfolio,
with higher levels likely at the end of the first and third quarters of each
year corresponding to the semi-annual (January 1st and July 1st) payment
characteristics of most Farmer Mac I loans. As of December 31, 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 $70.0 million and represented
1.39 percent of the principal balance of all loans held and loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, compared to $75.3
million (1.56 percent) as of December 31, 2002. Loans that have been
restructured after delinquency were insignificant and are included within the
reported 90-day delinquency and non-performing asset disclosures.
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)
December 31, 2003 $ 5,020,032 $ 69,964 1.39% $ 39,908 $ 30,056 0.60%
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%
June 30, 2001 3,089,460 53,139 1.72% 4,274 48,865 1.58%
March 31, 2001 2,562,374 67,134 2.62% 2,154 64,980 2.54%
The dollar level of 90-day delinquencies and period-over-period charge-offs
correlates to the proportion of Farmer Mac's portfolio of loans, guarantees and
commitments entering their peak delinquency and default years (approximately
years three through five after origination). As of December 31, 2003,
approximately $1.7 billion (34 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 (38
percent) of such loans as of December 31, 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 December 31, 2003, Farmer Mac analyzed the following three categories
of assets for impairment, based on the fair value of the underlying collateral:
o $70.0 million of non-performing assets;
o $37.4 million of loans for which Farmer Mac has adjusted the timing of
borrowers' payment schedules within the past three years, but still
expects to collect all amounts due and has not made economic
concessions; and
o $65.3 million of performing loans that have previously been delinquent
or are secured by real estate that produces commodities currently
under stress.
Those individual assessments covered a total of $172.7 million of assets
measured for impairment against updated appraised values, other updated
collateral valuations or discounted values. Of the $172.7 million of assets
analyzed, $154.5 million were adequately collateralized. For the $18.2 million
that were not adequately collateralized, individual collateral shortfalls
totaled $3.8 million. Accordingly, Farmer Mac allocated specific allowances of
$3.8 million to those under-collateralized assets as of December 31, 2003. As of
December 31, 2003, after the allocation of specific allowances to
under-collateralized loans, Farmer Mac had additional non-specific or general
allowances of $18.3 million, bringing the total allowance for losses to $22.1
million. The following table summarizes Farmer Mac's assets specifically
reviewed for impairment and its specific allowance for losses:
Farmer Mac I Post-1996 Act Assets Specifically Reviewed
for Impairment and the Allowance for Losses
- ---------------------------------------------------------------------------------------------------------------
As of December 31, 2003 As of December 31, 2002
----------------------------------- ------------------------------------
(in thousands)
Assets Specific Assets Specific
Specifically Allowance Specifically Allowance
Reviewed for Losses Reviewed for Losses
------------------- -------------- -------------------- ---------------
Loans in foreclosure $ 11,016 $ 119 $ 16,856 $ 519
Loans in bankruptcy * 38,047 2,769 35,229 687
Loans 90 days or more past due 5,185 100 17,600 238
Other loans specifically reviewed 102,736 536 - -
Real estate owned 15,716 238 5,623 592
------------------- -------------- -------------------- ---------------
Total $ 172,700 $ 3,762 $ 75,308 $ 2,036
------------------- -------------- -------------------- ---------------
Allowance Allowance
for Losses for Losses
-------------- ---------------
Specific allowance for losses $ 3,762 $ 2,036
General allowance for losses 18,291 17,975
-------------- ---------------
Total allowance for losses $ 22,053 $ 20,011
-------------- ---------------
* Includes loans that are performing under either their original loan terms
or a court-approved bankruptcy plan.
Based on Farmer Mac's loan-by-loan analyses, loan collection experience and
continuing provisions for the allowance for losses, Farmer Mac believes that
ongoing losses will be covered adequately by the allowance for losses.
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 agricultural economic forecasts.
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 the 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 market value of a property with due
regard for its income-producing potential. 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 December 31, 2003, the weighted-average original loan-to-value ratio
for all post-1996 Act loans and loans underlying Farmer Mac 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 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 December 31, 2003
- -----------------------------------------------------
(dollars in thousands)
Post-1996 Act
Non-performing
Original LTV Ratio Assets Percentage
-------------------- ---------------- ------------
0.00% to 40.00% $ 7,207 10%
40.01% to 50.00% 10,237 14%
50.01% to 60.00% 28,183 40%
60.01% to 70.00% 23,111 33%
70.01% to 80.00% 1,050 2%
80.01% + 176 1%
-------------- -----------
Total $ 69,964 100%
-------------- -----------
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 December 31, 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% $ 653,746 $ 2,328 0.36% $ -
1994 3% 156,635 863 0.55% -
1995 3% 154,805 4,912 3.17% 677
1996 7% 342,153 9,819 2.87% 395
1997 8% 403,455 13,667 3.39% 360
1998 13% 644,931 14,363 2.23% 541
1999 13% 673,406 9,928 1.47% 221
2000 8% 394,661 7,756 1.97% 908
2001 12% 581,473 5,791 1.00% 660
2002 12% 627,122 537 0.09% -
2003 8% 387,645 - 0.00% -
------------------- ------------------ ---------------- ---------------- --------------
Total 100% $ 5,020,032 $ 69,964 1.39% $ 3,762
------------------- ------------------ ---------------- ---------------- --------------
By geographic region (2):
Northwest 21% $ 1,066,399 $ 40,841 3.83% $ 1,065
Southwest 46% 2,307,812 18,321 0.79% 475
Mid-North 14% 677,755 3,561 0.53% 107
Mid-South 5% 257,664 5,396 2.09% 1,972
Northeast 8% 397,231 1,282 0.32% 48
Southeast 6% 313,171 563 0.18% 95
------------------- ------------------ ---------------- ---------------- --------------
Total 100% $ 5,020,032 $ 69,964 1.39% $ 3,762
------------------- ------------------ ---------------- ---------------- --------------
By commodity:
Crops 44% $ 2,228,506 $ 26,388 1.18% $ 688
Permanent plantings 27% 1,355,070 27,243 2.01% 1,619
Livestock 21% 1,025,245 13,810 1.35% 1,312
Part-time farm 7% 374,057 2,523 0.67% 143
Other 1% 37,154 - 0.00% -
------------------- ------------------ ---------------- ---------------- --------------
Total 100% $ 5,020,032 $ 69,964 1.39% $ 3,762
------------------- ------------------ ---------------- ---------------- --------------
(1) Includes loans 90 days or more past due, in foreclosure, restructured after
delinquency, in bankruptcy (including loans performing under either their
original loan terms or a court-approved bankruptcy plan), and real estate
owned.
(2) Geographic regions - Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY);
Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO,
WI); Mid-South (KS, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ,
NY, OH, PA, RI, TN, VA, VT, WV); and Southeast (AL, AR, FL, GA, LA, MS,
SC).
The following table presents Farmer Mac's cumulative charge-offs and
current specific allowances relative to the cumulative original purchased,
guaranteed or LTSPC principal balances 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 information is to present information regarding
losses and collateral deficiencies relative to original guarantees and
commitments.
Farmer Mac I Post-1996 Act Credit Losses and Specific Allowance for Losses
Relative to all Cumulative Original Loans, Guarantees and LTSPCs
- -------------------------------------------------------------------------------------------------------------------
Cumulative Combined
Cumulative Original Loans, Current Credit Loss
Net Guarantees Loss Specific and Specific
Credit Losses and LTSPCs Rate Allowances Allowance Rate
---------------- ---------------- ----------------- ----------------- -----------------
(dollars in thousands)
By year of origination:
Before 1994 $ - $ 1,963,835 0.00% $ - 0.00%
1994 - 357,510 0.00% - 0.00%
1995 488 320,056 0.15% 677 0.36%
1996 2,168 620,108 0.35% 395 0.41%
1997 3,263 710,891 0.46% 360 0.51%
1998 2,573 1,055,110 0.24% 541 0.30%
1999 1,414 1,050,984 0.13% 221 0.16%
2000 1,489 641,391 0.23% 908 0.37%
2001 10 862,811 0.00% 660 0.08%
2002 - 862,936 0.00% - 0.00%
2003 - 479,049 0.00% - 0.00%
---------------- ---------------- ----------------- ----------------- ---------------
Total $ 11,405 $ 8,924,681 0.13% $ 3,762 0.17%
---------------- ---------------- -----------------
By geographic region (1):
Northwest $ 5,919 $ 1,983,957 0.30% $ 1,065 0.35%
Southwest 5,381 3,886,015 0.14% 475 0.15%
Mid-North - 1,127,594 0.00% 107 0.01%
Mid-South 5 417,517 0.00% 1,972 0.47%
Northeast - 753,769 0.00% 48 0.01%
Southeast 100 755,829 0.01% 95 0.03%
---------------- ---------------- ----------------- ----------------- ---------------
Total $ 11,405 $ 8,924,681 0.13% $ 3,762 0.17%
---------------- ---------------- -----------------
By commodity:
Crops $ 1,552 $ 3,912,921 0.04% $ 688 0.06%
Permanent plantings 8,020 2,300,118 0.35% 1,619 0.42%
Livestock 1,458 1,962,189 0.07% 1,312 0.14%
Part-time farm 375 653,879 0.06% 143 0.08%
Other - 95,574 0.00% - 0.00%
---------------- --------------- ----------------- ----------------- ----------------
Total $ 11,405 $ 8,924,681 0.13% $ 3,762 0.17%
---------------- ---------------- -----------------
(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 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 portfolio performance by commodity distribution indicates that
losses and collateral deficiencies have been and are expected to remain less
prevalent in the loans secured by real estate producing agricultural commodities
that receive significant government support (such as cotton, soybeans, wheat and
corn) and more prevalent in those that do not receive such 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. 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.
Analysis of portfolio performance by geographic distribution indicates
that, while commodities are the primary determinant of exposure to loss, within
most commodity groups certain geographic areas allow greater economies of scale
or proximity to markets than others and, consequently, result in more successful
farms within the commodity group. Likewise, certain geographic areas offer
better growing conditions than others and, consequently, result in more
versatile and more successful farms within a given commodity group - and the
ability to switch crops among 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.
Credit Risk - Institutional. Farmer Mac is also exposed to credit risk
arising from its business relationships with other institutions including:
o issuers of AgVantage bonds and other investments held by Farmer Mac;
o sellers and servicers; and
o interest rate contract counterparties.
AgVantage bonds are general obligations of the AgVantage Issuers and are secured
by collateral in an amount ranging from 120 percent to 150 percent of the bond
amount. In addition to requiring collateral, Farmer Mac mitigates credit risk
related to AgVantage bonds by evaluating and monitoring the financial condition
of the issuers of the AgVantage bonds. Outstanding AgVantage bonds totaled $25.2
million as of December 31, 2003, and $28.6 million as of December 31, 2002.
Farmer Mac manages institutional credit risk related to sellers and
servicers by requiring those institutions to meet Farmer Mac's standards for
creditworthiness. Farmer Mac monitors the financial condition of those
institutions by evaluating financial statements and bank credit rating agency
reports and confirms that they maintain adequate fidelity bonds and errors and
omissions insurance. For more information on Farmer Mac's approval of sellers,
see "Business--Farmer Mac Programs--Farmer Mac I--Sellers." Credit risk related
to interest rate contracts is discussed in "--Risk Management--Interest Rate
Risk" and Note 6 to the consolidated financial statements.
Credit Risk - Other Investments. The credit risk inherent in other
investments held by Farmer Mac is mitigated by Farmer Mac's policies of
investing in highly-rated instruments and establishing concentration limits,
which reduce exposure to any one counterparty. Farmer Mac's policies limit the
Corporation's total credit exposure, including uncollateralized credit exposure
resulting from financial derivatives, to a single entity by limiting the dollar
amount of investments with each individual entity to the greater of 25 percent
of Farmer Mac's regulatory core capital or $25 million. That limitation excludes
exposure to agencies of the U.S. government, government-sponsored enterprises
and money market funds. Farmer Mac policy also requires each individual entity
to be rated in one of the three highest rating categories of at least one
nationally recognized statistical rating organization for investments with terms
greater than 270 days and in one of the two highest rating categories for
investments with terms of 270 days or less.
As of December 31, 2003, Farmer Mac had investments in commercial paper,
corporate debt securities, asset-backed securities, municipal bonds, and
preferred stock issued by forty-five entities totaling $887.4 million. Farmer
Mac's investments in eighteen of these entities each exceeded 10 percent of
Farmer Mac's core capital (the cumulative balance of investments in such
entities totaled $439.6 million), and investments in two of these entities each
exceeded 15 percent of core capital. In addition, as of December 31, 2002,
Farmer Mac held $282.3 million of securities issued by government-sponsored
enterprises or agencies of the U.S. government and $516.7 million in three money
market investment accounts. The maximum amount held in any one money market fund
investment fund at any time during 2003 was approximately $480.1 million. As of
December 31, 2003, 53 percent of the investment portfolio, excluding
government-sponsored enterprise and agency investments, consisted of short-term
highly liquid investments.
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 the capital markets.
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 purchases 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 the Farm Credit Administration or the United States or any
agency or instrumentality of the United States other than Farmer Mac. Farmer Mac
is an institution of the Farm Credit System, 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 exemption under federal law
from federal, state or local taxation.
Farmer Mac's board of directors has authorized the issuance of up to $5.0
billion of discount notes and medium-term notes (of which $3.9 billion was
outstanding as of December 31, 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 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 new discount notes and medium-term notes.
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 operaions, 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 principally 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 amount, 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 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 December 31, 2003, Farmer Mac was in compliance with the investment
authorizations set forth in its investment guidelines.
The following table presents Farmer Mac's five largest investments as of
December 31, 2003:
Security
Credit Recorded Percent of
Investment Issuer Rating Investment Core Capital
- ------------------------------- ----------------------------- --------------- --------------- --------------
(dollars in thousands)
Merrill Lynch Premier Merrill Lynch & Co., Inc. N/A * $ 255,554 118.5%
Institutional Fund
Federated Prime Value Federated Group Inc. N/A * 160,740 74.6%
Obligations Fund
Dreyfus Cash Management Dreyfus Corp. N/A * 100,379 46.6%
and Institutional Shares
Preferred Stock CoBank, ACB not rated ** 88,500 41.1%
Preferred Stock AgFirst Farm Credit Bank not rated ** 88,035 40.8%
* These money market funds are not rated, but invest in short-term, high
quality money market securities and conform to Rule 2a-7 of the Investment
Company Act of 1940.
** CoBank, ACB and AgFirst Farm Credit Bank are institutions of the Farm
Credit System, a government-sponsored enterprise.
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. Farmer Mac has also used 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 a liquidity 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 December 31, 2003, Farmer Mac's cash and cash equivalents and
investment securities totaled $623.7 million and $1,064.8 million, respectively,
a combined 39.3 percent of total assets and 42.9 percent of total notes payable.
In addition, as of December 31, 2003, Farmer Mac held a $678.2 million portfolio
of Farmer Mac II Guaranteed Securities backed by USDA Guaranteed Portions that
carry the full faith and credit of the U.S. Government. As of December 31, 2003,
the aggregate of the Farmer Mac II Guaranteed Securities and the liquidity
investment portfolio represented 55.1 percent of total assets and 60.1 percent
of total notes payable. During 2003, exclusive of daily overnight discount note
issuances the proceeds of which were invested overnight, the average discount
note issuance term and re-funding frequency was approximately 65.8 days.
The principal sources of funding for Farmer Mac's obligations under its
guarantees and LTSPCs are:
o the ongoing fees received on its guarantees and commitments:
o net interest income received on loans and Guaranteed Securities; and
o the proceeds of debt issuance.
Farmer Mac satisfies its guarantee and purchase commitment obligations by
purchasing defaulted loans out of LTSPCs and from the related trusts for Farmer
Mac Guaranteed Securities. 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. Farmer Mac's
liquidity position and ready access to the debt markets also provide additional
flexibility to meet liquidity needs that result from the uncertainty regarding
the timing and amount of required purchases of loans underlying either Farmer
Mac Guaranteed Securities or LTSPCs, should significantly more loans be required
to be purchased than in prior periods.
Capital Requirements. The Act, as amended by the 1996 Act, establishes
three capital standards for Farmer Mac--minimum, critical and risk-based. The
minimum capital requirement is expressed as a percentage of on-balance sheet
assets and off-balance sheet obligations, with the critical capital requirement
equal to one-half of the minimum capital amount. Higher minimum and critical
capital requirements were phased in over a transition period, which ended on
January 1, 1999, when the highest level of minimum capital became applicable.
The Act does not specify the required level of risk-based capital. It directs
FCA to establish a risk-based capital test for Farmer Mac, using specified
stress-test parameters. For a discussion of risk-based capital, see
"Business--Government Regulation of Farmer Mac--Regulation--Capital
Standards--General."
Certain enforcement powers are given to FCA depending upon Farmer Mac's
compliance with the capital standards. See "Business--Government Regulation of
Farmer Mac--Regulation--Capital Standards--Enforcement levels." As of December
31, 2003 and 2002, Farmer Mac was classified as within "level I" (the highest
compliance level). The following table sets forth Farmer Mac's minimum capital
requirement as of December 31, 2003 and 2002 based on the fully phased-in
requirements.
December 31, 2003 December 31, 2002
----------------------------------------- ----------------------------------------
Capital Capital
Amount Ratio Required Amount Ratio Required
------------- ------------ ------------- --------------- ----------- ------------
(dollars in thousands)
On-balance sheet assets as defined for
determining statutory minimum capital $4,231,931 2.75% $116,378 $4,126,719 2.75% $113,485
Outstanding balance of Farmer Mac
Guaranteed Securities held by others
and LTSPCs 3,352,078 0.75% 25,141 3,048,289 0.75% 22,862
Derivative and hedging obligations 67,670 0.75% 508 93,997 0.75% 705
------------- ------------
Minimum capital level 142,026 137,052
Actual core capital 215,550 183,978
------------- ------------
Capital surplus $ 73,524 $46,926
------------- ------------
Based on the statutory minimum capital requirements, Farmer Mac's current
capital surplus of $73.5 million would support additional guarantee growth in
amounts ranging from $2.7 billion of on-balance sheet guarantees to more than
$9.8 billion of off-balance sheet guarantees and commitments. Furthermore,
Farmer Mac could sell $1.7 billion of on-balance sheet non-program assets (cash
and cash equivalents and investment securities) and $2.5 billion of on-balance
sheet program assets in order to support further increases of on- and
off-balance sheet program guarantees and commitments. Any of these transactions
would be evaluated for compliance with risk-based capital requirements and to
optimize Farmer Mac's return on equity and capital flexibility.
Accordingly, in the opinion of management, Farmer Mac has sufficient
capital and liquidity for the next twelve months.
Contractual Obligations, Contingent Liabilities and Off-Balance Sheet
Arrangements. The following table presents the amount and timing of Farmer Mac's
known fixed and determinable contractual obligations by payment date as of
December 31, 2003. The payment amounts represent those amounts contractually due
to the recipient and do not include any unamortized premiums or discounts or
other similar carrying value adjustments.
One Year One to Three to Over Five
or Less Three Years Five Years Years Total
--------------- ---------------- ------------- ------------ ---------------
(in thousands)
Discount notes* $2,648,760 $ - $ - $ - $2,648,760
Medium-term notes* 381,375 510,969 307,798 367,239 1,567,381
Operating lease obligations** 545 1,131 1,187 1,897 4,760
Purchase obligations*** 479 13 492
* Future events, including additional issuance of discount notes and
medium-term notes and refinancing of those notes, could cause actual
payments to differ significantly from these amounts. For more information
regarding discount notes and medium-term notes, see Note 7 to the
consolidated financial statements.
** Includes amounts due under non-cancelable operating leases for office space
and office equipment. See Note 12 to the consolidated financial statements
for more information regarding Farmer Mac's minimum lease payments for
office space.
*** Includes minimum amounts due under non-cancelable agreements to purchase
goods or services that are enforceable and legally binding and specify all
significant terms. These agreements include agreements for the provision of
internal audit services, consulting services, information technology
support, equipment maintenance, and financial analysis software and
services. The amounts actually paid under these agreements will likely be
higher due to the variable components of some of these agreements under
which the ultimate obligation owed is determined by reference to actual
usage or hours worked. The table does not include amounts due under
agreements that are cancelable without penalty or further payment as of
December 31, 2003 and therefore do not represent enforceable and legally
binding obligations. The table also does not include amounts due under the
terms of employment agreements with members of senior management.
See the tables below in this section for information about Farmer Mac's
commitments to purchase loans and Farmer Mac's contingent obligations under
outstanding Farmer Mac I Guaranteed Securities and LTSPCs.
Farmer Mac enters into financial derivative contracts under which it either
receives cash from counterparties, or is required to pay cash to them, depending
on changes in interest rates. Financial derivatives are carried on the
consolidated balance sheet at fair value, representing the net present value of
expected future cash payments or receipts based on market interest rates as of
the balance sheet date. The fair values of the contracts change daily as market
interest rates change. Because the financial derivative liabilities recorded on
the consolidated balance sheet as of December 31, 2003 do not represent the
amounts that may ultimately be paid under the financial derivative contracts,
those liabilities are not included in the table of contractual obligations
presented above. Further information regarding financial derivatives is included
in Note 2(h) and Note 6 to the consolidated financial statements.
In conducting its loan purchase activities, Farmer Mac enters into
mandatory and optional delivery commitments to purchase agricultural mortgages
and corresponding optional commitments to deliver Farmer Mac Guaranteed
Securities. In conducting its LTSPC activities, Farmer Mac enters into
arrangements whereby it commits to buy agricultural mortgages at an undetermined
future date. The following table presents these significant commitments.
As of As of
December 31, December 31,
2003 2002
---------------- ---------------
(in thousands)
Mandatory commitments to
purchase loans and
USDA-guaranteed portions $ 11,226 $ 21,700
Optional commitments to
purchase loans - 4,478
Optional commitments to
deliver Farmer Mac
Guaranteed Securities - 4,478
LTSPCs 2,348,702 2,681,240
Further information regarding commitments to purchase and sell loans is included
in Note 12 to the consolidated financial statements.
Farmer Mac also may have liabilities that arise from its Farmer Mac
Guaranteed Securities. Farmer Mac Guaranteed Securities are issued through
trusts and, when sold to third-party investors, accordingly, are not included in
the consolidated balance sheets. In performing its obligations related to LTSPCs
and Farmer Mac Guaranteed Securities, Farmer Mac would have the right to enforce
the underlying agricultural mortgage loans, and in the event of the default
under the terms of those loans, would have access to the underlying collateral.
The following table presents the balance of outstanding LTSPCs and
off-balance sheet Farmer Mac Guaranteed Securities as of December 31, 2003 and
2002:
Outstanding Balance of LTSPCs and
Off-Balance Sheet Farmer Mac Guaranteed Securities
- --------------------------------------------------------------------------------------
As of December 31,
----------------------------------
2003 2002
----------------- ---------------
(in thousands)
Farmer Mac I Post-1996 Act obligations:
Farmer Mac I Guaranteed Securities $ 952,134 $ 299,940
LTSPCs 2,348,702 2,681,240
----------------- ---------------
Total Farmer Mac I Post-1996 Act obligations 3,300,836 2,981,180
Farmer Mac II Guaranteed Securities 51,241 67,109
----------------- ---------------
Total Farmer Mac I and II $ 3,352,077 $ 3,048,289
----------------- ---------------
See Note 2(c), Note 2(e) and Note 5 to the consolidated financial
statements for more information on Farmer Mac Guaranteed Securities and Note
2(o) and Note 12 to the consolidated financial statements for more information
on LTSPCs.
Other Matters
New Accounting Standards. For all LTSPCs or guarantees issued or modified
on or after January 1, 2003, Farmer Mac recognizes, at inception of the
guarantee or commitment, an asset that is equal to the fair value for 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. Both
the asset and liability were subsequently measured and recorded at fair value.
In December of 2003, the SEC provided additional guidance on the "day two"
accounting for these financial instruments. In accordance with this guidance,
Farmer Mac has adopted the amortized cost model for day two accounting. This
guidance will be applied prospectively for guarantees and commitments recorded
at December 31, 2003 and all guarantees and commitments issued or modified on or
after January 1, 2004.
In December 2003, the American Institute of Certified Public Accountants
issued Statement of Position 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer ("SOP 03-3"). SOP 03-3, addresses accounting
for differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
acquired in a transfer if those differences are attributable, at least in part,
to credit quality. Specifically, SOP 03-3 limits the yield that may be accreted
and prohibits the "carry-over" of a valuation allowance for all impaired loans
that are within the scope of SOP 03-3. SOP 03-3 is effective for loans acquired
in fiscal years beginning after December 15, 2004.
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 eliminated the classification of most debt extinguishments or
repurchases as extraordinary items, as reflected in Farmer Mac's consolidated
financial statements. All prior period repurchases of debt have been
reclassified to conform to the new classification.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Farmer Mac is exposed to market risk from changes in interest rates. Farmer
Mac manages this market risk by entering into various financial transactions,
including 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--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 2(h) and Note 6 to the consolidated
financial statements.
Item 8. Financial Statements
REPORTS OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Federal Agricultural Mortgage Corporation:
We have audited the accompanying consolidated balance sheets of the Federal
Agricultural Mortgage Corporation and subsidiary ("Farmer Mac") as of December
31, 2003 and 2002, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of Farmer Mac's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements for the year ended December
31, 2001, before the reclassifications discussed in Note 2 to the consolidated
financial statements, were audited by other auditors who have ceased operations.
Those auditors expressed an unqualified opinion, dated January 23, 2002, which
included an explanatory paragraph regarding Farmer Mac's change in its method of
accounting for financial derivatives on January 1, 2001 on those financial
statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such 2003 and 2002 consolidated financial statements present
fairly, in all material respects, the financial position of the Federal
Agricultural Mortgage Corporation and subsidiary at December 31, 2003 and 2002,
and the results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
As discussed above, the consolidated financial statements of the Federal
Agricultural Mortgage Corporation and subsidiary for the year ended December 31,
2001, were audited by other auditors who have ceased operations. As described in
Note 2 to the consolidated financial statements, certain reclassifications of
the 2001 consolidated financial statements were made to conform to the current
period presentation. We audited the reclassifications described in Note 2 to the
consolidated financial statements that were made to conform the 2001 financial
statements to the current period presentation. Our audit procedures with respect
to the 2001 reclassifications described in Note 2 included (1) comparing the
amounts shown as the provision for loan losses and the provision for losses in
Farmer Mac's consolidated statement of operations to Farmer Mac's underlying
accounting analysis obtained from management, (2) on a test basis, comparing the
amounts comprising the provision for loan losses and the provision for losses
obtained from management to supporting documentation, and (3) testing the
mathematical accuracy of the underlying analyses. In our opinion, such
reclassifications are appropriate and have been properly applied. However, we
were not engaged to audit, review, or apply any procedures to the 2001 financial
statements of Farmer Mac other than with respect to such reclassifications and,
accordingly, we do not express an opinion or any form of assurance on the 2001
financial statements taken as a whole.
DELOITTE & TOUCHE LLP
McLean, Virginia
March 15, 2004
The report of Arthur Andersen LLP below is a copy of their previously issued
report contained in Farmer Mac's Annual Report on Form 10-K for the year ended
December 31, 2001. Arthur Andersen LLP has ceased operations and has not
reissued its report in connection with this Form 10-K.
* * * * *
The Board of Directors and Stockholders of
Federal Agricultural Mortgage Corporation:
We have audited the accompanying consolidated balance sheets of the Federal
Agricultural Mortgage Corporation ("Farmer Mac") and subsidiaries as of December
31, 2001 and 2000, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of Farmer Mac's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Farmer Mac and subsidiaries as
of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2001, Farmer Mac changed its method of accounting for financial
derivatives.
Arthur Andersen LLP
Vienna, VA
January 23, 2002
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------------
2003 2002
----------------- -----------------
(in thousands)
Assets:
Cash and cash equivalents $ 623,674 $ 723,800
Investment securities 1,064,782 830,409
Farmer Mac Guaranteed Securities 1,508,134 1,608,507
Loans held for sale 46,662 37,015
Loans held for investment 942,929 929,108
Allowance for loan losses (5,967) (2,662)
----------------- -----------------
Loans, net 983,624 963,461
Real estate owned, net of valuation allowance 15,478 5,031
of $0.2 million and $0.6 million
Financial derivatives 961 317
Interest receivable 58,423 65,276
Guarantee and commitment fees receivable 16,885 5,938
Deferred tax asset, net 10,891 9,666
Prepaid expenses and other assets 16,798 10,510
----------------- -----------------
Total Assets $ 4,299,650 $ 4,222,915
----------------- -----------------
Liabilities and Stockholders' Equity:
Liabilities:
Notes payable:
Due within one year $ 2,799,384 $ 2,895,746
Due after one year 1,136,110 985,318
----------------- -----------------
Total notes payable 3,935,494 3,881,064
Financial derivatives 67,670 94,314
Accrued interest payable 26,342 29,756
Guarantee and commitment obligation 14,144 -
Accounts payable and accrued expenses 29,574 17,453
Reserve for losses 13,172 16,757
----------------- -----------------
Total Liabilities 4,086,396 4,039,344
----------------- -----------------
Commitments and Contingencies (Note 12)
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,
10,522,513 and 10,106,903 shares issued and outstanding
as of December 31, 2003 and 2002, respectively 10,523 10,107
Additional paid-in capital 88,652 82,527
Accumulated other comprehensive income/(loss) (2,295) (407)
Retained earnings 79,843 54,813
----------------- -----------------
Total Stockholders' Equity 213,254 183,571
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 4,299,650 $ 4,222,915
----------------- -----------------
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For Year Ended December 31,
------------------------------------------------
2003 2002 2001
--------------- --------------- --------------
(in thousands, except per share amounts)
Interest income:
Investments and cash equivalents $ 35,287 $ 42,629 $ 66,534
Farmer Mac Guaranteed Securities 73,692 89,736 110,169
Loans 52,580 39,505 5,710
--------------- --------------- --------------
Total interest income 161,559 171,870 182,413
Interest expense 124,307 132,771 153,147
--------------- --------------- --------------
Net interest income 37,252 39,099 29,266
Provision for loan losses (6,524) (1,340) (600)
--------------- --------------- --------------
Net interest income after provision for loan losses 30,728 37,759 28,666
Guarantee and commitment fees 20,685 19,277 15,807
Gains/(Losses) on financial derivatives and trading assets 2,357 (8,433) (3,053)
Gains on the repurchase of debt - 1,368 -
Gains on the sale of real estate owned 178 24 61
Miscellaneous income 812 1,332 560
--------------- --------------- --------------
Total revenues 54,760 51,327 42,041
--------------- --------------- --------------
Expenses:
Compensation and employee benefits 6,121 5,142 5,601
General and administrative 6,031 5,521 4,093
Regulatory fees 2,005 1,172 735
REO operating costs, net 264 25 1
Provision for losses 761 6,907 6,186
--------------- --------------- --------------
Total operating expenses 15,182 18,767 16,616
--------------- --------------- --------------
Income before income taxes 39,578 32,560 25,425
Income tax expense 12,308 9,809 8,419
------------------------------------------------
Net income before cumulative effect
of change in accounting principles 27,270 22,751 17,006
Cumulative effect of change
in accounting principles, net of taxes - - (726)
--------------- --------------- --------------
Net income 27,270 22,751 16,280
Preferred stock dividends (2,240) (1,456) -
--------------- --------------- --------------
Net income available to common stockholders $ 25,030 $ 21,295 $ 16,280
--------------- --------------- --------------
Earnings per common share:
Basic earnings per common share $ 2.13 $ 1.83 $ 1.44
Diluted earnings per common share $ 2.08 $ 1.77 $ 1.38
Earnings per common share before cumulative
effect of change in accounting principles
Basic earnings per common share $ 2.13 $ 1.83 $ 1.50
Diluted earnings per common share $ 2.08 $ 1.77 $ 1.45
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
Common Preferred Accumulated
Stock Stock Additional Other
------------------ ------------------ Paid-in Comprehensive Retained
Shares Amount Shares Amount Capital Income/(Loss) Earnings Total
-------- --------- -------- --------- ---------- -------------- ---------- ----------
Balance, January 1, 2001 11,152 $11,152 - $ - $ 72,773 $ 31,498 $17,238 $132,661
-------- --------- -------- --------- ---------- -------------- ---------- ----------
Net income 16,280 16,280
Change in unrealized gain/loss
on securities available-for-sale,
net of taxes of $4.2 million (7,601) (7,601)
Cumulative effect of change in
accounting principles,
net of taxes of $4.8 million (8,632) (8,632)
Change in unrealized gain/loss
on financial derivatives,
net of taxes of $3.7 million (6,870) (6,870)
----------
Total comprehensive loss (6,823)
Issuance of class C
common stock 412 412 8,187 8,599
-------- --------- -------- --------- ---------- -------------- -------- ----------
Balance, December 31, 2001 11,564 $11,564 - $ - $ 80,960 $ 8,395 $33,518 $134,437
-------- --------- -------- --------- ---------- -------------- -------- ----------
Net Income 22,751 22,751
Change in unrealized gain/loss
on securities available-for-sale,
net of taxes of $20.7 million 38,423 38,423
Change in unrealized gain/loss
on financial derivatives,
net of taxes of $25.4 million (47,225) (47,225)
----------
Total comprehensive income 13,949
Issuance of class C
common stock 74 74 1,900 1,974
Issuance of preferred stock 700 35,000 (333) 34,667
Preferred stock dividends (1,456) (1,456)
-------- --------- -------- --------- ---------- -------------- -------- ----------
Balance, December 31, 2002 11,638 $11,638 700 $35,000 $ 82,527 $ (407) $54,813 $183,571
-------- --------- -------- --------- ---------- -------------- -------- ----------
Net Income 27,270 27,270
Change in unrealized gain/loss
on securities available-for-sale,
net of taxes of $10.3 million (19,063) (19,063)
Change in unrealized gain/loss
on financial derivatives,
net of taxes of $9.2 million 17,175 17,175
----------
Total comprehensive income 25,382
Issuance of class C
common stock 416 416 6,125 6,541
Preferred stock dividends (2,240) (2,240)
-------- --------- -------- --------- ---------- -------------- -------- ----------
Balance, December 31, 2003 12,054 $12,054 700 $35,000 $ 88,652 $ (2,295) $79,843 $213,254
-------- --------- -------- --------- ---------- -------------- -------- ----------
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Year Ended December 31,
------------------------------------------------------
2003 2002 2001
----------------- ---------------- -----------------
(in thousands)
Cash flows from operating activities:
Net income $ 27,270 $ 22,751 $ 16,280
Adjustments to reconcile net income to net cash provided by
operating activities:
Net amortization of investment premiums and discounts (834) 743 (7,885)
Amortization of debt premiums, discounts and issuance costs 34,844 46,859 89,131
Proceeds from repayment of trading investment securities 7,184 34,029 21,717
Net change in fair value of trading securities and derivatives (2,479) 4,359 (202)
Amortization of settled financial derivatives contracts 1,596 1,111 461
Gain on the repurchase of debt - 889 -
Total provision for losses 7,285 8,247 6,786
Deferred income tax benefit (221) (2,959) (2,250)
Decrease/(increase) in interest receivable 6,853 (9,023) (572)
(Increase)/decrease in guarantee and
commitment fees receivable (10,947) 66 (510)
(Increase)/decrease in other assets (21,965) (6,089) 494
(Decrease)/increase in accrued interest payable (3,414) 3,398 5,506
Increase in other liabilities 23,436 6,756 3,762
----------------- ---------------- -----------------
Net cash provided by operating activities 68,608 111,137 132,718
----------------- ---------------- -----------------
Cash flows from investing activities:
Purchases of available-for-sale investment securities (959,081) (179,146) (592,747)
Purchases of Farmer Mac II Guaranteed Securities and
AgVantage bonds (299,079) (200,583) (273,061)
Purchases of loans (248,219) (794,328) (278,989)
Proceeds from repayment of investment securities 719,262 331,880 412,310
Proceeds from repayment Farmer Mac Guaranteed Securities 363,718 242,748 268,351
Proceeds from repayment of loans 151,824 67,168 2,021
Proceeds from sale of loans and
Farmer Mac Guaranteed Securities 78,254 47,682 82,995
Purchases of office equipment (126) (161) (71)
----------------- ---------------- -----------------
Net cash used in investing activities (193,447) (484,740) (379,191)
----------------- ---------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of discount notes 73,025,686 58,967,290 105,736,192
Proceeds from issuance of medium-term notes 354,027 303,017 295,186
Payments to redeem discount notes (73,235,160) (58,433,613) (105,641,354)
Payments to redeem medium-term notes (122,140) (207,254) (246,960)
Settlement of financial derivatives (2,001) (5,053) (5,230)
Net proceeds from preferred stock issuance - 34,667 -
Proceeds from common stock issuance 6,541 1,974 8,599
Preferred stock dividends (2,240) (1,456) -
----------------- ---------------- -----------------
Net cash provided by financing activities 24,713 659,572 146,433
----------------- ---------------- -----------------
Net (decrease)/increase in cash and cash equivalents (100,126) 285,969 (100,040)
Cash and cash equivalents at beginning of period 723,800 437,831 537,871
----------------- ---------------- -----------------
Cash and cash equivalents at end of period $ 623,674 $ 723,800 $ 437,831
----------------- ---------------- -----------------
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 and 2001
1. ORGANIZATION
The Federal Agricultural Mortgage Corporation ("Farmer Mac" or the
"Corporation") was chartered by the U.S. Congress in the Agricultural Credit Act
of 1987 (12 U.S.C. ss.ss. 2279aa et seq.), which amended the Farm Credit Act of
1971 (collectively, as amended, the "Act"). Farmer Mac is a stockholder-owned
instrumentality of the United States that was created to establish a secondary
market for agricultural real estate and rural housing mortgage loans and to
increase the availability of long-term credit at stable interest rates to
American farmers, ranchers and rural homeowners. The Farmer Mac secondary market
for agricultural mortgage loans accomplishes that mission by providing liquidity
and lending capacity to agricultural mortgage lenders by:
o purchasing newly originated and pre-existing ("seasoned") eligible
mortgage loans directly from lenders through its "cash window" and
seasoned eligible mortgage loans from lenders and other third parties
in negotiated transactions;
o exchanging newly issued agricultural mortgage-backed securities
guaranteed by Farmer Mac ("Farmer Mac Guaranteed Securities") for
newly originated and seasoned eligible mortgage loans that back those
securities in "swap" transactions;
o issuing long-term standby purchase commitments ("LTSPCs") for newly
originated and seasoned eligible mortgage loans; and
o purchasing and guaranteeing mortgage-backed bonds secured by eligible
mortgage loans, which are referred to as AgVantage bonds.
Farmer Mac conducts these activities through two programs--Farmer Mac I and
Farmer Mac II. Under the Farmer Mac I program, Farmer Mac
o purchases eligible mortgage loans;
o securitizes eligible mortgage loans purchased and guarantees the
timely payment of principal and interest on the agricultural
mortgage-backed securities backed by such loans; and
o commits to purchase eligible mortgage loans under LTSPCs for such
loans.
To be eligible for the Farmer Mac I program, loans must meet Farmer Mac's
underwriting, appraisal and documentation standards. Under the Farmer Mac II
program, Farmer Mac purchases the guaranteed portions of loans guaranteed by the
United States Department of Agriculture (the "USDA-guaranteed portions")
pursuant to the Consolidated Farm and Rural Development Act (7 U.S.C. ss.ss.
1921 et seq.) and guarantees securities backed by those USDA-guaranteed portions
purchased by Farmer Mac.
As of December 31, 2003, outstanding loans held by Farmer Mac and loans that
either back Farmer Mac Guaranteed Securities or are subject to LTSPCs totaled
$5.8 billion. Farmer Mac may retain Farmer Mac Guaranteed Securities in its
portfolio or sell them to third parties.
Farmer Mac's two principal sources of revenue are:
o fees received in connection with outstanding Farmer Mac Guaranteed
Securities and LTSPCs; and
o net interest income earned on its portfolio of Farmer Mac Guaranteed
Securities, loans and investment securities.
Farmer Mac funds its program purchases by issuing debt obligations of various
maturities. As of December 31, 2003, Farmer Mac had outstanding $2.6 billion of
discount notes and $1.3 billion of medium-term notes. During 2003, Farmer Mac
continued its strategy of issuing debt obligations and investing a portion of
the proceeds in non-program investments to increase its presence in the capital
markets and thereby improve the mortgage rates offered by lenders to farmers,
ranchers and rural homeowners.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Farmer Mac conform with accounting
principles generally accepted in the United States of America ("generally
accepted accounting principles"). The preparation of consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities (including, but not limited to, the allowance for loan losses,
reserve for losses, valuation allowance for real estate owned and valuation of
Farmer Mac Guaranteed Securities) as of the date of the consolidated financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates. The following are the
significant accounting policies that Farmer Mac follows in preparing and
presenting its consolidated financial statements:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Farmer Mac and its
wholly-owned subsidiary, Farmer Mac Securities Corporation, whose principal
activities are to facilitate the purchase and issuance of Farmer Mac Guaranteed
Securities and to act as a registrant under registration statements filed with
the Securities and Exchange Commission. All intercompany balances and
transactions have been eliminated in consolidation.
(b) 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 consolidated statements of cash flows. The following table sets forth
information regarding certain cash and non-cash transactions for the years ended
December 31, 2003, 2002 and 2001.
2003 2002 2001
------------ ------------- -------------
(in thousands)
Cash paid during the year for:
Interest $ 60,745 $ 63,750 $ 75,821
Income taxes 11,000 12,600 8,200
Non-cash activity:
Real estate owned acquired through foreclosure 19,868 7,632 2,457
Loans securitized as Farmer Mac
Guaranteed Securities 78,254 47,682 77,422
Loans under LTSPCs converted to Farmer Mac
Guaranteed Securities 722,315 - -
Loans acquired from on-balance sheet Farmer Mac
Guaranteed Securities 35,100 25,675 526
(c) Investments and Farmer Mac Guaranteed Securities
Farmer Mac classifies investments and Farmer Mac Guaranteed Securities that
Farmer Mac has the positive intent and ability to hold to maturity as
held-to-maturity. Such securities are carried at cost, adjusted for unamortized
premiums and unearned discounts. Securities for which Farmer Mac does not have
the positive intent to hold to maturity are classified as available-for-sale and
are carried at estimated fair value. Unrealized gains and losses on
available-for-sale securities are reported as accumulated other comprehensive
income/(loss) in stockholders' equity. Securities classified as trading
securities are reported at their fair value, with unrealized gains and losses
included in earnings. Gains and losses on the sale of available-for-sale and
trading securities are determined using the specific identification cost method.
Farmer Mac determines the fair value of Farmer Mac Guaranteed Securities based
on the present value of the associated expected future cash flows. In estimating
the present value of the expected future cash flows, management is required to
make estimates and assumptions. The key estimates and assumptions include future
discount rates and collateral repayment rates. Premiums, discounts and other
deferred costs are amortized to interest income over the estimated life of the
security using the effective interest method. Interest income on investments and
Farmer Mac Guaranteed Securities is recorded on an accrual basis unless the
collection of interest is considered doubtful.
Farmer Mac receives yield maintenance payments when certain loans or loans
underlying Farmer Mac Guaranteed Securities prepay. These payments mitigate
Farmer Mac's exposure to reinvestment risk and are calculated such that, when
reinvested with the prepaid principal, they should generate substantially the
same cash flows that would have been generated had the loans not prepaid. Yield
maintenance payments are recognized as interest income in the consolidated
statements of operations upon receipt.
(d) Loans
Loans for which Farmer Mac has the positive intent and ability to hold for the
foreseeable future are classified as held for investment and reported at their
unpaid principal balance net of unamortized purchase discounts or premiums. The
net unamortized purchase premiums as of December 31, 2003 and 2002 were $13.3
million and $16.7 million, respectively. Loans that Farmer Mac does not intend
to hold for the foreseeable future are classified as held for sale and reported
at the lower of cost or market using the aggregate method.
(e) Securitization of Loans
Asset securitization involves the transfer of financial assets to another entity
in exchange for cash and/or beneficial interests in the assets transferred.
Farmer Mac transfers agricultural mortgage loans into trusts that are used as
vehicles for the securitization of the transferred loans. The trusts issue
Farmer Mac Guaranteed Securities that are beneficial interests in the assets of
the trusts, to either Farmer Mac or third party investors. In most cases, Farmer
Mac retains all of the securities issued by the trusts. From time to time, the
securities issued by the trusts are sold to third party investors.
Farmer Mac guarantees the timely payment of principal and interest on the
securities issued by the trusts and receives guarantee fees as compensation for
its guarantee. Farmer Mac recognizes guarantee fees on an accrual basis over the
terms of the Farmer Mac Guaranteed Securities, which coincide with the terms of
the underlying loans. As such, no guarantee fees are unearned at the end of any
reporting period. If Farmer Mac purchases a delinquent loan underlying a Farmer
Mac Guaranteed Security, Farmer Mac stops accruing the guarantee fee upon the
loan purchase.
Prior to April 1, 2001, Farmer Mac accounted for the transfer of loans into
trusts in accordance with Statement of Financial Accounting Standards No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, ("SFAS 125"). Under that standard, each trust met the
requirements of a "qualifying special purpose entity." Therefore, the trusts
were not consolidated into Farmer Mac's consolidated financial statements. The
Farmer Mac Guaranteed Securities securitized prior to April 1, 2001 that Farmer
Mac retained, have been recorded in Farmer Mac's consolidated financial
statements as Farmer Mac Guaranteed Securities and are classified and accounted
for in accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, see Note 2(c).
Statement of Financial Accounting Standards No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS
140"), which became effective for transfers of financial assets after March 31,
2001, expanded the requirements for "qualifying special purposes entities." The
trust vehicles used in loan securitization transactions after March 31, 2001, in
which Farmer Mac retains all the Farmer Mac Guaranteed Securities issued by the
trust, do not meet the "qualifying special purpose entity" requirements of SFAS
140. Accordingly, Farmer Mac accounts for the Farmer Mac Guaranteed Securities
it retains in these transactions as loans in its consolidated balance sheets and
the guarantee fees earned on those assets are recorded as interest income in the
consolidated statements of operations.
Transfers of agricultural mortgage loans into trusts in which Farmer Mac
surrenders control over the financial assets and receives compensation other
than beneficial interests in the underlying loans are recorded as sales under
both SFAS 125 and SFAS 140. The carrying amount of the assets that are
transferred in these transactions is allocated between the assets sold and the
interests retained, if any, based on the relative fair values of each at the
date of the transfer. A gain or loss is included in income for the difference
between the allocated carrying amount of the asset sold and the net cash
proceeds received. In 2003, 2002 and 2001, Farmer Mac did not realize any gains
or losses upon the sale of loans accounted for as sales under SFAS 125 or SFAS
140.
When particular criteria are met, such as the default of the borrower, Farmer
Mac has the option to repurchase the defaulted loans underlying Farmer Mac
Guaranteed Securities (these options are commonly referred to as
"removal-of-account" provisions). Farmer Mac records these loans in the
consolidated financial statements during the period in which Farmer Mac has the
option to repurchase the loans and therefore regains effective control over the
transferred loans.
(f) Non-Performing Loans
Non-performing loans are loans for which it is probable that Farmer Mac will be
unable to collect all amounts due according to the contractual terms of the loan
agreement and include all loans 90 days or more past due. When a loan becomes 90
days past due, interest due on the loan is not recognized as interest income
until the payment is received from the borrower. Interest previously accrued on
such loans or interest advanced to security holders is charged against the
allowance for losses when deemed uncollectible.
(g) Real Estate Owned
Real estate owned consists of real estate acquired through foreclosure and is
recorded at fair value less estimated selling costs at acquisition. Fair value
is determined by appraisal or other appropriate valuation method. Losses
estimated at the time of acquisition are charged to the allowance for loan
losses. Subsequent to the acquisition, management continues to perform periodic
valuations and establishes a valuation allowance for real estate owned through a
charge to income in the provision for losses if the carrying value of a property
exceeds its estimated fair value less estimated selling costs.
Farmer Mac contracts with third parties to operate or preserve real estate owned
and offered for sale when appropriate to maintain property value.
Non-recoverable costs are expensed as incurred and those related to the
production of saleable goods or crops are capitalized to the extent they are
realizable. As revenues from the sale of goods or crops are received, they are
applied first to any capitalized costs and any remaining revenues offset
non-recoverable expenses incurred.
(h) 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.
Farmer Mac recognizes contracts and commitments as financial derivatives in
accordance with the Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended ("SFAS 133").
Effective January 1, 2001, Farmer Mac adopted SFAS 133, which establishes
accounting and reporting standards for financial derivatives including certain
financial derivatives embedded in other contracts and for hedging activities.
The adoption of SFAS 133 resulted in a $0.7 million charge, net of tax, reported
as a cumulative effect of a change in accounting principles (net of taxes) and
an $8.6 million decrease, net of tax, in stockholders' equity in Farmer Mac's
consolidated financial statements as of and for the year ended December 31,
2001.
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 SFAS 133 are not accounted for as
hedges and changes in the fair values of those financial derivatives are
reported as gains or losses on financial derivatives and trading assets in the
consolidated statements of operations.
Fair value hedges are accounted for by recording the fair value of the financial
derivative and the change in fair value of the asset attributable to the risk
being hedged on the consolidated balance sheets with the net difference reported
as ineffectiveness in the consolidated statements of operations as a gain or
loss on financial derivatives. The adjustment to the hedged asset is included in
the reported amount of the hedged item. Cash payments or receipts and related
amounts accrued during the reporting period on financial derivatives in fair
value hedging relationships are recorded as an adjustment to the interest income
on the hedged asset. If a financial derivative in a fair value hedging
relationship is no longer effective, is de-designated from its hedging
relationship, or is terminated, Farmer Mac discontinues fair value hedge
accounting for the financial derivative and the hedged item. Accordingly, the
hedged item is no longer adjusted for changes in its fair value attributable to
the risk being hedged. The accumulated adjustment of the carrying amount of the
hedged asset is recognized in earnings as an adjustment to interest income over
the expected remaining life of the asset using the effective interest rate
method.
Cash flow hedges are accounted for by recording the fair value of the financial
derivative as either a freestanding asset or a freestanding liability on the
consolidated balance sheets, with the effective portion of the change in fair
value of the financial derivative recorded in accumulated other comprehensive
income/(loss) within stockholders' equity, net of tax. Amounts are reclassified
from accumulated other comprehensive income/(loss) to interest income or expense
in the consolidated statements of operations in the period the hedged forecasted
transaction affects earnings. Any ineffective portion of the change in fair
value of the financial derivative is reported as a gain or loss on financial
derivatives and trading assets in the consolidated statements of operations. If
it becomes probable that a hedged forecasted transaction will not occur, any
amounts included in accumulated other comprehensive income related to the
specific hedging relationship are reclassified from accumulated other
comprehensive income/(loss) to the consolidated statements of operations and
reported as gains or losses on financial derivatives and trading assets.
Gains and losses on financial derivatives not considered highly effective in
hedging the change in fair value or expected cash flows of the related hedged
item are recognized in the consolidated statement of operations as a gain or
loss on financial derivatives and trading assets, as these derivatives do not
qualify for hedge accounting under SFAS 133. If a financial derivative has not
been or will not continue to be highly effective as a hedge, hedge accounting is
discontinued prospectively and the financial derivative continues to be recorded
at fair value with changes in fair value reported as a gain or loss on financial
derivatives and trading assets in the consolidated statement of operations.
(i) Notes Payable
Notes payable are classified as due within one year or due after one year based
on their contractual maturities. Debt issuance costs are deferred and amortized
to interest income or expense using the effective interest method over the
estimated life of the related debt.
(j) Allowance for Losses
Farmer Mac maintains an allowance and contingent obligation for probable losses
("allowance for losses") to cover estimated probable losses on loans held for
investment, 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"), as amended. 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 substantially the same, i.e.,
the underlying agricultural mortgage loans all meet the same credit underwriting
and appraisal standards.
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. Charge-offs represent losses on the outstanding
principal balance, any interest payments previously accrued or advanced and
expected costs of liquidation.
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
modified by the application of management's judgment, as required to take key
factors into account, 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.
In addition, Farmer Mac specifically analyzes certain assets in its portfolio
for impairment. 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.
For this analysis and the allocation of specific reserves as of December 31,
2003, Farmer Mac expanded the population of loans specifically reviewed to
include:
o 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);
o loans for which Farmer Mac had adjusted the timing of borrowers'
payment schedules within the past three years, but still expects to
collect all amounts due and has not made economic concessions; and
o additional performing loans that have previously been delinquent or
are secured by real estate that produces commodities currently under
stress.
Prior to December 31, 2003, the review consisted only of non-performing assets.
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 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 Farmer Mac's 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 more representative of Farmer
Mac's portfolio and credit underwriting standards; and
o considers the effects of the ageing of the loan portfolio along the
expected loss curves associated with individual origination years,
including the segments that are entering into or coming out of their
peak default years.
When certain criteria are met, such as the default of the borrower, Farmer Mac
may, in its sole discretion, repurchase the defaulted loans underlying Farmer
Mac Guaranteed Securities and is obligated to purchase those underlying an
LTSPC. These acquisitions are recorded in the consolidated financial statements
at their fair value. Fair value is determined by appraisal or management's
estimate of discounted collateral value.
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.
(k) Earnings Per Common Share
Basic earnings per common share are based on the weighted-average number of
common shares outstanding. Diluted earnings per share is based on the
weighted-average number of common shares outstanding adjusted to include all
potentially dilutive common stock options. The following schedule reconciles
basic and diluted earnings per common share ("EPS") for the years ended December
31, 2003, 2002 and 2001.
2003 2002 2001
-------------------------------- ------------------------------- -------------------------------
Dilutive Dilutive Dilutive
Basic stock Diluted Basic stock Diluted Basic stock Diluted
EPS options EPS EPS options EPS EPS options EPS
---------- ----------- --------- --------- ---------- ---------- --------- ---------- ----------
(in thousands, except per share amounts)
Net income available to $ 25,030 $ 25,030 $ 21,295 $ 21,295 $ 16,280 $ 16,280
common stockholders
Weighted-average 11,742 307 12,049 11,613 437 12,050 11,329 440 11,769
shares
Earnings per
common share $ 2.13 $ 2.08 $ 1.83 $ 1.77 $ 1.44 $ 1.38
Effects of:
Cumulative effect of
change in accounting
principles - - - - $ (0.06) $ (0.07)
(l) Income Taxes
Deferred federal income tax assets and liabilities are established for temporary
differences between financial and taxable income and are measured using the
current enacted statutory tax rate. Income tax expense is equal to the income
taxes payable in the current year plus the net change in the deferred tax asset
or liability balance.
(m) Stock-Based Compensation
Farmer Mac accounts for its stock-based employee compensation plans, which are
described more fully in Note 9, 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.
Accordingly, no compensation expense was recognized in 2003, 2002 and 2001 for
employee stock option plans. 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 years ended December 31, 2003, 2002
and 2001 would have been reduced to the pro forma amounts indicated in the
following table:
For the Years Ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------- -------------
(in thousands, except per share amounts)
Net income available to common
stockholders, as reported $ 25,030 $ 21,295 $ 16,280
Add back: Restricted stock
compensation expense included in
reported net income, net of taxes 304 617 577
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method
for all awards, net of tax (2,833) (2,990) (2,662)
------------ ------------- -------------
Pro forma net income available to
common stockholders $ 22,501 $ 18,922 $ 14,195
------------ ------------- -------------
Earnings per share:
Basic - as reported $ 2.13 $ 1.83 $ 1.44
Basic - pro forma 1.92 $ 1.63 $ 1.25
Diluted - as reported $ 2.08 $ 1.77 $ 1.38
Diluted - pro forma 1.87 $ 1.57 $ 1.21
The underlying assumptions to these fair value calculations are presented in
Note 9.
(n) Comprehensive Income/(Loss)
Comprehensive income/(loss) represents all changes in stockholders' equity
except those resulting from investments by or distributions to stockholders, and
is comprised of net income available to common stockholders, unrealized gains
and losses on securities available-for-sale and the effective portion of the
unrealized gains and losses on financial derivatives in cash flow hedge
relationships, net of reclassification adjustments and related taxes.
Comprehensive income is reported in the consolidated statements of changes in
stockholders' equity. The following table presents Farmer Mac's accumulated
other comprehensive income/(loss) as of December 31, 2003, 2002 and 2001.
As of December 31,
2003 2002 2001
------------- ------------ -------------
(in thousands)
Net unrealized gains on securities
available-for-sale, net of taxes $ 43,258 $ 62,321 $ 23,898
Net unrealized losses on financial derivatives in
cash flow hedge relationships, net of taxes (45,553) (62,728) (15,503)
------------- ------------ -------------
Accumulated other comprehensive income/(loss), net of tax $ (2,295) $ (407) $ 8,395
------------- ------------ -------------
(o) Long-Term Standby Purchase Commitments ("LTSPCs")
Farmer Mac accounts for its LTSPCs in accordance with the consensus reached in
EITF 85-20, Recognition of Fees for Guaranteeing a Loan. As is specified in this
consensus, Farmer Mac recognizes LTSPC commitment fees over the life of the
underlying loans. As such, no guarantee fees or commitment fees are unearned at
the end of any reporting period. If Farmer Mac purchases a defaulted loan
underlying an LTSPC, Farmer Mac stops accruing the commitment fee upon the loan
purchase. If the loan becomes current and is repurchased from Farmer Mac under
the terms of an LTSPC, Farmer Mac resumes accrual of the commitment fee. See
Note 2(j) for Farmer Mac's policy for estimating probable losses for LTSPCs.
(p) New Accounting Standards
On January 1, 2003, Farmer Mac adopted the liability recognition provisions of
the Financial Accounting Standards Board Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45") which requires 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. In December of 2003,
the SEC provided additional guidance on the "day two" accounting for these
financial instruments. In accordance with this guidance, Farmer Mac has adopted
the amortized cost model for day two accounting. This guidance will be applied
prospectively for guarantees and commitments recorded at December 31, 2003 and
all guarantees and commitments issued or modified on or after January 1, 2004.
In December 2003, the American Institute of Certified Public Accountants issued
Statement of Position 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer ("SOP 03-3"). SOP 03-3 addresses accounting for
differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
acquired in a transfer if those differences are attributable, at least in part,
to credit quality. Specifically, SOP 03-3 limits the yield that may be accreted
and prohibits the "carry-over" of a valuation allowance for all impaired loans
that are within the scope of SOP 03-3. SOP 03-3 is effective for loans acquired
in fiscal years beginning after December 15, 2004.
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 eliminated the classification of most debt extinguishments or
repurchases as extraordinary items, as reflected in Farmer Mac's consolidated
financial statements. All prior period repurchases of debt have been
reclassified to conform to the new classification.
(q) Reclassifications
Certain reclassifications of prior year information were made to conform to the
2003 presentation.
Farmer Mac has reclassified items on its consolidated statements of operations
to present more clearly the costs related to carrying its real estate owned and
the gains or losses incurred upon the ultimate disposition of real estate owned.
Previously, gains and losses on the sale of real estate owned were reflected as
adjustments to the allowance for losses as either a charge-off or recovery.
Those amounts have been reclassified and are reported separately as gains or
losses on the sale of real estate owned. Gains on the sale of real estate owned
were $0.2 million, $0.1 million and $0.1 million for each of the years ended
December 2003, 2002 and 2001, respectively.
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 years ended December 31, 2003, 2002 and 2001, this
reclassification resulted in increases of net interest income and offsetting
decreases in gains and losses on financial derivatives and trading assets of
$0.2 million, $4.1 million and $2.3 million, respectively.
Farmer Mac reclassified its presentation of the allowance for losses and the
provisions for losses as of and for the year ended December 31, 2001 to conform
to the current year presentation. The following table summarizes the
reclassifications on the 2001 consolidated financial statements to conform to
the current presentation.
2001 Reclass- 2003
Presentation ifications Presentation
--------------- ----------- ---------------
(in thousands)
Balance sheet reclassifications:
Allowance for loan losses $ - $ 1,352 $ 1,352
Reserve for losses 15,884 (1,352) 14,532
--------------- ----------- ---------------
Total $ 15,884 $ - $ 15,884
--------------- ----------- ---------------
Statement of operations reclassifications:
Provision for loan losses $ - $ 600 $ 600
(Gain)/loss on sale of real estate owned - (61) (61)
Provision for losses 6,725 (539) 6,186
--------------- ----------- ---------------
Total $ 6,725 $ - $ 6,725
--------------- ----------- ---------------
3. RELATED PARTY TRANSACTIONS
As provided by Farmer Mac's statutory charter, only banks, insurance companies
and other financial institutions or similar entities may hold Farmer Mac's Class
A voting common stock and only institutions of the Farm Credit System may hold
Farmer Mac's Class B voting common stock. Farmer Mac's statutory charter also
provides that Class A stockholders elect five members of Farmer Mac's 15-member
board of directors and that Class B stockholders elect five members of the board
of directors. Additionally, in order to participate in the Farmer Mac I program,
a financial institution must own a requisite amount of Farmer Mac Class A or
Class B voting common stock, based on the size and type of institution. As a
result of these requirements, Farmer Mac conducts business with related parties
in the normal course of Farmer Mac's business. Farmer Mac considers that all
such transactions were "arm's length" and has neither made to nor received
concessions from these institutions that were outside the range of those made
and received in other, similar transactions with non-related parties.
During 2003, Farmer Mac purchased newly originated and current seasoned eligible
loans from 81 entities, placed loans under LTSPCs with 11 entities and conducted
Farmer Mac II transactions with 150 entities operating throughout the United
States. During 2003, the top ten institutions generated 80.8 percent of the
total Farmer Mac I cash window loan volume. During 2002, Farmer Mac purchased
newly originated and current seasoned eligible loans from 79 entities, placed
loans under LTSPCs with 16 entities and conducted Farmer Mac II transactions
with 143 entities operating throughout the United States. During 2002, the top
10 institutions generated 90.0 percent of the total Farmer Mac I cash window
loan volume.
For all of the transactions discussed below, Farmer Mac has a related party
relationship with each entity resulting from a member of Farmer Mac's board of
directors being affiliated with the entity in some capacity. These transactions
were conducted in the ordinary course of business, with terms and conditions
comparable to those availible to any other third party.
The following is a summary of the related party activity for the year ended
December 31, 2003:
o The following transactions occurred between Zions First National Bank
or its affiliates ("Zions"), which is Farmer Mac's largest holder of
Class A voting common stock and a major holder of Class C non-voting
common stock, and Farmer Mac during 2003:
o Farmer Mac purchased 148 loans having an aggregate principal
amount of approximately $74.5 million from Zions under the Farmer
Mac I program, representing approximately 38.7 percent of that
program's volume for the year;
o Farmer Mac purchased six USDA-guaranteed portions having an
aggregate principal amount of approximately $1.7 million from
Zions under the Farmer Mac II program, representing approximately
0.6 percent of that program's volume for the year;
o Farmer Mac sold approximately $75.8 million of Farmer Mac
Guaranteed Securities to Zions at no gain or loss;
o Farmer Mac and Zions entered into interest rate swap transactions
having an aggregate notional principal amount of approximately
$28.6 million (the aggregate outstanding notional principal
amount all interest rate swap transactions between Farmer Mac and
Zions was $307.6 million as of December 31, 2003);
o Farmer Mac received approximately $1.4 million in guarantee fees
on Farmer Mac Guaranteed Securities whose underlying loans were
swapped or sold to Farmer Mac by Zions;
o Farmer Mac paid Zions approximately $48,000 in underwriting and
loan file review fees;
o Zions received approximately $1.3 million in servicing fees for
acting as a central servicer in the Farmer Mac I program;
o Zions received approximately $225,500 in fees for acting as agent
with respect to approximately $154.7 million of Farmer Mac
medium-term notes; and
o Zions received approximately $18,400 in commissions for acting as
dealer with respect to approximately $189.0 million par value of
Farmer Mac discount notes;
o The following transactions occurred between AgFirst Farm Credit Bank
("AgFirst"), which is a major holder of Class B voting common stock,
and Farmer Mac during 2003:
o Farmer Mac purchased four loans having an aggregate principal
amount of approximately $0.9 million from AgFirst under the
Farmer Mac I program, representing approximately 0.5 percent of
that program's volume for the year;
o Farmer Mac extended LTSPCs on 1,016 loans having an aggregate
principal balance of approximately $172.5 million to AgFirst (the
aggregate outstanding principal balance of the 3,843 total loans
underlying LTSPCs with AgFirst was $545.9 million as of December
31, 2003);
o For the year ended December 31, 2003, Farmer Mac guaranteed
approximately $393.0 million of Farmer Mac Guaranteed Securities
backed by rural housing loans under which Farmer Mac is
second-loss guarantor for the last 10 percent of the securities;
the total guaranteed amount outstanding as of December 31, 2003
was $741.5 million;
o Farmer Mac received approximately $0.4 million in guarantee fees
and approximately $2.1 million in commitment fees attributable to
transactions with AgFirst;
o AgFirst received approximately $107,000 in servicing fees for
acting as a central servicer in the Farmer Mac I program;
o As of December 31, 2003, Farmer Mac owned approximately $88.0
million of fixed rate preferred stock issued by AgFirst, which
Farmer Mac purchased on the open market prior to 2003.
o During 2003, Farmer Mac extended LTSPCs on 287 loans having an
aggregate principal balance of approximately $174.3 million to Farm
Credit West, ACA or its affiliates ("FCW"), and Farmer Mac received
commitment fees of approximately $1.9 million. During third quarter
2003, FCW exercised the conversion feature incorporated in all
existing LTSPCs, and Farmer Mac converted $722.3 million of FCW's
LTSPCs into a Farmer Mac I Guaranteed Security in a swap transaction.
Farmer Mac received guarantee fees of approximately $1.7 million on
FCW's Farmer Mac I Guaranteed Security during 2003. As of December 31,
2003, the aggregate outstanding principal balance of the 157 loans
underlying LTSPCs with FCW was $106.2 million, and the aggregate
outstanding balance of the 885 loans underlying FCW's Farmer Mac I
Guaranteed Security was $680.2 million.
o During 2003, Farmer Mac extended LTSPCs on 295 loans having an
aggregate principal balance of approximately $47.4 million to Farm
Credit Bank of Texas (the aggregate outstanding principal balance of
the 275 loans underlying LTSPCs with AgStar Financial Services, ACA
was $40.8 million as of December 31, 2003), and Farmer Mac received
commitment fees of approximately $89,000.
o During 2003, Farmer Mac purchased 37 USDA-guaranteed portions having
an aggregate principal amount of approximately $8.7 million from Bath
State Bank under the Farmer Mac II program, and Farmer Mac received
approximately $45,000 in guarantee fees on Farmer Mac II Guaranteed
Securities whose underlying USDA-guaranteed portions were sold to
Farmer Mac by Bath State Bank.
o During 2003, Farmer Mac extended LTSPCs on 2,347 loans having an
aggregate principal balance of approximately $194.2 million to AgStar
Financial Services, ACA (the aggregate outstanding principal balance
of the 3,570 loans underlying LTSPCs with AgStar Financial Services,
ACA was $265.6 million as of December 31, 2003), and Farmer Mac
received commitment fees of approximately $0.9 million.
The following is a summary of the related party activity for the year ended
December 31, 2002:
o The following transactions occurred between Zions and Farmer Mac
during 2002:
o Farmer Mac purchased 183 loans having an aggregate principal
amount of approximately $77.2 million from Zions under the Farmer
Mac I program, representing approximately 4.1 percent of that
program's volume for the year;
o Farmer Mac purchased 16 USDA-guaranteed portions having an
aggregate principal amount of approximately $3.6 million from
Zions under the Farmer Mac II program, representing approximately
2.1 percent of that program's volume for the year;
o Farmer Mac sold approximately $47.7 million of Farmer Mac
Guaranteed Securities to Zions at no gain or loss;
o Farmer Mac and Zions entered into interest rate swap transactions
having an aggregate notional principal amount of approximately
$41.6 million (the aggregate outstanding notional principal
amount all interest rate swap transactions between Farmer Mac and
Zions was $326.8 million as of December 31, 2002);
o Farmer Mac received approximately $1.0 million in guarantee fees
on Farmer Mac Guaranteed Securities whose underlying loans were
swapped or sold to Farmer Mac by Zions;
o Farmer Mac paid Zions approximately $51,000 in underwriting and
loan file review fees;
o Zions received approximately $1.2 million in servicing fees for
acting as a central servicer in the Farmer Mac I program;
o Zions received approximately $43,000 in fees for acting as agent
with respect to approximately $28.3 million of Farmer Mac
medium-term notes; and
o Zions received approximately $89,000 in commissions for acting as
dealer with respect to approximately $738.7 million par value of
Farmer Mac discount notes.
o The following transactions occurred between AgFirst and Farmer Mac
during 2002:
o Farmer Mac extended LTSPCs on 1,810 loans having an aggregate
principal balance of approximately $314.1 million to AgFirst (the
aggregate outstanding principal balance of the 2,840 total loans
underlying LTSPCs with AgFirst was $431.3 million as of December
31, 2002);
o Farmer Mac guaranteed approximately $161.0 million of Farmer Mac
Guaranteed Securities backed by rural housing loans under which
Farmer Mac is second-loss guarantor for the last 10 percent of
the securities;
o Farmer Mac received approximately $0.2 million in guarantee fees
and approximately $1.3 million in commitment fees attributable to
transactions with AgFirst; and
o AgFirst received approximately $122,000 in servicing fees for
acting as a central servicer in the Farmer Mac I program.
o During 2002, Farmer Mac extended LTSPCs on 389 loans having an
aggregate principal balance of approximately $388.6 million to FCW
(the aggregate outstanding principal balance of the 777 loans
underlying LTSPCs with FCW was $712.4 million as of December 31,
2002), and Farmer Mac received commitment fees of approximately $2.8
million.
o During 2002, Farmer Mac purchased 28 USDA-guaranteed portions having
an aggregate principal amount of approximately $4.6 million from Bath
State Bank under the Farmer Mac II program, and Farmer Mac received
approximately $50,000 in guarantee fees on Farmer Mac II Guaranteed
Securities whose underlying USDA-guaranteed portions were sold to
Farmer Mac by Bath State Bank.
o During 2002, Farmer Mac extended LTSPCs on 56 loans having an
aggregate principal balance of approximately $4.5 million to AgStar
Financial Services, ACA (the aggregate outstanding principal balance
of the 1,540 loans underlying LTSPCs with AgStar Financial Services,
ACA was $103.3 million as of December 31, 2002), and Farmer Mac
received commitment fees of approximately $0.5 million.
o During 2002, GreenPoint Financial Corp. or its affiliates received
approximately $25,000 in servicing fees for acting as a central
servicer in the Farmer Mac I program.
As of December 31, 2003 and 2002, Farmer Mac had net interest payable to Zions
or its affiliates of approximately $6.2 million and $7.3 million, respectively.
As of December 31, 2003 and 2002, Farmer Mac had the following commitment fees
receivable from related parties:
As of As of
December 31, December 31,
2003 2002
----------- ----------
(in thousands)
Farm Credit West, ACA or its affiliates $ 321 $ 291
AgStar Financial Services, ACA 100 38
AgFirst Farm Credit Bank 380 307
4. INVESTMENT SECURITIES
Farmer Mac's investment portfolio is comprised of the following:
December 31, December 31,
2003 2002
------------- ------------
(in thousands)
Held-to-maturity $ 10,604 $ 10,604
Available-for-sale 1,039,673 795,234
Trading 14,505 24,571
------------- ------------
$ 1,064,782 $ 830,409
------------- ------------
The amortized cost and estimated fair values of investments as of December 31,
2003 and 2002 were as follows. Fair value was estimated based on quoted market
prices.
2003 2002
--------------------------------------------------- ---------------------------------------------
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gain Loss Fair Value Cost Gain Loss Fair Value
------------ ------------ ------------ ------------ ----------- ---------- ----------- -----------
(in thousands)
Held-to-maturity:
Cash investment in
fixed rate guaranteed
investment contract $ 10,604 $ 342 $ - $ 10,946 $ 10,604 $ 890 $ - $ 11,494
------------ ------------ ------------ ------------ ----------- ---------- ----------- -----------
Total held-to-maturity $ 10,604 $ 342 $ - $ 10,946 $ 10,604 $ 890 $ - $ 11,494
------------ ------------ ------------ ------------ ----------- ---------- ----------- -----------
Available-for-sale:
Floating rate
asset-backed securities $ 78,817 $ 682 $ - $ 79,499 $ 12,543 $ - $ (345) $ 12,198
Floating rate corporate
debt securities 370,145 573 (100) 370,618 344,330 - (1,464) 342,866
Fixed rate corporate
debt securities - - - - 34,000 552 - 34,552
Fixed rate preferred
stock 186,253 12,196 - 198,449 186,799 11,511 - 198,310
Fixed rate
commercial paper 120,452 - - 120,452 - - - -
Floating rate
municipal bonds 2,820 - - 2,820 - - - -
Floating rate mortgage-
backed securities 268,522 198 (885) 267,835 207,394 - (86) 207,308
------------ ------------ ------------ ------------ ----------- ---------- ----------- -----------
Total available-for-sale $1,027,009 $ 13,649 $ (985) $1,039,673 $785,066 $ 12,063 $ (1,895) $ 795,234
------------ ------------ ------------ ------------ ----------- ---------- ----------- -----------
Trading:
Adjustable rate mortgage-
backed securities $ 14,296 $ 209 $ - $ 14,505 $ 23,944 $ 627 $ - $ 24,571
------------- ----------- ----------- ------------------------ ----------- ----------- -----------
Total trading $ 14,296 $ 209 $ - $ 14,505 $ 23,944 $ 627 $ - $ 24,571
------------- ----------- ----------- ------------------------ ----------- ----------- -----------
As of December 31, 2003 no unrealized losses were incurred on trading and
held-to-maturity portfolios. Unrealized losses on available-for-sale securities
were as follows as of December 31, 2003.
Available-for-Sale
Securities
---------------------------------
Fair Value Unrealized Loss
------------- ----------------
(in thousands)
Unrealized loss position
for less than 12 months $ 258,893 $ (961)
Unrealized loss position
for more than 12 months 10,171 (24)
------------- --------------
Total $ 269,064 $ (985)
------------- --------------
The amortized cost, fair value and yield of investments by remaining contractual
maturity as of December 31, 2003 are set forth below. Asset- and mortgage-backed
securities are included based on their final maturities, although the actual
maturities may differ due to prepayments of the underlying assets or mortgages.
As of December 31, 2003 Farmer Mac owned one held-to-maturity investment that
matures after ten years with an amortized cost of $10.6 million, a fair value of
$10.9 million, and a yield of six percent.
Available-for-Sale Trading Total
----------------------------------- -------------------------------- ---------------------------------
Amortized Amortized Amortized
Cost Fair Value Yield Cost Fair Value Yield Cost Fair Value Yield
----------------------------------- -------------------------------- ---------------------------------
(dollars in thousands)
Due within one year $ 218,891 $ 218,949 1.34% $ - $ - - $ 218,891 $ 218,949 1.34%
Due after one year
through five years 281,701 282,130 1.39% - - - 281,701 282,130 1.39%
Due after five years
through ten years 187,371 199,569 8.07% - - - 187,371 199,569 8.07%
Due after ten years 339,046 339,025 1.60% 14,296 14,505 4.38% 353,342 353,530 1.71%
--------------------------------- ------------- -------------------- ---------------------------------
Total $1,027,009 $1,039,673 2.67% $ 14,296 $ 14,505 4.38% $1,041,305 $1,054,178 2.69%
--------------------------------- ------------- -------------------- ---------------------------------
5. FARMER MAC GUARANTEED SECURITIES
As of December 31, 2003 and 2002, Farmer Mac on-balance sheet Guaranteed
Securities included the following:
As of December 31,
----------------------------------------------------------------------------
2003 2002
----------------------------------- ---------------------------------------
Held-to- Available-for Held-to- Available-for
Maturity Sale Total Maturity Sale Total
---------- ------------- ---------- ---------- --------------- ------------
(in thousands)
Farmer Mac I $ 49,901 $779,560 $829,461 $ 60,519 $969,234 $1,029,753
Farmer Mac II 678,673 - 678,673 578,754 - 578,754
---------- ------------- ---------- ---------- --------------- ------------
Total $728,574 $779,560 $1,508,134 $639,273 $969,234 $1,608,507
---------- ------------- ---------- ---------- --------------- ------------
The following table sets forth the amortized costs, unrealized gains and losses
and estimated fair values of the Farmer Mac Guaranteed Securities as of December
31, 2003 and 2002.
As of December 31,
----------------------------------------------------------------------------
2003 2002
----------------------------------- ---------------------------------------
Held-to- Available-for Held-to- Available-for
Maturity Sale Total Maturity Sale Total
---------- ------------- ---------- ---------- -------------- ------------
(in thousands)
Amortized cost $728,574 $725,674 $1,454,248 $639,273 $883,120 $1,522,393
Unrealized gains 14,434 53,886 68,320 24,376 86,114 110,490
Unrealized losses - - - - - -
---------- ------------- ---------- ---------- -------------- ------------
Fair value $743,008 $779,560 $1,522,568 $663,649 $969,234 $1,632,883
---------- ------------- ---------- ---------- -------------- ------------
Of the total Farmer Mac Guaranteed Securities held by Farmer Mac as of December
31, 2003, $969.6 million are fixed-rate or reprice after one year.
The table below presents a sensitivity analysis for Farmer Mac's retained Farmer
Mac Guaranteed Securities as of December 31, 2003.
December 31, 2003
-----------------------
(dollars in thousands)
Fair value of beneficial interests retained
in Farmer Mac Guaranteed Securities $ 1,522,568
Weighted-average remaining life (in years) 4.7
Weighted-average prepayment speed (annual rate) 9.9%
Effect on fair value of a 10% adverse change $(811)
Effect on fair value of a 20% adverse change $(1,531)
Weighted-average discount rate 4.6%
Effect on fair value of a 10% adverse change $(19,299)
Effect on fair value of a 20% adverse change $(38,445)
These sensitivities are hypothetical. 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. See Note 8 for more information
regarding this credit risk. 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 December 31, For the Year Ended December 31,
------------------------------------------ -------------------------------
2003 2002 2003 2002 2003 2002 2001
----------- ---------- -------- --------- ---------- --------------------
(in thousands)
On-balance sheet assets:
Farmer Mac I:
Loans $ 976,280 $ 949,378 $ 22,721 $ 54,679 $ 3,219 $ 3,728 $ 1,325
Guaranteed Securities 777,134 946,014 5,368 - 440 368 (211)
Farmer Mac II:
Guaranteed Securities 678,229 578,681 - - - - -
----------- ---------- -------- --------- -------- -------- --------
Total on-balance sheet $ 2,431,643 $ 2,474,073 $ 28,089 $ 54,679 $ 3,659 $ 4,096 $ 1,114
----------- ---------- -------- --------- -------- -------- --------
Off-balance sheet assets:
Farmer Mac I:
LTSPCs $ 2,348,703 $ 2,681,240 $ 1,560 $ 3,535 $ - $ - $ -
Guaranteed Securities 952,134 299,940 407 - - - 1,050
Farmer Mac II:
Guaranteed Securities 51,241 67,109 - - - - -
----------- ---------- -------- --------- -------- -------- --------
Total off-balance sheet $ 3,352,078 $ 3,048,289 $ 1,967 $ 3,535 $ - $ - $ 1,050
----------- ---------- -------- --------- -------- -------- --------
Total $ 5,783,721 $ 5,522,362 $ 30,056 $ 58,214 $ 3,659 $ 4,096 $ 2,164
----------- ---------- -------- --------- -------- -------- --------
(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.
90-day deliquencies do not include deliquencies on Farmer Mac II Guaranteed
Securities because the portion of loans underlying these securities are
obligations backed by full faith credit of the United States.
6. FINANCIAL DERIVATIVES
Farmer Mac enters into interest rate swap contracts to adjust the
characteristics of Farmer Mac's debt to match more closely the cash flow and
duration characteristics of the Corporation's assets and to derive an overall
lower effective fixed-rate cost of borrowing than would otherwise be available
to Farmer Mac in the conventional debt market. Farmer Mac is also required to
recognize certain contracts and commitments as derivatives when the
characteristics of those contracts and commitments meet the definition of a
derivative as promulgated by SFAS 133. Farmer Mac enters into financial
derivatives as an end-user, not for trading or speculative purposes. As with any
financial instrument, financial derivatives have inherent risks: market risk and
credit risk.
Market Risk:
Market risk is the risk of an adverse effect resulting from changes in interest
rates or spreads on the value of a financial instrument. Farmer Mac manages
market risk associated with financial derivatives by establishing and monitoring
limits as to the degree of risk that may be undertaken. This risk is
periodically measured as part of Farmer Mac's overall risk monitoring processes,
which include market value of equity measurements, net interest income modeling
and other measures.
Credit Risk:
Credit risk is the risk that a counterparty will fail to perform according to
the terms of a financial contract in which Farmer Mac has an unrealized gain.
Credit losses could occur in the event of non-performance by counterparties to
the financial derivative contracts. Farmer Mac mitigates this counterparty
credit risk by contracting only with counterparties that have investment grade
credit ratings (i.e., at least BBB), establishing and maintaining collateral
requirements based upon credit ratings and entering into netting agreements.
Netting agreements provide for the calculation of the net amount of all
receivables and payables under all transactions covered by the netting agreement
between Farmer Mac and a single counterparty. Farmer Mac's exposure to credit
risk related to its financial derivatives is represented by those counterparties
for which Farmer Mac has a net receivable, including the effect of any netting
arrangements. As of December 31, 2003 and 2002, Farmer Mac's credit exposure,
excluding netting arrangements, was $1.0 million and $0.4 million, respectively;
however, including netting arrangements, Farmer Mac had no net receivables.
Conversely, financial derivatives in a net payable position required Farmer Mac
to pledge securities as collateral of approximately $16.9 million and $37.0
million as of December 31, 2003 and December 31, 2002, respectively.
Interest Rate Risk:
Farmer Mac uses financial derivatives to provide a cost- and capital-efficient
way to manage its interest rate risk exposure by modifying the repricing or
maturity characteristics of certain assets and liabilities and by locking in the
rates for certain forecasted issuances of liabilities. The primary financial
derivatives Farmer Mac uses include interest rate swaps and forward sale
contracts. Farmer Mac uses interest-rate swaps to assume fixed rate interest
payments in exchange for variable rate interest payments and vice versa.
Depending on the hedging relationship, the effects of these agreements are (a)
the conversion of variable rate liabilities to longer-term fixed rate
liabilities, (b) the conversion of long-term fixed rate assets to shorter-term
variable rate assets, or (c) the reduction of the variability of future changes
in interest rates on forecasted issuances of liabilities. The net payments of
these agreements are charged to either interest expense or interest income,
depending on whether the agreement is designated to hedge an existing or
forecasted liability or asset.
Fair Value Hedges:
Interest Rate Swaps: Farmer Mac uses interest rate swaps primarily to offset the
change in value of certain fixed rate investments and liabilities caused by
movements in the benchmark interest rate (LIBOR). In calculating the effective
portion of the fair value hedges under SFAS 133, the change in fair value of the
financial derivative is recognized currently in earnings, as is the change in
the value of the hedged items attributable to the risk being hedged.
Accordingly, the net difference or hedge ineffectiveness, if any, is recognized
currently in the consolidated statement of operations as a gain or loss on
financial derivatives and trading assets. Fair value hedge ineffectiveness for
each of the years ended December 31, 2003 and 2002 was not significant.
Forward Sale Agreements: Loans held for sale expose Farmer Mac to interest rate
risk. Farmer Mac manages this risk for certain loans held for sale by selling
forward government-sponsored enterprise debt and mortgage backed securities. The
changes in fair values of the hedged loans and the related financial derivatives
are recorded in the consolidated statements of operations as a gain or loss on
financial derivatives and trading assets. The net change in the fair values of
loans held for sale and the related financial derivatives for each of the years
ended December 31, 2003 and 2002 was not significant.
The following table summarizes information related to Farmer Mac's financial
derivatives in fair value hedge relationships as of December 31, 2003:
Weighted-
Weighted- Weighted- Weighted- Average
Fair Value Average Average Average Remaining
Notional --------------------------- Pay Receive Forward Life
Amount Asset (Liability) Rate Rate Price (in Years)
----------- ------------- ------------- ------------ ------------ ------------ ------------
(dollars in thousands)
Medium-term notes:
Pay variable interest rate swaps $ 145,000 - (2,782) 1.93% 3.70% - 4.82
Loans:
Agency forwards 26,332 76 - - - 1.07 0.04
----------- ------------- ------------- ------------ ------------
Total fair value hedges $ 171,332 $ 76 $ (2,782) 1.93% 3.70%
----------- ------------- ------------- ------------ ------------
Cash Flow Hedges:
Interest Rate Swaps:
Farmer Mac uses interest rate swaps to hedge the variability of future cash
flows associated with existing variable rate liabilities and forecasted
issuances of liabilities. With respect to the variable rate liabilities
(discount notes or medium-term notes) on its balance sheet, Farmer Mac uses
interest rate swaps to hedge the risk of changes in the benchmark rate (LIBOR).
With respect to the hedging of the forecasted issuance of discount notes or
medium-term notes, Farmer Mac utilizes interest rate swaps with a longer
maturity than the underlying liabilities. The use of interest rate swap
contracts with longer maturities than the underlying liabilities allows Farmer
Mac to hedge both the risk of changes in the benchmark rate (LIBOR) on existing
liabilities and the replacement of such liabilities upon maturity. These cash
flow hedge relationships are treated as effective hedges as long as the future
issuances of liabilities remain probable and the hedges continue to meet the
requirements of SFAS 133. Farmer Mac expects to hedge the forecasted issuance of
liabilities over a period that ranges from a minimum of 1 year to a maximum of
15 years.
Farmer Mac measures the ineffectiveness of cash flow hedges in accordance with
SFAS 133 and reports this amount, if any, as a gain or loss on financial
derivatives and trading assets in the consolidated statement of operations. The
ineffectiveness for each of the years ended December 31, 2003 and 2002 was not
significant.
Basis Swaps:
Farmer Mac uses basis swaps to create comparable asset-liability positions.
Specifically, Farmer Mac uses basis swaps to hedge combined asset-liability
positions in which an asset and a liability with variable cash flows have
different interest rate bases. Basis swaps are used to convert the interest rate
index of the asset to the same index as the variable rate liability or vice
versa. These swaps are treated as effective hedge relationships if the index of
one leg of the swap is the same as the index of the identified asset and the
index of the other leg of the swap is the same as the index of the identified
liability. Farmer Mac measures ineffectiveness for basis swaps in accordance
with SFAS 133 and reports this amount as a gain or loss on financial derivatives
and trading assets in the consolidated statement of operations. The
ineffectiveness for each of the years ended December 31, 2003 and 2002 was not
significant.
A significant proportion of Farmer Mac's outstanding basis swaps are with a
related party. See Note 3 for additional information on these related party
transactions.
Forward Sale Agreements and Future Contracts:
Farmer Mac uses forward sale contracts involving government-sponsored enterprise
debt instruments and mortgage backed securities and futures contracts involving
U.S. Treasury securities to reduce the variability of future changes in interest
rates on forecasted issuances of liabilities. Farmer Mac measures
ineffectiveness in accordance with the provisions of SFAS 133. The
ineffectiveness for each of the years ended December 31, 2003 and 2002 was not
significant. The effective portion of the change in fair value of these
contracts is recorded in accumulated other comprehensive income/(loss), net of
tax. The amounts recorded in accumulated other comprehensive income/(loss) will
be recognized in the statements of operations as the hedged transactions affect
earnings.
The following table summarizes information related to financial derivatives in
cash flow hedging relationships, as of December 31, 2003:
Weighted-
Weighted- Weighted- Weighted- Average
Fair Value Average Average Average Remaining
Notional --------------------------- Pay Receive Forward Life
Amount Asset (Liability) Rate Rate Price (in Years)
----------- ------------- ------------- ------------ ------------ ------------ ------------
(dollars in thousands)
Discount notes or medium-term notes:
Pay fixed interest rate swaps $ 636,213 $ 885 $(56,282) 5.81% 1.16% - 7.74
Agency forwards 54,196 - (417) - - 1.03 0.04
Loans or Farmer Mac Guaranteed
Securities and discount notes:
Basis swaps 307,621 - (5,879) 4.80% 1.46% - 11.76
--------------- ------------ ------------ ------------ ------------
Total cash flow hedges $ 998,030 $ 885 $(62,578) 5.48% 1.26%
--------------- ------------ ------------ ------------ ------------
As of December 31, 2003, Farmer Mac had approximately $45.6 million of net
after-tax unrealized losses on cash flow hedges included in accumulated other
comprehensive income/(loss). 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 issuance of discount notes or medium-term
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.
During the next 12 months, Farmer Mac expects to reclassify approximately $8.1
million of the net after-tax unrealized losses included in accumulated other
comprehensive income/(loss) as of December 31, 2003.
Other Financial Derivatives:
Farmer Mac employs certain hedging strategies that do not meet the hedge
accounting criteria in SFAS 133. These financial derivatives are recorded on the
balance sheet at fair value as freestanding assets or liabilities and the
related changes in fair value are recognized in the consolidated statements of
operations as gains or losses on financial derivatives and trading assets.
The following table summarizes information related to Farmer Mac's other
financial derivatives as of December 31, 2003:
Weighted-
Weighted- Weighted- Average
Fair Value Average Average Remaining
Notional ------------------------ Pay Receive Life
Amount Asset (Liability) Rate Rate (in Years)
----------- ---------- ------------- ------------ ----------- ------------
(dollars in thousands)
Pay fixed callable interest rate swaps $ 138,177 $ - $ (2,023) 6.16% 2.70% 8.76
Basis swaps 14,296 - (260) 4.38% 1.43% 3.30
Other swaps 25,000 - (27) 1.67% 1.04% 2.83
Purchased caps 210,000 - - - - 0.75
---------------------- ------------ ------------ -----------
Total other financial derivatives $ 387,473 $ - $ (2,310) 5.38% 2.36%
---------------------- ------------ ------------ -----------
For the years ended December 31, 2003 and 2002, Farmer Mac reported $2.4 million
of gains and $8.4 million of losses, respectively, on financial derivatives that
do not receive hedge accounting treatment and trading assets in the consolidated
statements of operations.
7. NOTES PAYABLE
Farmer Mac's borrowings consist of discount notes and medium-term notes, both of
which are unsecured general obligations of the Corporation. Discount notes
generally have maturities of one year or less, whereas medium-term notes have
maturities of one to 15 years.
The following table sets forth information related to Farmer Mac's borrowings
for 2003 and 2002:
2003 2002
------------------------------------------------------------------------------------------------------------
Average Average
Outstanding as of Outstanding During Maximum Outstanding as of Outstanding During Maximum
December 31, 2003 the Year Outstanding December 31, 2002 the Year Outstanding
-------------------- --------------------- at Any ------------------- ------------------- at Any
Amount Rate Amount Rate Month End Amount Rate Amount Rate Month End
----------- -------- ------------- ------ ------------ ------------ ------ ------------------- ------------
(dollars in thousands)
Due within one
year:
Discount notes $2,645,624 1.04% $2,702,188 1.21% $2,781,377 $2,777,206 2.71% $2,533,762 2.65% $2,815,784
Current portion
of medium-
term notes 153,760 4.57% 118,540 4.61%
----------- --------- ------------ ------
$2,799,384 1.23% $2,895,746 2.79%
------------ ------
Due after one
year:
Medium-term
notes due in:
2005 302,903 4.87%
2006 253,310 3.93%
2007 59,303 3.93%
2008 209,360 2.82%
2009 134,914 6.56%
Thereafter 176,320 6.51%
------------ --------
1,136,110 4.69%
------------ --------
Total $3,935,494 2.23%
------------ --------
Callable medium-term notes give Farmer Mac the option to redeem the debt at par
value on a specified call date or at any time on or after a specified call date.
The following table summarizes the maturities, amounts and costs for Farmer Mac
callable debt by call period as of December 31, 2003.
Callable Debt as of
December 31, 2003
-----------------------------------------
Maturity Amount Rate
------------ -------------- ------------
(dollars in thousands)
Callable in:
2004 2005-2013 $ 167,748 2.68%
2005 2008 15,000 3.63%
-------------- ------------
$ 182,748 2.76%
-------------- ------------
The following schedule summarizes the earliest repricing date of total
borrowings outstanding as of December 31, 2003, including callable and
non-callable medium-term notes, assuming callable notes are redeemed at the
initial call date.
Earliest Repricing Date of
Borrowings Outstanding
-----------------------------
Weighted-
Average
Amount Rate
--------------- -----------
(dollars in thousands)
2004 $ 2,967,133 3.58%
2005 262,986 5.38%
2006 166,878 4.75%
2007 59,303 5.36%
2008 184,360 2.68%
2009 134,914 5.56%
Thereafter 159,920 6.60%
--------------- -----------
Total $ 3,935,494 3.96%
--------------- -----------
During 2003 and 2002, Farmer Mac called $83.7 million and $49.3 million of
callable medium-term notes, respectively.
Authority to Borrow from the U.S. Treasury
Farmer Mac's statutory charter authorizes Farmer Mac to borrow, in extreme
circumstances, up to $1.5 billion from the Secretary of the Treasury, if
necessary, to fulfill its obligations under any guarantee. The debt would bear
interest at a rate determined by the Secretary of the Treasury based on the then
current cost of funds to the United States. The charter requires the debt to be
repaid within a reasonable time. To date, Farmer Mac has not utilized this
borrowing authority.
Gains and Losses on the Repurchase of Outstanding Debt
During 2002, Farmer Mac recognized $1.4 million of net gains on the repurchase
of $103.7 million of outstanding Farmer Mac debt. All of the repurchases were
from outstanding Farmer Mac debt that had a maturity date of October 14, 2011
and an interest rate of 5.4 percent. Those debt securities were replaced with
new fixed-rate funding to the same maturity dates at lower effective interest
rates.
8. ALLOWANCE FOR LOSSES AND CONCENTRATIONS OF CREDIT RISK
Allowance for Losses
Farmer Mac maintains an allowance for losses to cover probable estimated
principal and interest losses on all loans held (allowance for loan losses),
loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs
(reserve for losses and a portion of the guarantee and commitment obligation
that represents Farmer Mac's contingent obligation for probable losses) and real
estate owned (real estate owned valuation allowance). No allowance for losses
has been provided for Farmer Mac I Guaranteed Securities issued prior to the
1996 Act or for Farmer Mac II Securities. See Note 2(e), Note 2(j), Note 5 and
Note 12 for more information about Farmer Mac Guaranteed Securities.
The allowance for losses is increased through periodic provisions for losses
charged to expense and reduced by charge-offs for actual losses, net of
recoveries. Charge-offs represent losses on the outstanding principal balance,
any interest payments previously accrued or advanced and expected costs of
liquidation.
The following is a summary of the changes in the allowance for losses for each
year in the three-year period ended December 31, 2003:
-------------------------------------------------------------------------
Contingent
Allowance REO Obligation Total
for Loan Valuation Reserve for Probable Allowance
Losses Allowance for Losses Losses for Losses
-------------- -------------- ------------- -------------- -------------
(in thousands)
Balances as of January 1, 2001 $ 420 $ - $ 10,903 $ - $ 11,323
-------------- -------------- ------------- -------------- -------------
Provision for losses 600 - 6,186 - 6,786
Net allocation of
allowance (5) - 5 - -
Net recoveries/(charge-offs) 337 - (2,562) - (2,225)
-------------- -------------- ------------- -------------- -------------
Balances as of December 31, 2001 $ 1,352 $ - $ 14,532 $ - $ 15,884
-------------- -------------- ------------- -------------- -------------
Provision for losses 1,340 - 6,907 - 8,247
Net allocation of
allowance 3,221 1,308 (4,529) - -
Net charge-offs (3,251) (716) (153) - (4,120)
-------------- -------------- ------------- -------------- -------------
Balances as of December 31, 2002 $ 2,662 $ 592 $ 16,757 $ - $ 20,011
-------------- -------------- ------------- -------------- -------------
Provision for losses 6,524 1,230 (3,145) 2,676 7,285
Net charge-offs (3,219) (1,584) (440) - (5,243)
-------------- -------------- ------------- -------------- -------------
Balances as of December 31, 2003 $ 5,967 $ 238 $ 13,172 $ 2,676 $ 22,053
-------------- -------------- ------------- -------------- -------------
All loans that Farmer Mac purchases, issues guarantees with respect to, or
commits to purchase under an LTSPC in the Farmer Mac I program are underwritten
for conformance to Farmer Mac's underwriting and appraisal standards and Farmer
Mac believes the ultimate credit risk is substantially the same. Accordingly,
management establishes general allowances for loans held and loans underlying
LTSPCs and Farmer Mac Guaranteed Securities collectively.
The following table presents Farmer Mac's reserve for losses for all post-1996
Act Farmer Mac I Guaranteed Securities and LTSPCs on a pro rata basis as of
December 31, 2003 and 2002.
Reserve for Losses on LTSPCs and Post-1996 Act
Farmer Mac I Guaranteed Securities
- -----------------------------------------------------------------------------------------
December 31, December 31,
2003 2002
----------------- ---------------
(in thousands)
On-balance sheet Farmer Mac I Guaranteed Securities $ 2,861 $ 4,036
Off-balance sheet Farmer Mac I Guaranteed Securities 1,070 1,280
LTSPCs 9,241 11,441
----------------- ---------------
Total reserve for losses $ 13,172 $ 16,757
----------------- ---------------
When certain criteria are met, such as the default of the borrower, Farmer Mac
may, in its sole discretion, repurchase the defaulted loans underlying Farmer
Mac Guaranteed Securities and is obligated to purchase those underlying an
LTSPC. These acquisitions are recorded in the consolidated financial statements
at their fair value. Fair value is determined by appraisal or other appropriate
valuation method. In September 2002, Farmer Mac adopted EITF 02-9, which
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 EITF 02-9, any specific allowance that had
been established for the off-balance sheet obligation would be transferred from
the reserve for losses to the allowance for loan losses (referred to as "net
allocation of the allowance" in the summary of the changes in the allowance for
losses). Upon the receipt of each loan's updated appraisal or estimation of
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.
A portion of the allowance for losses is specifically allocated to impaired
loans when the fair value of the collateral, less the estimated selling cost, is
less than the cost basis in the loan. For this analysis and the allocation of
specific reserves as of December 31, 2003, Farmer Mac expanded the population of
loans specifically reviewed to include:
o non-performing assets;
o loans for which Farmer Mac had adjusted the timing of borrowers'
payment schedules within the past three years, but still expects to
collect all amounts due and has not made economic concessions; and
o additional performing loans that have previously been delinquent or
are secured by real estate that produces commodities currently under
stress.
Prior to December 31, 2003, the review consisted only of non-performing assets.
The balance of impaired loans, both on- and off-balance sheet, and the related
allowance specifically allocated to those impaired loans as of December 31, 2003
and 2002 are summarized in the following table:
December 31, 2003 December 31, 2002
--------------------------------------- ----------------------------------------
Specific Net Specific Net
Balance Allowance Balance Balance Allowance Balance
------------- ------------------------- ------------- ---------------------------
(in thousands)
Assets specifically reviewed
for impairment:
Specific allowance for losses $ 18,213 $ (3,762) $ 14,451 $ 12,137 $ (2,036) $ 10,101
No specific allowance for losses 154,487 - 154,487 63,171 - 63,171
------------- ------------ ------------ ------------ ------------ -------------
Total $ 172,700 $ (3,762) $ 168,938 $ 75,308 $ (2,036) $ 73,272
------------- ------------ ------------ ------------ ------------ -------------
Farmer Mac recognized interest income of approximately $1.7 million and $0.6
million on impaired loans during the years ended December 31, 2003 and 2002,
respectively. During 2003 and 2002, Farmer Mac's average investment in impaired
loans and loans underlying on-balance sheet Farmer Mac Guaranteed Securities was
$68.5 million and $71.0 million, respectively.
In accordance with the terms of all applicable trust agreements, Farmer Mac
acquires all loans that collateralize Farmer Mac Guarantee Securities that
become and remain 90 days or more past due on the next subsequent loan payment
date. During 2003, Farmer Mac purchased 81 defaulted loans having a principal
balance of $55.6 million from pools underlying Farmer Mac Guaranteed Securities
and LTSPCs. During 2002, Farmer Mac made 79 such purchases for a total of $46.4
million. The following table presents Farmer Mac's purchases of defaulted loans
underlying Farmer Mac I Guaranteed Securities and LTSPCs.
For the Year Ended
December 31,
------------------------------
2003 2002
-------------- --------------
(in thousands)
Defaulted loans purchased underlying
off-balance sheet Farmer Mac I
Guaranteed Securities $ 16,276 $ 17,386
Defaulted loans underlying
on-balance sheet Farmer Mac I
Guaranteed Securities transferred
to loans 35,100 25,675
Defaulted loans purchased underlying
LTSPCs 4,266 3,386
-------------- --------------
Total $ 55,642 $ 46,447
-------------- --------------
Concentrations of Credit Risk
The following table sets forth the geographic and commodity diversification, as
well as the range of original loan-to-value ratios, for all loans held and loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs as of
December 31, 2003 and 2002:
As of December 31,
---------------------------------
2003 2002
--------------- ---------------
(in thousands)
By geographic region (1):
Northwest $ 1,066,399 $ 1,167,331
Southwest 2,307,812 2,273,846
Mid-North 677,755 518,439
Mid-South 257,664 233,997
Northeast 397,231 298,340
Southeast 313,171 329,681
--------------- ---------------
Total $ 5,020,032 $ 4,821,634
--------------- ---------------
By commodity:
Crops $ 2,228,506 $ 2,085,963
Livestock 1,355,070 987,533
Permanent plantings 1,025,245 1,341,165
Part-time farms 374,057 367,823
Other 37,154 39,150
--------------- ---------------
Total $ 5,020,032 $ 4,821,634
--------------- ---------------
By original loan-to-value:
0.00% to 40.00% $ 1,300,869 $ 1,246,891
40.01% to 50.00% 1,082,540 1,046,915
50.01% to 60.00% 1,404,260 1,339,891
60.01% to 70.00% 1,107,888 1,066,419
70.01% to 80.00% 109,848 106,493
80.01% to 90.00% 14,627 15,025
--------------- ---------------
Total $ 5,020,032 $ 4,821,634
--------------- ---------------
(1) Geographic regions: Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South (KS,
OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA, RI, TN,
VA, VT, WV); Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY); Southeast (AL,
AR, FL, GA, LA, MS, SC); Southwest (AZ, CA, CO, HI, NM, NV, UT).
The original loan-to-value ratio is 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. Current loan-to-value ratios may
be higher or lower than the original loan-to-value ratios.
9. STOCKHOLDERS' EQUITY
Common Stock
Farmer Mac has three classes of common stock outstanding:
o Class A voting common stock, which may be held only by banks,
insurance companies and other financial institutions or similar
entities that are not institutions of the Farm Credit System. By
statute, no holder of Class A voting common stock may directly or
indirectly be a beneficial owner of more than 33 percent of the
outstanding shares of Class A voting common stock;
o Class B voting common stock, which may be held only by institutions of
the Farm Credit System. There are no restrictions on the maximum
holdings of Class B voting common stock; and
o Class C non-voting common stock, which has no ownership restrictions.
Dividends have not been paid to any common stockholders nor does Farmer Mac
expect to pay dividends in the foreseeable future. Farmer Mac's ability to
declare and pay a dividend could be restricted if it failed to comply with
regulatory capital requirements.
Preferred Stock
The Corporation has outstanding 700,000 shares of 6.40 percent Cumulative
Preferred Stock, Series A, which has a redemption price and liquidation
preference of $50.00 per share, plus accrued and unpaid dividends. The preferred
stock does not have a maturity date. Beginning on June 30, 2012, Farmer Mac has
the option to redeem the preferred stock at any time, in whole or in part, at
the redemption price of $50.00 per share, plus accrued and unpaid dividends
through and including the redemption date. Farmer Mac pays cumulative dividends
on the preferred stock quarterly in arrears, when and if declared by the board
of directors. Farmer Mac's ability to declare and pay a dividend could be
restricted if it failed to comply with regulatory capital requirements. The
costs of issuing the preferred stock were charged to additional paid-in capital.
Stock Option Plan
In 1996, Farmer Mac adopted a stock option plan for officers to acquire shares
of Class C non-voting common stock. Under the 1996 plan, stock options awarded
under the plan vested annually in thirds, with the last installment having
vested in June 1998. If not exercised, any options granted under the 1996 plan
will expire 10 years from the date of grant. The exercise price of options
granted under the 1996 plan, which were issued in 1996, is $2.63. The maximum
number of options that could be issued under the 1996 plan was 338,490, all of
which were issued.
In 1997, Farmer Mac adopted a new stock option plan for directors, officers and
other employees, the terms of which are generally the same as for the 1996 plan,
except that options issued to directors since June 1, 1998, if not exercised,
will expire five years from the date of grant. Of the 3,750,000 shares
authorized to be issued under the 1997 plan, 2,265,751 have been issued, net of
cancellations. Options granted under the 1997 plan during 2003 have exercise
prices ranging from $22.40 to $26.68 per share. For all stock options granted
under both of Farmer Mac's plans, the exercise price was equal to the closing
price of the Class C common stock on or immediately preceding the grant date.
The following table summarizes stock option activity for 2003 and 2002:
2003 2002
------------------------------ --------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------------- --------------- ------------- -----------
Outstanding, beginning of year 1,637,111 $ 19.45 1,416,426 $ 17.61
Granted 366,104 22.67 270,421 28.97
Exercised (422,236) 9.14 (39,736) 15.64
Canceled (4,999) 28.07 (10,000) 31.24
------------- ------------ ------------- -----------
Outstanding, end of year 1,575,980 $ 22.92 1,637,111 $ 19.45
------------- ------------ ------------- -----------
Options exercisable at year end 1,247,658 1,368,884
------------- -------------
The cancellations of stock options during 2003 and 2002 were due to unvested
options terminating in accordance with the provisions of the applicable stock
option plans upon directors' or employees' departures from Farmer Mac. For 2003
and 2002 the additional paid in capital received as a result of the exercise of
stock options was $3.4 million and $0.6 million, respectively. During 2003 and
2002 the reduction of income tax paid as a result of the deduction for the
exercise of stock options was $2.8 million and $0.3 million, respectively.
The following table summarizes information regarding options outstanding as of
December 31, 2003:
Options Outstanding Exercisable
------------------------------ --------------
Weighted-
Average
Remaining
Exercise Number of Contractual Number of
Price Shares Life Shares
------------- -------------- --------------- --------------
$ 2.63 5,490 2.5 years 5,490
11.83 57,312 3.5 years 57,312
12.67 1,200 4.7 years 1,200
15.13 295,775 6.4 years 295,775
16.38 24,110 6.7 years 24,110
18.13 3,000 6.8 years 3,000
18.25 2,400 3.9 years 2,400
19.38 16,063 5.7 years 16,063
20.00 77,586 2.7 years 77,586
21.19 3,000 6.9 years 3,000
22.08 194,064 5.4 years 194,064
22.38 2,000 7.0 years 2,000
22.40 343,104 9.4 years 114,368
22.94 1,500 5.6 years 1,500
26.20 2,000 7.2 years 2,000
26.25 13,000 8.7 years 8,667
26.68 21,000 9.8 years 6,999
26.92 500 7.3 years 500
27.75 3,000 7.1 years 3,000
29.10 242,257 8.4 years 161,505
29.56 1,000 8.7 years 500
31.02 4,627 7.5 years 4,627
31.20 8,750 7.7 years 8,750
31.24 250,042 7.4 years 250,042
31.50 1,500 7.4 years 1,500
34.90 1,000 7.7 years 1,000
34.91 200 7.7 years 200
45.06 500 8.3 years 500
-------------- --------------
1,575,980 1,247,658
-------------- --------------
The weighted-average fair values of options granted in 2003, 2002 and 2001 were
$10.68, $13.50 and $11.61, respectively, which under the fair value-based method
of accounting for stock-based compensation cost would have reduced net income
available to common stockholders by $2.5 million, $2.4 million and $2.1 million
for 2003, 2002 and 2001, respectively. The fair values were estimated using the
Black-Scholes option pricing model based on the following assumptions:
2003 2002 2001
----------- ---------- -----------
Risk-free interest rate 2.9% 5.2% 5.4%
Expected years until exercise 5 years 5 years 5 years
Expected stock volatility 47.8% 40.0% 47.1%
Dividend yield 0.0% 0.0% 0.0%
Restricted Stock
In addition to stock options, the Corporation, by authorization of the board of
directors, issued restricted stock to employees during 2003, 2002 and 2001.
Restricted stock entitles participants to all the rights of a stockholder,
except that some of the shares awarded are subject to forfeiture if the
participant is not employed by Farmer Mac at the end of the restriction period
and other shares are not subject to forfeiture but may not be disposed of by the
participant during the restriction period. The vesting or restriction period is
usually one to two years. The value of restricted stock granted to employees is
amortized over the vesting period. During 2003, 2002 and 2001, 37,045 shares,
32,338 shares and 28,602 shares of restricted stock, respectively, were granted,
resulting in compensation expense of $0.8 million, $0.9 million and $0.9 million
being recognized during the respective years.
Statutory and Regulatory Capital Requirements
Farmer Mac is subject to three statutory and regulatory capital requirements:
o Minimum capital - Farmer Mac's minimum capital level is an amount of
core capital (stockholders equity less accumulated other comprehensive
income) equal to the sum of 2.75 percent of Farmer Mac's aggregate
on-balance sheet assets, as calculated for regulatory purposes, plus
0.75 percent of the aggregate off-balance sheet obligations of Farmer
Mac, specifically including:
o the unpaid principal balance of outstanding Farmer Mac Guaranteed
Securities;
o instruments issued or guaranteed by Farmer Mac that are
substantially equivalent to Farmer Mac Guaranteed Securities,
including LTSPCs; and
o other off-balance sheet obligations of Farmer Mac.
o Critical capital - Farmer Mac's critical capital level is an amount of
core capital equal to 50 percent of the total minimum capital
requirement at that time.
o Risk-based capital - The Act directs FCA to establish a risk-based
capital stress test for Farmer Mac, using specified stress-test
parameters. While the Act does not specify the required level of
risk-based capital, that level is permitted to exceed the statutory
minimum capital requirement applicable to Farmer Mac, if so indicated
by the risk-based capital stress test.
Farmer Mac is required to comply with the higher of the minimum capital
requirement or the risk-based capital requirement.
As of December 31, 2003, Farmer Mac's minimum and critical capital requirements
were $142.0 million and $71.0 million, respectively, and its actual core capital
level was $215.5 million, $73.5 million above the minimum capital requirement
and $144.5 million above the critical capital requirement. Based on the
risk-based capital stress test, Farmer Mac's risk-based capital requirement as
of December 31, 2003 was $38.8 million and Farmer Mac's regulatory capital (core
capital plus allowance for losses) of $237.6 million exceeded that amount by
approximately $198.8 million.
10. INCOME TAXES
The components of the provision for federal income taxes for the years ended
December 31, 2003, 2002 and 2001 were as follows:
2003 2002 2001
------------- ------------- -------------
(in thousands)
Current $ 12,529 $ 12,768 $ 10,669
Deferred (221) (2,959) (2,250)
------------- ------------- -------------
$ 12,308 $ 9,809 $ 8,419
------------- ------------- -------------
A reconciliation of tax at the statutory federal tax rate to the income tax
provision for the years ended December 31, 2003, 2002 and 2001 is as follows:
2003 2002 2001
----------- ----------- ------------
(dollars in thousands)
Tax expense at statutory rate $ 13,852 $ 11,396 $ 8,899
Effect of non-taxable
dividend income (1,694) (1,596) (386)
Other 150 9 (94)
----------- ----------- ------------
Income tax expense $ 12,308 $ 9,809 $ 8,419
----------- ----------- ------------
Statutory tax rate 35.0% 35.0% 35.0%
Effective tax rate 31.1% 30.1% 33.1%
The components of the deferred tax assets and liabilities as of December 31,
2003 and 2002 were as follows:
2003 2002
------------ -----------
(in thousands)
Deferred tax assets:
Allowance for losses $ 8,216 $ 7,004
Unrealized loss on financial derivatives
designated as cash flow hedges 24,529 33,777
Other 1,439 2,442
------------ -----------
Total deferred tax assets 34,184 43,223
Deferred tax liability:
Unrealized gain on available-for-sale securities 23,293 33,557
------------ -----------
Total deferred tax liability 23,293 33,557
------------ -----------
Net deferred tax aset $10,891 $ 9,666
------------ -----------
A valuation allowance is required to reduce the net deferred tax asset to an
amount that is more likely than not to be realized. No valuation allowance was
considered necessary as of December 31, 2003 and 2002.
11. EMPLOYEE BENEFITS
On December 28, 1989, Farmer Mac adopted a defined contribution retirement plan
for all of its employees. Through 2001, Farmer Mac contributed 13.2 percent of
the lesser of an individual's gross salary or $170,000, plus 5.7 percent of the
difference between (1) the lesser of the gross salary or $170,000 and (2) the
Social Security Taxable Wage Base. The Economic Growth and Tax Relief
Reconciliation Act of 2001 increased the $170,000 limit to $200,000 in 2002, to
be adjusted from time to time for inflation. Employees are fully vested after
having been employed for three years. Expense for this plan for the years ended
December 31, 2003, 2002 and 2001 was $464,000, $384,000 and $376,000,
respectively.
12. OFF-BALANCE SHEET GUARANTEES AND LTSPCs, COMMITMENTS AND CONTINGENCIES
Farmer Mac offers approved agricultural and rural residential mortgage lenders
two 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. Both of these alternatives result in off-balance sheet transactions for
Farmer Mac.
Off-Balance Sheet Farmer Mac Guaranteed Securities
Periodically Farmer Mac transfers agricultural mortgage loans into trusts that
are used as vehicles for the securitization of the transferred assets and the
beneficial interests in the loans are sold to third party investors. The table
below summarizes certain cash flows received from and paid to these trusts.
Year Ended December 31,
-----------------------------
2003 2002 2001
--------- --------- ---------
(in thousands)
Proceeds from new securitizations $ 78,254 $ 47,682 $ 82,995
Guarantee fees received 1,988 775 579
Purchase of assets from the trusts 16,276 17,386 6,005
Servicing advances 503 1,235 819
Repayments of servicing advances 107 1,134 52
Farmer Mac is liable under its guarantee to ensure that the securities make
timely payments to investors of principal and interest based on the underlying
loans, regardless of whether the trust has actually received such scheduled loan
payments. As consideration for Farmer Mac's assumption of the credit risk on
these mortgage pass-through certificates, Farmer Mac receives guarantee fees
that are recognized as earned on an accrual basis over the life of the loan and
based upon the outstanding balance of the Farmer Mac Guaranteed Security.
Farmer Mac is required to perform under its obligation when the underlying loans
for the off-balance sheet Farmer Mac Guaranteed Securities do not make their
scheduled installment payments. When a loan underlying a Farmer Mac I Guaranteed
Security becomes 90 days or more past due, Farmer Mac may, in its sole
discretion, 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.
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 December 31, 2003 and
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
- ----------------------------------------------------------------------------
December 31, December 31,
2003 2002
----------------- ---------------
(in thousands)
Farmer Mac I Guaranteed Securities:
Post-1996 Act $ 952,134 $ 299,940
Pre-1996 Act - -
----------------- ---------------
Total Farmer Mac I 952,134 299,940
Farmer Mac II Guaranteed Securities 51,241 67,109
----------------- ---------------
Total Farmer Mac I and II $ 1,003,375 $ 367,049
----------------- ---------------
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 access to the underlying
collateral. 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.
Farmer Mac has recourse to the USDA for any 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 thereof.
As of December 31, 2003, the weighted-average remaining maturity of all loans
underlying off-balance sheet Farmer Mac Guaranteed Securities was 16.4 years. As
of December 31, 2003 and 2002, the portion of the allowance for losses
attributable to off-balance sheet Farmer Mac Guaranteed Securities was $3.7
million and $1.3 million, respectively. The increase is largely a result of the
contingent obligation for probable losses of $2.7 million, a component of the
allowance for losses reported on the consolidated balance sheet as part of the
guarantee and commitment obligation, which relates to an LTSPC converted into a
Farmer Mac Guaranteed Security at the request of a program participant during
2003. The conversion resulted in a corresponding decrease in the portion of the
allowance for losses attributable to LTSPCs. For additional detail on Farmer
Mac's methodology for determining the allowance for losses, see Note 2(j) and
Note 8.
Long-Term Standby Purchase Commitments
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. As consideration for its assumption of the credit
risk on loans underlying an LTSPC, Farmer Mac receives a commitment fee payable
monthly in arrears, in an amount approximating what would have been the
guarantee fee if the transaction were structured as a swap for Farmer Mac
Guaranteed Securities.
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
eligible loans, the seller effectively transfers the credit risk on those loans
to Farmer Mac, thereby reducing the seller's credit and concentration risk
exposures and, consequently, its regulatory capital requirements and its 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 or exchange some or all of the loans under the LTSPC to Farmer
Mac.
Farmer Mac generally purchases loans subject to an LTSPC:
o At par plus accrued interest, if the loans become four months
delinquent;
o At a mark-to-market price, if the loans are not delinquent and are
standard Farmer Mac cash window loan products; or in exchange for
Farmer Mac I Guaranteed Securities.
o If the loans are not four months delinquent, either at a
mark-to-market negotiated price for all (but not some) loans in the
pool, based on the sale of Farmer Mac I Guaranteed Securities in the
capital markets or the funding obtained by Farmer Mac through the
issuance of matching debt in the capital markets; or in exchange for
Farmer Mac I Guaranteed Securities.
As of December 31, 2003 and 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 $2.3 billion and
$2.7 billion respectively.
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.
As of December 31, 2003, the weighted-average remaining maturity of all loans
underlying LTSPCs was 14.5 years. The portion of the reserve for losses that was
attributable to LTSPCs was $9.2 million and $11.4 million as of December 31,
2003 and 2002, respectively. The decrease is largely a result of the contingent
obligation for probable losses, a component of the allowance for losses of $2.7
million created upon the conversion of an LTSPC into a Farmer Mac Guaranteed
Security at the request of a program participant during 2003. The conversion
resulted in a corresponding decrease in the portion of the allowance for losses
attributable to LTSPCs. For additional detail on Farmer Mac's methodology for
determining the reserve for losses, see Note 2(j) and Note 8.
Commitments
Farmer Mac enters into mandatory and optional delivery commitments to purchase
loans. Most loan purchase commitments entered into by Farmer Mac are mandatory
commitments, in which Farmer Mac charges a fee to extend or cancel the
commitment. All optional loan purchase commitments are sold forward under
optional commitments to deliver Farmer Mac Guaranteed Securities that may be
cancelled by Farmer Mac without penalty. As of December 31, 2003, commitments to
purchase Farmer Mac I and II loans totaled $11.2 million, none of which were
optional commitments. Outstanding loan purchase commitments as of December 31,
2002, totaled $26.2 million, of which $4.5 million were optional commitments.
Farmer Mac is exposed to interest rate risk from the time it commits to purchase
a loan to the time it either: (a) sells Farmer Mac Guaranteed Securities backed
by the loan or (b) issues debt to retain the loan in its portfolio. There were
no commitments to sell Farmer Mac Guaranteed Securities as of December 31, 2003
and 2002. Farmer Mac manages the interest rate risk related to loans not yet
sold or funded as a retained investment through the use of forward sale
contracts involving government sponsored enterprise debt and mortgage-backed
securities and futures contracts involving U.S. Treasury securities. See Note
2(h) and Note 6 for information regarding financial derivatives.
Rental expense for Farmer Mac's office space for each of the years ended
December 31, 2003, 2002 and 2001 was $0.5 million, $0.5 million and $0.3
million, respectively. The future minimum lease payments under Farmer Mac's
non-cancelable lease for its office space are as follows:
Future Minimum Lease Payments
- -----------------------------------
(in thousands)
2004 $ 545
2005 558
2006 573
2007 586
2008 601
Thereafter 1,897
---------------
Total $ 4,760
---------------
13. FAIR VALUE DISCLOSURES
The following table sets forth the estimated fair values and the carrying values
for financial assets, liabilities and guarantees and commitments as of December
31, 2003 and 2002. Significant estimates, assumptions and present value
calculations are used for the following disclosure, resulting in a high degree
of subjectivity in the indicated fair values. Accordingly, these estimated fair
values are not necessarily indicative of what Farmer Mac would realize in an
actual sale or purchase.
As of December 31,
----------------------------------------------------------
2003 2002
--------------------------- ----------------------------
Carrying Carrying
Fair Value Amount Fair Value Amount
-------------- ----------- -------------- ------------
(in thousands)
Financial assets:
Cash and cash equivalents $623,674 $623,674 $723,800 $ 723,800
Investment securities 1,065,124 1,064,782 831,299 830,409
Farmer Mac Guaranteed Securities 1,522,568 1,508,134 1,632,883 1,608,507
Loans 1,038,247 983,624 1,008,706 963,461
Financial derivatives 961 961 317 317
Financial liabilities:
Notes payable:
Due within one year 2,801,616 2,799,384 2,863,224 2,895,746
Due after one year 1,213,623 1,136,110 1,168,760 985,318
Financial derivatives 67,670 67,670 94,314 94,314
Guarantee and commitment fees receivable:
LTSPCs 26,547 4,136 27,102 -
Off-balance sheet Farmer Mac
Guaranteed Securities 8,032 7,333 5,452 -
Farmer Mac estimates the fair value of its loans and Farmer Mac Guaranteed
Securities by discounting the projected cash flows of these instruments at
projected interest rates. Because the cash flows of these instruments may be
interest rate path dependent, these values and projected discount rates are
derived using a Monte Carlo simulation model. Notes payable and interest rate
contracts are valued using a similar methodology. For investment securities,
futures contracts and commitments to purchase and sell government sponsored
enterprise debt and mortgage-backed securities, fair values are based on market
quotes. The carrying value of cash and cash equivalents approximates fair value.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2003 Quarter Ended 2002 Quarter Ended
------------------------------------------------ ------------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
----------- ------------ ----------- ----------- ----------- ------------ ----------- -----------
(dollars in thousands, except per share amounts)
Interest income $39,405 $39,320 $40,866 $41,968 $44,062 $46,185 $43,935 $37,688
Interest expense 30,311 30,402 31,501 32,093 34,557 35,096 33,991 29,126
----------- ------------ ----------- ----------- ----------- ------------ ----------- -----------
Net interest income 9,094 8,918 9,365 9,875 9,505 11,089 9,944 8,562
Provision for loan losses (509) (3,391) (1,416) (1,208) (1,340) - - -
----------- ------------ ----------- ----------- ----------- ------------ ----------- -----------
Net interest income after
provision for loan losses 8,585 5,527 7,949 8,667 8,165 11,089 9,944 8,562
Guarantee and commitment fees 5,424 5,056 5,111 5,094 5,114 4,874 4,723 4,567
Gains/(Losses) on derivatives (1,297) (3,348) 3,669 3,333 (3,679) (2,563) (1,324) (868)
Gains/(Losses) on the
repurchase of debt - - - - (2,021) - 897 2,490
Gains/(Losses) on the sale
of real estate owned 201 79 (225) 123 - 85 (27) (34)
Miscellaneous 69 354 138 251 114 458 368 391
----------- ------------ ----------- ----------- ----------- ------------ ----------- -----------
Total revenues 12,982 7,668 16,642 17,468 7,693 13,943 14,581 15,108
Total operating expenses 5,292 2,325 3,532 4,033 3,210 6,012 5,015 4,530
----------- ------------ ----------- ----------- ----------- ------------ ----------- -----------
Income before income taxes 7,690 5,343 13,110 13,435 4,483 7,931 9,566 10,578
Income tax expense 2,234 1,438 4,184 4,452 1,146 2,341 2,944 3,376
----------- ------------ ----------- ----------- ----------- ------------ ----------- -----------
Net income 5,456 3,905 8,926 8,983 3,337 5,590 6,622 7,202
----------- ------------ ----------- ----------- ----------- ------------ ----------- -----------
Preferred stock dividends (560) (560) (560) (560) (560) (560) (336) -
----------- ------------ ----------- ----------- ----------- ------------ ----------- -----------
Net income available to
common stockholders $ 4,896 $ 3,345 $ 8,366 $ 8,423 $ 2,777 $ 5,030 $ 6,286 $ 7,202
----------- ------------ ----------- ----------- ----------- ------------ ----------- -----------
Earnings per share:
Basic net earnings $ 0.42 $ 0.28 $ 0.72 $ 0.72 $ 0.24 $ 0.43 $ 0.54 $ 0.62
Diluted net earnings $ 0.40 $ 0.28 $ 0.70 $ 0.70 $ 0.23 $ 0.42 $ 0.52 $ 0.59
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable
Item 9A. 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 December
31, 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. For the quarter ended
December 31, 2003, there were no significant changes in Farmer Mac's internal
controls, or in other factors that could materially affect these controls,
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies or material weaknesses.
PART III
Item 10. Directors and Executive Officers of the Registrant
Farmer Mac has adopted a code of business conduct and ethics (the "Code")
that applies to all directors, officers, employees and agents of Farmer Mac,
including Farmer Mac's principal executive officer, principal financial officer,
principal accounting officer and other senior financial officers. A copy of the
Code is available in the "Investors--Corporate Governance" section of Farmer
Mac's Internet website (www.farmermac.com). Farmer Mac will post any amendment
to, or waiver from, a provision of the Code in that same section of its Internet
website. A print copy of the Code is available free of charge upon written
request to Farmer Mac's Corporate Secretary.
Additional information required by this item is incorporated by reference
to the Corporation's Proxy Statement to be filed on or about April 19, 2004.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
Corporation's Proxy Statement to be filed on or about April 19, 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
Corporation's Proxy Statement to be filed on or about April 19, 2004.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
Corporation's Proxy Statement to be filed on or about April 19, 2004.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated by reference to the
Corporation's Proxy Statement to be filed on or about April 19, 2004.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements.
Refer to Item 8 above.
(2) Financial Statement Schedules.
All schedules are omitted since they are not applicable, not required or
the information required to be set forth therein is included in the consolidated
financial statements or in notes thereto.
(3) Exhibits.
* 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).
__________________
* 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.
+* 10.1.3 - Amended and Restated 1997 Incentive Plan (Form 10-Q filed November
14, 2003).
+* 10.2 - Employment Agreement dated May 5, 1989 between Henry D. Edelman and
the Registrant (Previously filed as Exhibit 10.4 to Form 10-K filed
February 14, 1990).
+* 10.2.1 - Amendment No. 1 dated as of January 10, 1991 to Employment
Contract between Henry D. Edelman and the Registrant (Previously
filed as Exhibit 10.4 to Form 10-K filed April 1, 1991).
+* 10.2.2 - Amendment to Employment Contract dated as of June 1, 1993 between
Henry D. Edelman and the Registrant (Previously filed as Exhibit
10.5 to Form 10-Q filed November 15, 1993).
+* 10.2.3 - Amendment No. 3 dated as of June 1, 1994 to Employment Contract
between Henry D. Edelman and the Registrant (Previously filed as
Exhibit 10.6 to Form 10-Q filed August 15, 1994).
+* 10.2.4 - Amendment No. 4 dated as of February 8, 1996 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-K filed
March 29, 1996).
+* 10.2.5 - Amendment No. 5 dated as of June 13, 1996 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed August
14, 1996).
+* 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).
__________________
* 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.
+* 10.2.10 - 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).
+* 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
Contract between Nancy E. Corsiglia and the Registrant (Form 10-K
filed March 29, 1996).
__________________
* 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.
+* 10.3.8 - Amendment No. 8 dated as of June 13, 1996 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 1996).
+* 10.3.9 - Amendment No. 9 dated as of August 7, 1997 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
November 14, 1997).
+* 10.3.10 - Amendment No. 10 dated as of June 4, 1998 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 1998).
+* 10.3.11 - Amendment No. 11 dated as of June 3, 1999 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 12, 1999).
+* 10.3.12 - Amendment No. 12 dated as of June 1, 2000 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 2000).
+* 10.3.13 - Amendment No. 13 dated as of June 7, 2001 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 2001).
+* 10.3.14 - Amendment No. 14 dated as of June 6, 2002 to Employment Contract
between Nancy E. Corsiglia and the Registrant (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).
__________________
* 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.
+* 10.4.3 - Amendment No. 3 dated as of June 1, 2000 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed August
14, 2000).
+* 10.4.4 - Amendment No. 4 dated as of June 7, 2001 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed August
14, 2001).
+* 10.4.5 - Amendment No. 5 dated as of June 6, 2002 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed August
14, 2002).
+* 10.4.6 - Amendment No. 6 dated as of June 5, 2003 to Employment Contract
between Tom D. Stenson and the Registrant (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).
__________________
* 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.
* 10.8 - 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).
*# 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).
__________________
* 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.
* 10.14 - 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).
+** 10.15 - Employment Contract dated October 31, 2003 between Michael P.
Morris and the Registrant.
21 - Farmer Mac Mortgage Securities Corporation, a Delaware corporation.
** 31.1 - Certification of Chief Executive Officer relating to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 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 Annual Report on Form 10-K for the fiscal year ended
December 31, 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 Annual Report on Form 10-K for the
fiscal year ended December 31, 2003, pursuant to 18 U.S.C.ss.1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K.
On October 16, 2003, Farmer Mac furnished to the Securities and Exchange
Commission a Current Report on Form 8-K that attached a press release addressing
a report issued by the U.S. General Accounting Office on Farmer Mac.
On October 23, 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 third quarter 2003.
On November 14, 2003, Farmer Mac filed with the Securities and Exchange
Commission a Current Report on Form 8-K reporting that Farmer Mac had filed its
Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and that
four of Farmer Mac's officers had each entered into a trading plan in compliance
with Securities and Exchange Commission Rule 10b5-1.
On December 5, 2003, Farmer Mac filed with the Securities and Exchange
Commission a Current Report on Form 8-K announcing that, on December 4, 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
/s/ Henry D. Edelman March 12, 2004
- ------------------------------------- -------------------------------------
By: Henry D. Edelman Date
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ Fred L. Dailey Chairman of the Board and March 12, 2004
- -------------------------------- Director
Fred L. Dailey
/s/ Henry D. Edelman President and Chief Executive March 12, 2004
- -------------------------------- Officer (Principal Executive
Henry D. Edelman Officer)
/s/ Nancy E. Corsiglia Vice President - Finance, March 12, 2004
- -------------------------------- Chief Financial Officer
Nancy E. Corsiglia and Treasurer
(Principal Financial Officer)
/s/ Timothy L. Buzby Vice President - Controller March 12, 2004
- -------------------------------- (Principal Accounting Officer)
Timothy L. Buzby
Name Title Date
/s/ Julia Bartling Director March 12, 2004
- ---------------------------------------
Julia Bartling
/s/ Dennis L. Brack Director March 12, 2004
- ---------------------------------------
Dennis L. Brack
/s/ Ralph W. Cortese Director March 12, 2004
- ---------------------------------------
Ralph W. Cortese
/s/ Grace T. Daniel Director March 12, 2004
- ---------------------------------------
Grace T. Daniel
/s/ Paul A. DeBriyn Director March 12, 2004
- ---------------------------------------
Paul A. DeBriyn
/s/ Kenneth E. Graff Director March 12, 2004
- ---------------------------------------
Kenneth E. Graff
/s/ W. David Hemingway Director March 12, 2004
- ---------------------------------------
W. David Hemingway
/s/ Mitchell A. Johnson Director March 12, 2004
- ---------------------------------------
Mitchell A. Johnson
/s/ Lowell L. Junkins Vice Chairman March 12, 2004
- --------------------------------------- and Director
Lowell L. Junkins
/s/ Glen Klippenstein Director March 12, 2004
- ---------------------------------------
Glen Klippenstein
/s/ Charles E. Kruse Director March 12, 2004
- ---------------------------------------
Charles E. Kruse
/s/ John G. Nelson Director March 12, 2004
- ---------------------------------------
John G. Nelson
/s/ Peter T. Paul Director March 12, 2004
- ---------------------------------------
Peter T. Paul
/s/ John Dan Raines, Jr. Director March 12, 2004
- ---------------------------------------
John Dan Raines, Jr.