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As filed with the Securities and Exchange Commission
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on May 10, 2004
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004 Commission File Number 0-17440
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
Federally chartered instrumentality
of the United States 52-1578738
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
1133 Twenty-First Street, N.W., Suite 600
Washington, D.C. 20036
(Address of principal executive offices) (Zip code)
(202) 872-7700
(Registrant's telephone number, including area code)
----------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of May 1, 2004, there were 1,030,780 shares of Class A Voting Common
Stock, 500,301 shares of Class B Voting Common Stock and 10,554,918 shares of
Class C Non-Voting Common Stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
The following interim condensed consolidated financial statements of the
Federal Agricultural Mortgage Corporation ("Farmer Mac" or the "Corporation")
have been prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. These interim condensed consolidated
financial statements reflect all normal and recurring adjustments that are, in
the opinion of management, necessary to present a fair statement of the
financial condition and the results of operations and cash flows of Farmer Mac
for the interim periods presented. Certain information and footnote disclosures
normally included in annual consolidated financial statements have been
condensed or omitted as permitted by such rules and regulations. Management
believes that the disclosures are adequate to present fairly the condensed
consolidated financial position, condensed consolidated results of operations
and condensed consolidated cash flows as of the dates and for the periods
presented. These condensed consolidated financial statements should be read in
conjunction with the audited 2003 consolidated financial statements of Farmer
Mac included in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2003. Results for interim periods are not necessarily indicative of
those that may be expected for the fiscal year.
The following information concerning Farmer Mac's interim condensed
consolidated financial statements is included in this report beginning on the
pages listed below:
Condensed Consolidated Balance Sheets as of March 31, 2004
and December 31, 2003.......................................... 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2004 and 2003..................... 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2004 and 2003..................... 5
Notes to Condensed Consolidated Financial Statements............. 6
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
March 31, December 31,
2004 2003
------------------ ------------------
Assets:
Cash and cash equivalents $ 336,245 $ 623,674
Investment securities 1,107,471 1,064,782
Farmer Mac Guaranteed Securities 1,420,890 1,508,134
Loans held for sale 32,754 46,662
Loans held for investment 946,617 942,929
Allowance for loan losses (7,671) (5,967)
------------------ ------------------
Loans, net 971,700 983,624
Real estate owned, net of valuation allowance of
$0.2 million and $0.2 million 12,284 15,478
Financial derivatives 2,789 961
Interest receivable 37,153 58,423
Guarantee and commitment fees receivable 14,714 16,885
Deferred tax asset, net 13,839 10,891
Prepaid expenses and other assets 28,505 16,798
------------------ ------------------
Total Assets $ 3,945,590 $ 4,299,650
------------------ ------------------
Liabilities and Stockholders' Equity:
Liabilities:
Notes payable:
Due within one year $ 2,288,511 $ 2,799,384
Due after one year 1,291,956 1,136,110
------------------ ------------------
Total notes payable 3,580,467 3,935,494
Financial derivatives 80,567 67,670
Accrued interest payable 28,425 26,342
Guarantee and commitment obligation 13,597 14,144
Accounts payable and accrued expenses 16,819 29,574
Reserve for losses 11,952 13,172
------------------ ------------------
Total Liabilities 3,731,827 4,086,396
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,
10,539,131 and 10,522,513 shares issued and outstanding
as of March 31, 2004 and December 31, 2003 10,539 10,523
Additional paid-in capital 88,968 88,652
Accumulated other comprehensive income/(loss) (9,945) (2,295)
Retained earnings 87,670 79,843
------------------ ------------------
Total Stockholders' Equity 213,763 213,254
------------------ ------------------
Total Liabilities and Stockholders' Equity $ 3,945,590 $ 4,299,650
------------------ ------------------
See accompanying notes to condensed consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three Months Ended
--------------------------------------
March 31, 2004 March 31, 2003
----------------- -----------------
Interest income:
Investments and cash equivalents $ 8,335 $ 9,607
Farmer Mac Guaranteed Securities 16,628 19,512
Loans 14,125 12,849
----------------- -----------------
Total interest income 39,088 41,968
Interest expense 29,621 32,093
----------------- -----------------
Net interest income 9,467 9,875
Provision for loan losses (2,793) (1,208)
----------------- -----------------
Net interest income after provision
for loan losses 6,674 8,667
Guarantee and commitment fees 5,222 5,094
Gains on financial derivatives
and trading assets 3,248 3,333
Gains/(Losses) on the sale of
real estate owned (282) 123
Miscellaneous income 522 251
----------------- -----------------
Total revenues 15,384 17,468
----------------- -----------------
Expenses:
Compensation and employee benefits 1,797 1,440
General and administrative 2,071 1,192
Regulatory fees 412 383
REO operating costs, net 75 -
Provision for losses (1,178) 1,018
----------------- -----------------
Total operating expenses 3,177 4,033
----------------- -----------------
Income before income taxes 12,207 13,435
Income tax expense 3,820 4,452
----------------- -----------------
Net income 8,387 8,983
----------------- -----------------
Preferred stock dividends (560) (560)
----------------- -----------------
Net income available to common stockholders $ 7,827 $ 8,423
----------------- -----------------
Earnings per common share:
Basic earnings per common share $ 0.65 $ 0.72
Diluted earnings per common share $ 0.64 $ 0.70
See accompanying notes to condensed consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended
------------------------------------
March 31, 2004 March 31, 2003
----------------- -----------------
Cash flows from operating activities:
Net income $ 8,387 $ 8,983
Adjustments to reconcile net income to net cash provided by
operating activities:
Net amortization of investment premiums and discounts 590 95
Amortization of debt premiums, discounts and issuance costs 7,149 9,681
Proceeds from repayment of trading investment securities 1,202 2,720
Net change in fair value of trading securities and derivatives (3,098) (3,756)
Amortization of settled financial derivatives contracts 273 298
(Gains)/Losses on the sale of real estate owned 282 (123)
Total provision for losses 1,615 2,226
Decrease in interest receivable 21,270 25,556
Decrease in guarantee and commitment fees receivable 2,171 2,285
Increase in other assets (14,219) (17,308)
Increase in accrued interest payable 2,083 1,016
Increase/(decrease) in other liabilities (16,944) 17,150
----------------- -----------------
Net cash provided by operating activities 10,761 48,823
Cash flows from investing activities:
Purchases of available-for-sale investment securities (257,116) (191,508)
Purchases of Farmer Mac II Guaranteed Securities and
AgVantage bonds (37,511) (46,936)
Purchases of loans (31,234) (103,410)
Proceeds from repayment of investment securities 219,090 135,031
Proceeds from repayment of Farmer Mac Guaranteed Securities 97,460 114,944
Proceeds from repayment of loans 46,574 51,640
Proceeds from sale of loans and Farmer Mac Guaranteed Securities 29,065 13,256
Proceeds from sale of REO 1,300 903
----------------- -----------------
Net cash provided by/(used in) investing activities 67,628 (26,080)
Cash flows from financing activities:
Proceeds from issuance of discount notes 24,515,765 10,148,517
Proceeds from issuance of medium-term notes 369,971 53,700
Payments to redeem discount notes (25,183,124) (10,185,804)
Payments to redeem medium-term notes (66,720) (75,401)
Settlement of financial derivatives (1,482) (1,165)
Proceeds from common stock issuance 332 11
Preferred stock dividends (560) (560)
----------------- -----------------
Net cash used in financing activities (365,818) (60,702)
----------------- -----------------
Net decrease in cash and cash equivalents (287,429) (37,959)
Cash and cash equivalents at beginning of period 623,674 723,800
----------------- -----------------
Cash and cash equivalents at end of period $ 336,245 $ 685,841
----------------- -----------------
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Accounting Policies
(a) Cash and Cash Equivalents
Farmer Mac considers highly liquid investment securities with remaining
maturities of three months or less at the time of purchase to be cash
equivalents. Changes in the balance of cash and cash equivalents are reported in
the Condensed Consolidated Statements of Cash Flows. The following table sets
forth information regarding certain cash and non-cash transactions for the three
months ended March 31, 2004 and 2003.
Three Months Ended
March 31,
-------------------------
2004 2003
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(in thousands)
Cash paid for:
Interest $ 14,415 $ 13,854
Income taxes - -
Non-cash activity:
Real estate owned acquired through foreclosure 2,079 5,794
Loans acquired and securitized as Farmer Mac
Guaranteed Securities 27,203 13,261
Loans acquired from on-balance sheet Farmer Mac
Guaranteed Securities 4,744 20,019
(b) Allowance for Losses
As of March 31, 2004, Farmer Mac maintained a $22.2 million 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 long-term
standby purchase commitments ("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, as amended ("SFAS 114"). The methodology for
determining the allowance for losses is the same for loans held for investment
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs
because Farmer Mac believes the ultimate credit risk is 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 payment 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 for investment, 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 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 allocates 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 allowances as of March 31,
2004 and December 31, 2003, the population of loans specifically reviewed
included:
o non-performing assets (loans 90 days or more past due, in foreclosure,
restructured, in bankruptcy - including loans performing under either
their original loan term 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'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 (as described above), to determine its allowance for losses.
The table below summarizes the components of Farmer Mac's allowance for
losses, which includes its contingent obligation for probable losses, as of
March 31, 2004 and December 31, 2003.
March 31, December 31,
2004 2003
---------------- -----------------
(in thousands)
Allowance for loan losses $ 7,671 $ 5,967
Real estate owned valuation allowance 193 238
Reserve for losses:
On-balance sheet Farmer Mac I Guaranteed Securities 2,312 2,861
Off-balance sheet Farmer Mac I Guaranteed Securities 1,048 1,070
LTSPCs 8,592 9,241
Contingent obligation for probable losses 2,343 2,676
---------------- -----------------
Total $ 22,159 $ 22,053
---------------- -----------------
No allowance for losses has been made for loans underlying Farmer Mac I
Guaranteed Securities issued prior to the Farm Credit System Reform Act of 1996
(the "1996 Act") or securities issued under the Farmer Mac II program ("Farmer
Mac II Guaranteed Securities"). Farmer Mac I Guaranteed Securities issued prior
to the 1996 Act are supported by unguaranteed first loss subordinated interests,
which are expected to exceed the estimated credit losses on those loans. The
guaranteed portions of loans collateralizing Farmer Mac II Guaranteed Securities
are guaranteed by the United States Department of Agriculture ("USDA"). Each
USDA guarantee is an obligation backed by the full faith and credit of the
United States. To date, Farmer Mac has experienced no credit losses on any
pre-1996 Act Farmer Mac I Guaranteed Securities or on any Farmer Mac II
Guaranteed Securities and does not expect to incur any such losses in the
future.
(c) Financial Derivatives
Farmer Mac enters into financial derivative transactions principally to
protect against risk from the effects of market price or interest rate movements
on the value of certain assets and future cash flows or debt issuance, not for
trading or speculative purposes. Farmer Mac enters into interest rate swap
contracts principally to adjust the characteristics of its short-term debt to
match more closely the cash flow and duration characteristics of its longer-term
mortgage and other assets, and also to adjust the characteristics of its
long-term debt to match more closely the cash flow and duration characteristics
of its short-term assets, thereby reducing interest rate risk. These
transactions also may provide an overall lower effective cost of borrowing than
would otherwise be available in the conventional debt market.
All financial derivatives are recorded on the balance sheet at fair value
as a freestanding asset or liability. Financial derivatives in hedging
relationships that mitigate exposure to changes in the fair value of assets are
considered fair value hedges. Financial derivatives in hedging relationships
that mitigate the exposure to the variability in expected future cash flows or
other forecasted transactions are considered cash flow hedges. Financial
derivatives that do not satisfy the hedging criteria of Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended ("SFAS 133") are not accounted for as hedges and changes
in the fair values of those financial derivatives are reported as gains or
losses on financial derivatives and trading assets in the condensed consolidated
statements of operations.
The following table summarizes information related to Farmer Mac's
financial derivatives as of March 31, 2004 and December 31, 2003:
March 31, 2004
---------------------------------------------------------------------------------------------------------------
Cash Flow Hedges Fair Value Hedges No Hedge Designation Total
-------------------------- ------------------------- -------------------------- -------------------------------
Notional Fair Value Notional Fair Value Notional Fair Value Notional Fair Value
------------ ------------- ------------ ------------ ------------- ------------ ------------------ ------------
(in thousands)
Interest rate swaps:
Pay-fixed $625,550 $(68,773) $ - $ - $ 38,177 $ (516) $ 663,727 $(69,289)
Receive-fixed - - 140,000 (851) 100,000 2,344 240,000 1,493
Basis 283,292 (9,630) - - 293,093 (134) 576,385 (9,764)
Other - - - - 25,000 9 25,000 9
Interest rate caps - - - - 210,000 - 210,000 -
Agency forwards 56,516 (238) - - 28,792 11 85,308 (227)
------------ ------------- ------------ ------------ ------------- ------------ ------------------ ------------
Total $965,358 $(78,641) $140,000 $ (851) $ 695,062 $ 1,714 $ 1,800,420 $(77,778)
============ ============= ============ ============ ============= ============ ================== ============
December 31, 2003
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Cash Flow Hedges Fair Value Hedges No Hedge Designation Total
-------------------------- ------------------------- -------------------------- -------------------------------
Notional Fair Value Notional Fair Value Notional Fair Value Notional Fair Value
------------ ------------- ------------ ------------ ------------- ------------ ------------------ ------------
(in thousands)
Interest rate swaps:
Pay-fixed $ 636,213 $ (55,397) $ - $ - $ 138,177 $ (2,023) $ 774,390 $ (57,420)
Receive-fixed - - 145,000 (2,782) - - 145,000 (2,782)
Basis 307,621 (5,879) - - 14,296 (260) 321,917 (6,139)
Other - - - - 25,000 (27) 25,000 (27)
Interest rate caps - - - - 210,000 - 210,000 -
Agency forwards 54,196 (417) 26,332 76 - - 80,528 (341)
------------ ------------- ------------ ------------ ------------- ------------ ------------------ ------------
Total $ 998,030 $ (61,693) $ 171,332 $ (2,706) $ 387,473 $ (2,310) $1,556,835 $ (66,709)
============ ============= ============ ============ ============= ============ ================== ============
As of March 31, 2004, Farmer Mac had approximately $58.0 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 the issuance of discount notes) affect
earnings or immediately when it becomes probable that the original hedged
forecasted transaction will not occur within two months of the originally
specified date. Over the next twelve months, Farmer Mac estimates that $9.8
million of the amount currently reported in accumulated other comprehensive
income/(loss) will be reclassified into earnings. For the quarter ended March
31, 2004, any ineffectiveness related to Farmer Mac's designated hedges was
insignificant.
(d) Earnings Per Common Share
Basic earnings per common share are based on the weighted-average number of
common shares outstanding. Diluted earnings per common share are based on the
weighted-average number of common shares outstanding adjusted to include all
potentially dilutive common stock options. The following schedule reconciles
basic and diluted earnings per common share for the three months ended March 31,
2004 and 2003:
Three Months Ended March 31,
----------------------------------------------------------------
2004 2003
-------------------------------- ------------------------------
Dilutive Dilutive
Basic stock Diluted Basic stock Diluted
EPS options EPS EPS options EPS
---------- ----------- --------- --------- ---------- ----------
(in thousands, except per share amounts)
Net income available to $ 7,827 $ 7,827 $ 8,423 $ 8,423
common stockholders
Weighted average shares 12,066 207 12,273 11,638 325 11,963
Earnings per common share $ 0.65 $ 0.64 $ 0.72 $ 0.70
(e) Stock-Based Compensation
Farmer Mac accounts for its stock-based employee compensation plans using
the intrinsic value method of accounting for employee stock options pursuant to
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
as amended ("SFAS 123"). Accordingly, no compensation expense was recognized in
first quarter 2004 or first quarter 2003 for employee stock options. Had Farmer
Mac elected to use the fair value method of accounting for employee stock
options, there would have been no effect on net income available to common
stockholders and earnings per share for the three months ended March 31, 2004
and 2003, as no stock options were granted during either period.
The following table summarizes stock option activity for the three months
ended March 31, 2004 and 2003:
Three Months Ended March 31,
---------------------------------------------------------------
2004 2003
-------------------------------- -----------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
--------------- ---------------- -------------- -------------
Outstanding, beginning of period 1,575,980 $ 22.92 1,637,111 $ 19.45
Granted - - - -
Exercised (16,124) 13.63 - -
Canceled (2,501) 30.27 - -
--------------- ---------------- -------------- -------------
Outstanding, end of period 1,557,355 $ 23.00 1,637,111 $ 19.45
--------------- ---------------- -------------- -------------
Options exercisable at end of period 1,229,312 1,373,949
--------------- --------------
(f) Reclassifications
Certain reclassifications of prior period information were made to conform
to the current period presentation.
(g) New Accounting Standards
In March 2004, the Emerging Issues Task Force ("EITF") amended EITF 03-01,
The Meaning of Other-Than-Temporary Impairment, to introduce a three-step model
to: 1) determine whether an investment is impaired; 2) evaluate whether the
impairment is other-than-temporary; and 3) account for other-than-temporary
impairments. In part, this amendment requires companies to apply qualitative and
quantitative measures to determine whether a decline in the fair value of a
security is other-than-temporary. This amendment is effective for financial
periods beginning after June 15, 2004. Farmer Mac is evaluating this amendment
and will adopt it beginning in third quarter 2004.
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 2003, the
Securities and Exchange Commission 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
prospectively effective January 1, 2004.
Note 2. Farmer Mac Guaranteed Securities
Farmer Mac creates Farmer Mac Guaranteed Securities through the transfer of
agricultural mortgage loans into trusts that are used as vehicles for the
securitization of the transferred assets. The beneficial interests that are
securitized are either retained or sold to third party investors. Farmer Mac
records the beneficial interests that it has retained on its balance sheet as
Farmer Mac Guaranteed Securities. As of March 31, 2004 and December 31, 2003,
retained Farmer Mac Guaranteed Securities included the following:
March 31, 2004 December 31, 2003
------------------------------------------------ -------------------------------------------------
Available- Held-to- Available- Held-to-
for-Sale Maturity Total for-Sale Maturity Total
--------------- ---------------- --------------- ---------------- --------------- ---------------
(in thousands)
Farmer Mac I $ 695,958 $ 48,528 $ 744,486 $ 779,560 $ 49,901 $ 829,461
Farmer Mac II - 676,404 676,404 - 678,673 678,673
--------------- ---------------- --------------- ---------------- --------------- ---------------
Total $ 695,958 $ 724,932 $ 1,420,890 $ 779,560 $ 728,574 $ 1,508,134
--------------- ---------------- --------------- ---------------- --------------- ---------------
Amortized cost $ 640,513 $ 724,932 $ 1,365,445 $ 725,674 $ 728,574 $ 1,454,248
Unrealized gains 55,445 22,560 78,005 53,902 14,434 68,336
Unrealized losses - - - (16) - (16)
--------------- ---------------- --------------- ---------------- --------------- ---------------
Fair value $ 695,958 $ 747,492 $ 1,443,450 $ 779,560 $ 743,008 $ 1,522,568
--------------- ---------------- --------------- ---------------- --------------- ---------------
The table below presents a sensitivity analysis for Farmer Mac's retained
Farmer Mac Guaranteed Securities as of March 31, 2004.
March 31, 2004
-----------------------
(dollars in thousands)
Fair value of beneficial interests retained
in Farmer Mac Guaranteed Securities $ 1,442,666
Weighted-average remaining life 4.8 years
Weighted-average prepayment speed (annual rate) 10.3%
Effect on fair value of a 10% adverse change $ (1,056)
Effect on fair value of a 20% adverse change $ (2,009)
Weighted-average discount rate
Effect on fair value of a 10% adverse change $ (18,960)
Effect on fair value of a 20% adverse change $ (37,761)
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. Due to the differing interest rate and
funding risk characteristics of on- and off-balance sheet asset classes, Farmer
Mac manages its on-balance sheet agricultural mortgage loans held and
securitized differently from its off-balance sheet securitized agricultural
mortgage loans and off-balance sheet agricultural mortgage loans underlying
LTSPCs.
Farmer Mac separately manages its securitized USDA-guaranteed portions and
manages those held on its balance sheet differently from those that are
off-balance sheet - also due to their differing interest rate and funding risk
characteristics.
As part of fulfilling its guarantee obligations for Farmer Mac I Guaranteed
Securities and commitments to purchase eligible loans underlying LTSPCs, Farmer
Mac purchases defaulted loans, all of which are at least 90 days delinquent at
the time of purchase, out of those securities and pools, and records the
purchased loans as such on its balance sheet.
The table below presents the outstanding principal balances, 90-day
delinquencies and net credit losses as of and for the periods indicated for each
managed asset class, both on- and off-balance sheet.
Outstanding Principal 90-Day
Amount Delinquencies (1) Net Credit Losses
-------------------------- -------------------------- ----------------------------
As of As of As of As of For the Three Months Ended
March 31, December 31, March 31, December 31, March 31,
----------- -------------- ----------- -------------- ----------------------------
2004 2003 2004 2003 2004 2003
----------- -------------- ----------- -------------- ---------- -----------------
(in thousands)
On-balance sheet assets:
Farmer Mac I:
Loans $ 966,734 $ 976,280 $ 49,145 $ 28,089 $ 1,089 $ 842
Guaranteed Securities 689,705 777,134 - - - 180
Farmer Mac II:
Guaranteed Securities 675,978 678,229 - - - -
----------- -------------- ----------- -------------- ----------------------------
Total on-balance sheet $2,332,417 $ 2,431,643 $ 49,145 $ 28,089 $ 1,089 $ 1,022
----------- -------------- ----------- -------------- ----------------------------
Off-balance sheet assets:
Farmer Mac I:
LTSPCs $2,382,648 $ 2,348,703 $ 8,230 $ 1,967 $ - $ -
Guaranteed Securities 919,757 952,134 - - - -
Farmer Mac II:
Guaranteed Securities 47,000 51,241 - - - -
----------- -------------- ----------- -------------- ----------------------------
Total off-balance sheet $3,349,405 $ 3,352,078 $ 8,230 $ 1,967 $ - $ -
----------- -------------- ----------- -------------- ----------------------------
Total $5,681,822 $ 5,783,721 $ 57,375 $ 30,056 $ 1,089 $ 1,022
----------- -------------- ----------- -------------- ----------------------------
(1) Includes loans and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities that are 90 days or more past due, in foreclosure, restructured
after delinquency, and in bankruptcy excluding loans performing under
either their original loan terms or a court-approved bankruptcy plan.
Note 3. Off-Balance Sheet Guarantees and Long-Term Standby Purchase Commitments
Overview
Farmer Mac offers approved agricultural and rural residential mortgage
lenders two off-balance sheet alternatives to increase their liquidity or
lending capacity while retaining the cash flow benefits of their loans: (1)
Farmer Mac Guaranteed Securities, which are available through either the Farmer
Mac I program or the Farmer Mac II program, and (2) LTSPCs, which are available
only through the Farmer Mac I program. 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.
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 trusts are sold to third party investors. The
table below summarizes certain cash flows received from and paid to these
trusts.
Three Months Ended March 31,
-------------------------------------
2004 2003
------------------ -----------------
(in thousands)
Proceeds from new securitizations $ 27,203 $ 13,261
Guarantee fees received 616 714
Purchases of assets from the trusts 1,046 23,478
Servicing advances 15 3
Repayment of servicing advances 20 -
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 March 31, 2004 and
December 31, 2003, 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
- ----------------------------------------------------------------------------
March 31, December 31,
2004 2003
----------------- ---------------
(in thousands)
Farmer Mac I Guaranteed Securities $ 919,757 $ 952,134
Farmer Mac II Guaranteed Securities 47,000 51,241
----------------- ---------------
Total Farmer Mac I and II $ 966,757 $ 1,003,375
----------------- ---------------
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 amounts advanced for the timely
payment of principal and interest on Farmer Mac II Guaranteed Securities. That
recourse is the USDA guarantee, a full faith and credit obligation of the United
States that becomes enforceable if a lender fails to repurchase the
USDA-guaranteed portion from its owner within 30 days after written demand from
the owner when (a) the borrower under the guaranteed loan is in default not less
than 60 days in the payment of any principal or interest due on the
USDA-guaranteed portion, or (b) the lender has failed to remit to the owner the
payment made by the borrower on the USDA-guaranteed portion or any related loan
subsidy within 30 days after the lender's receipt of the payment.
As of March 31, 2004, the weighted-average remaining maturity of all loans
underlying off-balance sheet Farmer Mac Guaranteed Securities was 16.3 years.
For the off-balance sheet Farmer Mac I Guaranteed Securities that were executed
on or before December 31, 2002, Farmer Mac has recorded an allowance for
probable losses of $1.0 million as of March 31, 2004 and $1.1 million as of
December 31, 2003. For those securities that were issued or modified on or after
January 1, 2003, Farmer Mac has recorded the fair value of its initial
obligation to stand ready under the guarantee as a liability. This liability
approximated $3.8 million as of March 31, 2004 and $4.1 million as of December
31, 2003 and is reported in the guarantee and commitment obligation on the
condensed consolidated balance sheet.
Long-Term Standby Purchase Commitments (LTSPCs)
An LTSPC is a commitment by Farmer Mac to purchase eligible loans, either
for cash or in exchange for Farmer Mac I Guaranteed Securities, on one or more
undetermined future dates. In consideration for Farmer Mac's assumption of the
credit risk on loans underlying an LTSPC, Farmer Mac receives 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 credit underwriting, appraisal and documentation
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 exposures and, consequently, its
regulatory capital requirements and loan loss reserve requirements. Credit risk
is transferred through Farmer Mac's commitment to purchase the segregated loans
from the counterparty based upon Farmer Mac's original credit review and
acceptance of the credit risk on the loans.
The specific events or circumstances that would require Farmer Mac to
purchase some or all of the segregated loans under its LTSPCs include: (1) the
failure of the borrower under any loan to make installment payments under that
loan for a period of at least four months; or (2) the determination by the
holder of the LTSPC to sell some or all of the loans under the LTSPC to Farmer
Mac.
As of March 31, 2004 and December 31, 2003, 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 $2.4
billion and $2.3 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. For all LTSPC transactions to date, Farmer Mac has
incurred a charge-off on one loan.
As of March 31, 2004, the weighted-average remaining maturity of all loans
underlying LTSPCs was 14.6 years. For the LTSPCs that were executed on or before
December 31, 2002, Farmer Mac has recorded an allowance for probable losses of
$8.6 million as of March 31, 2004 and $9.2 million as of December 31, 2003. For
those LTSPCs that were issued or modified on or after January 1, 2003, Farmer
Mac has recorded the fair value of its initial obligation to stand ready under
the commitment as a liability. This liability approximated $7.5 million as of
March 31, 2004 and $7.3 million as of December 31, 2003 and was included in the
guarantee and commitment obligation on the condensed consolidated balance sheet.
Note 4. Comprehensive Income
Comprehensive income is comprised of net income plus other changes in
stockholders' equity not resulting from investments by or distributions to
stockholders. The following table sets forth comprehensive income for the three
months ended March 31, 2004 and 2003.
Three Months Ended
March 31,
--------------------------
2004 2003
------------ ------------
(in thousands)
Net income $ 8,387 $ 8,983
Other comprehensive income/(loss):
Available-for-sale securities:
Change in unrealized gains 7,380 (4,856)
Tax effect (2,583) 1,699
------------ ------------
Net change from available-for-sale securities 4,797 (3,157)
Cash flow hedges:
Change in fair value, net of
reclassification adjustments (19,148) 1,763
Tax effect 6,702 (617)
------------ ------------
Net change from cash flow hedges (12,446) 1,146
------------ ------------
Other comprehensive income/(loss) (7,649) (2,011)
------------ ------------
Comprehensive income $ 738 $ 6,972
------------ ------------
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Special Note Regarding Forward-Looking Statements
Certain statements made in this report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995
pertaining to management's current expectations as to Farmer Mac's future
financial results, business prospects and business developments. Forward-looking
statements include, without limitation, any statement that may predict,
forecast, indicate or imply future results, performance or achievements, and
typically are accompanied by, and identified with, such terms as "anticipates,"
"believes," "expects," "intends," "should" and similar phrases. The following
management's discussion and analysis includes forward-looking statements
addressing Farmer Mac's:
o prospects for earnings;
o growth in loan purchase, guarantee, LTSPC and securitization 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 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 affect Farmer Mac's business and
its financial performance. Furthermore, new risk factors emerge from time to
time and it is not possible for management to predict all such risk factors, nor
assess the effects of such factors on Farmer Mac's business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from the expectations expressed or implied by the forward-looking
statements. In light of these potential risks and uncertainties, no undue
reliance should be placed on any forward-looking statements expressed in this
report. Furthermore, Farmer Mac undertakes no obligation to release publicly the
results of revisions to any forward-looking statements that may be made to
reflect any future events or circumstances, except as otherwise mandated by the
Securities and Exchange Commission.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires the use
of estimates and assumptions that affect the amounts reported in the condensed
consolidated financial statements and related notes for the periods presented.
Actual results could differ from those estimates. The critical accounting policy
that is both important to the portrayal of Farmer Mac's financial condition and
results of operations and requires complex, subjective judgments is the
accounting policy for the allowance for losses. Farmer Mac's allowance for
losses is presented as follows on its consolidated balance sheet:
o an "Allowance for loan losses" on loans held for investment;
o a valuation allowance on real estate owned, which is included in the
balance sheet under "Real estate owned, net of valuation allowance";
o an allowance for losses on loans underlying post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs entered into or modified after
January 1, 2003, which is included in the balance sheet as a portion
of the amount reported as "Guarantee and commitment obligation"; and
o an allowance for losses on loans underlying post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs entered into prior to January 1,
2003, which is included in the balance sheet under "Reserve for
losses."
The purpose of the allowance for losses is to provide for estimated losses
that are probable to have occurred as of the balance sheet date, not to predict
or account for future potential losses. The determination of the allowance for
losses requires management to make significant estimates based on information
available as of the balance sheet date, including the amounts and timing of
losses and current market and economic conditions. These estimates are subject
to change in future reporting periods if such conditions and information change.
For example, a continued decline in the national or agricultural economies could
result in an increase in delinquencies or foreclosures, which may require
additional allowances for losses in future periods.
Farmer Mac maintains an allowance for losses to cover estimated probable
losses on 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
that are charged to operating expense and reduced by charge-offs for actual
losses, net of recoveries. The establishment of and periodic adjustments to the
REO valuation allowance are charged against income as a portion of the provision
for losses charged to operating expense. Charge-offs represent losses on the
outstanding principal balance, any interest payments previously accrued or
advanced and expected costs of liquidation. 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
"--Quantitative and Qualitative Disclosures About Market Risk Management--Credit
Risk."
Results of Operations
Overview. Net income available to common stockholders for first quarter
2004 was $7.8 million or $0.64 per diluted common share, compared to $8.4
million or $0.70 per diluted common share for first quarter 2003. During first
quarter 2004, Farmer Mac:
o added $147.3 million of Farmer Mac I eligible loans under LTSPCs;
o purchased $25.4 million of newly originated Farmer Mac I eligible
loans; and
o purchased $34.5 million of Farmer Mac II eligible USDA-guaranteed
portions of loans.
USDA is currently forecasting national farm cash receipts to increase to
$215.0 billion in 2004 from the $212.4 billion forecasted level in 2003. Prices
available to farmers have been rising as a result of strong domestic and foreign
demand. Forecasted net cash income on farms for 2004 is $55.9 billion, a $7.1
billion decrease from 2003 forecasted levels of $63.0 billion, but still higher
than the $49.1 billion level of 2002. The forecasted net cash income on farms
for 2004 includes government payments of $10.3 billion, as compared to $17.4
billion in 2003 and $11.0 billion in 2002.
Despite the decline in farm income in 2004, the rise in farm business
assets, debt, and equity values is expected to continue through the end of the
year. USDA forecasts the value of U.S. farm real estate assets to rise 3.5
percent to $1.13 trillion in 2004, up from 2003's $1.09 trillion. Total farm
real estate debt is expected to approach $116.5 billion by the end of 2004, a
4.7 percent increase over the 2003 level. This more moderate rise in farm real
estate debt follows growth of 7.7 percent in 2003 and 7.7 percent in 2002.
Sector equity is expected to rise more than 3 percent, as the gain in asset
values exceeds the increase in debt by approximately $36 billion.
The financial measures reflect farm investors' and lenders' collective
decisions about the long-term expected profitability of farm investments and
agriculture generally. These expectations should be favorable for Farmer Mac's
business plans, as they indicate increased U.S. farm real estate values, an
expanding mortgageable farm real estate base, and a stronger equity position in
U.S. agriculture, which should in the aggregate improve Farmer Mac'Ss ability to
recover in foreclosures.
Set forth below is a more detailed discussion of Farmer Mac's results of
operations.
Net Interest Income. Net interest income, 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 $9.5 million for first quarter 2004, compared to $9.9 million for first
quarter 2003. The net interest yield was 93 basis points for the three months
ended March 31, 2004, compared to 99 basis points for the three months ended
March 31, 2003. The effect of the adoption of SFAS 140 was a reclassification of
approximately $1.1 million (10 basis points) of guarantee fee income as interest
income for the three months ended March 31, 2004, compared to $1.1 million (11
basis points) for the three months ended March 31, 2003.
In 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 three months ended March 31, 2004 and 2003, this
reclassification resulted in the decrease of the net interest yield of 4 basis
points and an increase of 4 basis points, respectively.
The net interest yields for first quarter 2004 and 2003 included the
benefits of yield maintenance payments received of 11 basis points and 14 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 amounts of these
payments vary greatly, variations should not be considered indicative of
positive or negative trends to gauge future financial results. For the three
months ended March 31, 2004 and 2003, the effects of yield maintenance payments
on net income and diluted earnings per share were $0.8 million or $0.06 per
diluted share and $0.9 million or $0.07 per diluted share, respectively.
The following table provides information regarding the average balances and
rates of interest-earning assets and funding for the three months ended March
31, 2004 and 2003. The balance of non-accruing loans is included in the average
balance of interest-earning loans presented, though no related income is
included in the income figures presented. The decreases in the average rates for
cash and cash equivalents reflect their short-term nature. The decreases in the
average rates for investments and loans and Farmer Mac Guaranteed Securities
reflect the relatively large proportion of adjustable rates in those asset
categories (71.5 percent of investments and 65.1 percent of loans and Farmer Mac
Guaranteed Securities). The decrease in the average rate for discount notes also
reflects their short-term nature. The decreases in all of these rates track the
general decrease in market rates between the two periods.
Three Months Ended March 31,
-----------------------------------------------------------------------
2004 2003
---------------------------------- ----------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
------------- ---------- --------- ----------- ----------- ----------
(dollars in thousands)
Interest-earning assets:
Cash and cash equivalents $ 702,546 $ 1,993 1.13% $ 727,265 $ 2,789 1.53%
Investments 961,262 6,342 2.64% 815,501 6,818 3.34%
Loans and Farmer Mac Guaranteed Securities 2,396,623 30,753 5.13% 2,444,857 32,361 5.29%
------------- ---------- --------- ----------- ----------- ----------
Total interest-earning assets 4,060,431 39,088 3.85% 3,987,623 41,968 4.21%
------------- ---------- ----------- -----------
Funding:
Notes payable due within one year 2,416,202 12,974 2.15% 2,738,155 16,474 2.41%
Notes payable due after one year 1,445,586 16,647 4.61% 1,085,048 15,619 5.76%
------------- ---------- --------- ----------- ----------- ----------
Total interest-bearing liabilities 3,861,788 29,621 3.07% 3,823,203 32,093 3.36%
Net non-interest-bearing funding 198,643 164,420
------------- ---------- --------- ----------- ----------- ----------
Total funding $ 4,060,431 29,621 2.92% $ 3,987,623 32,093 3.22%
------------- ---------- --------- ----------- ----------- ----------
Net interest income/yield $ 9,467 0.93% $ 9,875 0.99%
---------- --------- ----------- ----------
The following table sets forth information regarding the changes in the
components of Farmer Mac's net interest income for the periods indicated. For
each category, information is provided on changes attributable to changes in
volume (change in volume multiplied by old rate) and changes in rate (change in
rate multiplied by old volume). Combined rate/volume variances, the third
element of the calculation, are allocated based on their relative size. The
decreases due to rate reflect the short-term or adjustable-rate nature of most
assets or liabilities and the general decreases in market rates described above.
Three Months Ended March 31, 2004
Compared to Three Months Ended
March 31, 2003
--------------------------------------------
Increase/(Decrease) Due to
--------------------------------------------
Rate Volume Total
--------------- -------------- -------------
(in thousands)
Income from interest-earning assets
Cash and cash equivalents $ (704) $ (92) $ (796)
Investments (1,576) 1,100 (476)
Loans and Farmer Mac Guaranteed Securities (978) (630) (1,608)
--------------- -------------- -------------
Total (3,258) 378 (2,880)
Expense from interest-bearing liabilities (5,186) 2,714 (2,472)
--------------- -------------- -------------
Change in net interest income $ 1,928 $ (2,336) $ (408)
--------------- -------------- -------------
Guarantee and Commitment Fees. Guarantee and commitment fees were $5.2
million for first quarter 2004, compared to $5.1 million for first quarter 2003.
The increase in guarantee and commitment fees reflects an increase in the
average balance of outstanding guarantees and LTSPCs. The effects of the
adoption of SFAS 140 reclassified $1.1 million and $1.1 million, respectively,
of guarantee fee income as interest income for first quarter 2004 and first
quarter 2003, although management considers the 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.
Farmer Mac's ongoing guarantee and commitment fee income reflects the
annuity-like revenue stream of that aspect of the Corporation's business. That
fee income is earned on the cumulative outstanding principal balance of
guaranteed securities and loans underlying LTSPCs. Accordingly, GAAP earnings
increase or decrease through changes in periodic business volume in proportion
to the change in that cumulative outstanding principal balance, not in
proportion to the change in periodic volume.
Expenses. Compensation and employee benefits for first quarter 2004 were
$1.8 million, compared to $1.4 million for first quarter 2003. General and
administrative expenses for first quarter 2004 were $2.1 million, compared to
$1.2 million for first quarter 2003. The increases in compensation and employee
benefits and general and administrative expenses were due, in large part, to
increased staffing levels necessary for increased regulatory compliance
activities, including requirements of the Sarbanes-Oxley Act of 2002 and Farmer
Mac's federal regulator, the Farm Credit Administration ("FCA"), as well as
heightened focus on the regulatory environment for government-sponsored
enterprises generally. Regulatory fees assessed by FCA for first quarter 2004
and 2003 were $0.4 million. FCA has advised Farmer Mac that its estimated
assessment level for the year ending September 30, 2004 will be $1.7 million.
After the end of a federal government fiscal year, FCA may revise its prior year
estimated assessments to reflect actual costs incurred, and has issued both
additional assessments and refunds in the past.
Farmer Mac's total provision for losses was $1.6 million for first quarter
2004, compared to $2.2 million for first quarter 2003. (See "--Quantitative and
Qualitative Disclosures About Market Risk Management--Credit Risk" for
additional information regarding Farmer Mac's provision for losses and provision
for loan losses.) As of March 31, 2004, Farmer Mac's total allowance for losses
totaled $22.2 million, or 0.45 percent of outstanding loans held or loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, compared
to $22.1 million (0.44 percent of outstanding loans held or loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs) as of December 31,
2003.
Gains on Financial Derivatives and Trading Assets. For first quarter 2004,
the gain on financial derivatives and trading assets was $3.2 million, compared
to a gain of $3.3 million for first quarter 2003. The gains in first quarter
2004 and first quarter 2003 resulted primarily from fluctuations in the fair
values of financial derivatives that have not been designated in either fair
value or cash flow hedge relationships.
Non-GAAP Performance Measures. Farmer Mac reports its financial results in
accordance with GAAP. In addition to GAAP measures, Farmer Mac presents certain
non-GAAP performance measures. Farmer Mac uses these non-GAAP performance
measures to develop financial plans, to measure corporate performance, and to
set incentive compensation. As described below, because FASB has adopted a mixed
attribute accounting model that does not reflect the economics for transactions
involving Farmer Mac's callable swaps, in management's view the non-GAAP
measures provide a more accurate representation of Farmer Mac's economic
performance, transaction economics and business trends. Investors and the
investment analyst community have previously relied upon similar measures to
evaluate performance and issue projections. These non-GAAP disclosures are not
intended to replace GAAP information but, rather, to supplement it.
One such non-GAAP measure is core earnings, which Farmer Mac developed to
present net income less the after-tax effects of SFAS 133. Core earnings for the
three months ended March 31, 2004 were $5.9 million, compared to $5.9 million
for the three months ended March 31, 2003. The reconciliation of GAAP net income
available to common stockholders to core earnings is presented in the following
table:
Reconciliation of GAAP Net Income Available
to Common Stockholders to Core Earnings
- -----------------------------------------------------------------------------------
Three Months Ended
------------------------------------------
March 31, 2004 March 31, 2003
-------------------- -------------------
(in thousands)
GAAP net income available
to common stockholders $ 7,827 $ 8,423
Less the effects of SFAS 133:
Unrealized gains/(losses)
on financial derivatives and
trading assets, net of tax 1,825 2,441
Benefit from non-amortization
of premium payments
on financial derivatives,
net of tax 76 81
-------------------- -------------------
Core earnings $ 5,926 $ 5,901
-------------------- -------------------
Business Volume. Loans are brought into the Farmer Mac I and Farmer Mac II
programs as follows:
o Farmer Mac purchases eligible loans and guarantees timely payments of
principal and interest of securities backed by those loans as part of
the Farmer Mac I program. Farmer Mac may retain some or all of those
securities in its portfolio or sell them to third parties in capital
markets transactions.
o Farmer Mac purchases USDA-guaranteed portions of loans and guarantees
timely payments of principal and interest of securities backed by
those guaranteed portions as part of the Farmer Mac II program. Farmer
Mac may retain some or all of those securities in its portfolio or
sell them to third parties in capital markets transactions.
o Farmer Mac also enters into LTSPCs for eligible loans. Farmer Mac's
commitments through LTSPCs include either newly originated or seasoned
eligible loans, and are part of the Farmer Mac I program.
o Farmer Mac exchanges Farmer Mac Guaranteed Securities for eligible
loans or USDA-guaranteed portions of loans ("swaps"). Farmer Mac's
swaps of Farmer Mac Guaranteed Securities for USDA-guaranteed portions
of loans are part of the Farmer Mac II program; Farmer Mac's swaps of
Farmer Mac Guaranteed Securities for any other eligible loans are part
of the Farmer Mac I program.
The following table sets forth the amount of all Farmer Mac I and Farmer
Mac II loan purchase and guarantee activities for newly originated and current
seasoned loans during the periods indicated.
Three Months Ended
March 31,
------------------------------
2004 2003
-------------- -------------
(in thousands)
Loan purchase and guarantee and
commitment activity:
Farmer Mac I:
Loans $ 25,444 $ 59,054
LTSPCs 147,273 166,574
Farmer Mac II Guaranteed Securities 34,483 41,893
-------------- -------------
Total purchases, guarantees
and commitments $ 207,200 $267,521
-------------- -------------
Farmer Mac I Guaranteed Securities issuances:
Retained $ - $ -
Sold 27,203 13,261
-------------- -------------
Total $ 27,203 $ 13,261
-------------- -------------
The purchase price of newly originated and seasoned eligible loans and
portfolios purchased by Farmer Mac (none of which were delinquent at the time of
purchase) is the fair value based on current market interest rates and Farmer
Mac's target net yield, which includes an amount to compensate Farmer Mac for
credit risk that is similar to the guarantee or commitment fee it receives for
accepting credit risk on loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs. As part of fulfilling its guarantee obligations for
Farmer Mac I Guaranteed Securities and assumption of credit risk on commitments
to purchase eligible loans underlying LTSPCs, Farmer Mac purchases defaulted
loans (all of which are at least 90 days delinquent at the time of purchase) out
of those securities and pools. The purchase price for defaulted loans purchased
out of Farmer Mac I Guaranteed Securities is the current outstanding principal
balance of the loan plus accrued and unpaid interest. The purchase price for
defaulted loans purchased under an LTSPC is the current outstanding principal
balance of the loan, with accrued and unpaid interest on the defaulted loans
payable out of any future loan payments or liquidation proceeds received. The
following table presents Farmer Mac's loan purchases of newly originated and
current seasoned loans and defaulted loans purchased underlying Farmer Mac I
Guaranteed Securities and LTSPCs.
Three Months Ended
March 31,
-----------------------------
2004 2003
-------------- -------------
(in thousands)
Farmer Mac I newly originated
and current seasoned loan purchases $ 25,444 $ 59,054
Defaulted loans purchased from
off-balance sheet Farmer Mac I
Guaranteed Securities 1,046 23,478
Defaulted loans transferred from
on-balance sheet Farmer Mac I
Guaranteed Securities 4,744 20,019
Defaulted loans purchased
from LTSPCs - 859
-------------- -------------
Total loan purchases $ 31,234 $ 103,410
-------------- -------------
To fulfill its guarantee and commitment obligations, Farmer Mac purchases
delinquent loans underlying Farmer Mac Guaranteed Securities and LTSPCs. The
decreases in defaulted loans purchased and in defaulted loans transferred to
loans reflect a reduction in newly delinquent loans underlying Farmer Mac
Guaranteed Securities and LTSPCs.
The weighted-average age of the Farmer Mac I newly originated and current
seasoned loans purchased during first quarter 2004 and first quarter 2003 was
less than one month and 1.8 months, respectively. Of the Farmer Mac I newly
originated and current seasoned loans purchased during first quarter 2004 and
first quarter 2003, 70 percent and 77 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 15.3 years, respectively. The weighted-average age of delinquent loans
purchased out of securitized pools and LTSPCs during first quarter 2004 and
first quarter 2003 was 6.7 years and 4.8 years, respectively.
Indicators of future loan purchase and guarantee volume (but not of future
LTSPC, swap or portfolio purchase volume) in the immediately succeeding
reporting period include outstanding commitments to purchase loans (other than
under an LTSPC) and the total balance of loans submitted for approval or
approved but not yet purchased. Many purchase commitments entered into by Farmer
Mac are mandatory delivery commitments. If a seller obtains a mandatory
commitment and is unable to deliver the loans as required thereunder, Farmer Mac
requires the seller to pay a fee to modify, extend or cancel the commitment. As
of March 31, 2004, outstanding commitments to purchase Farmer Mac I loans
totaled $2.3 million, compared to $15.1 million as of March 31, 2003. Of the
total Farmer Mac I commitments outstanding as of March 31, 2004 and 2003, $2.3
million and $5.8 million, respectively, were mandatory commitments. Loans
submitted for approval or approved but not yet committed to purchase totaled
$25.4 million as of March 31, 2004, compared to $67.3 million as of March 31,
2003. Not all of these loans will be purchased, as some will ultimately be
denied for credit reasons or withdrawn by the seller.
New business volume for first quarter 2004 was $207.2 million, down $60.3
million from the same period in 2003. Presently, Farmer Mac's new business with
agricultural mortgage lenders has been slowed by:
o reduced growth rates in the agricultural mortgage market;
o increased capital and liquidity at those agricultural mortgage lenders
in the current interest rate and regulatory environments; and
o increased regulatory pressure on government-sponsored enterprises.
The Farm Credit System Insurance Corporation (a U.S. Government controlled
corporation managed by a three-member board of directors composed of the members
of the FCA Board) has indicated that Farm Credit System institutions should be
cautious about the risk of doing business with government-sponsored enterprises,
including Farmer Mac, and has raised objections to those institutions' use of
Farmer Mac swaps because they generate Farmer Mac I Guaranteed Securities not
subject to its insurance premiums. Notwithstanding these circumstances, Farmer
Mac continues to see promising new business opportunities, with marketing
initiatives advanced by new and expanded business relationships, including a
strategic alliance, product enhancements and refined security structures.
While significant progress has been made in developing the secondary market
for agricultural mortgages, Farmer Mac continues to face the challenges of
establishing a market where none previously existed. Acceptance of Farmer Mac's
programs is based upon the competitive rates, terms and products offered and the
advantages Farmer Mac believes its programs provide, including increased
liquidity and lending capacity. As of March 31, 2004, Farmer Mac's outstanding
program volume was $5.7 billion, which represented approximately 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 objectives over the longer term, the use of Farmer Mac's
programs and products by agricultural mortgage lenders, whether traditional or
non-traditional, must continue to expand.
As of March 31, 2004, there were 160 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.
During 2003, there were 81 approved loan sellers active in the Farmer Mac I
program. In addition to participating directly in the Farmer Mac I program, some
of the approved loan sellers enable other lenders to participate indirectly in
the Farmer Mac I program by managing correspondent networks of lenders from
which they purchase loans to sell to Farmer Mac. As of March 31, 2004, more than
75 lenders were participating in those networks, bringing the total Farmer Mac I
program participants to more than 200 as of March 31, 2004.
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 March 31, 2004, there were 145
active sellers in the Farmer Mac II program, compared to 150 as of December 31,
2003 and 132 as of March 31, 2003. Sellers in the Farmer Mac II program consist
mostly of community and regional banks.
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 as of March 31, 2004.
Balance Sheet Review
During the three months ended March 31, 2004, total assets decreased by
$354.1 million from December 31, 2003, with decreases in program assets (Farmer
Mac Guaranteed Securities and loans) of $97.5 million. For further information
regarding off-balance sheet program activities, see "--Off-Balance Sheet Program
Activities" below. Consistent with the decrease in total assets during the
period, total liabilities decreased by $354.6 million from December 31, 2003 to
March 31, 2004.
During the three months ended March 31, 2004, accumulated other
comprehensive income/(loss) decreased $7.6 million, which is the net after-tax
effect of a $7.4 million increase in unrealized gains on securities available
for sale and a $19.1 million decrease in the fair value of financial derivatives
classified as cash flow hedges. Accumulated other comprehensive income/(loss) is
not a component of Farmer Mac's core capital or regulatory capital.
As of March 31 2004, Farmer Mac's core capital totaled $223.7 million,
compared to $215.5 million as of December 31, 2003. As of March 31, 2004, core
capital exceeded Farmer Mac's statutory minimum capital requirement of $132.1
million by $91.6 million.
FCA issued its final risk-based capital regulation for Farmer Mac on April
12, 2001. Farmer Mac was required to meet the risk-based capital standards
beginning on May 23, 2002. The risk-based capital stress test promulgated by FCA
is intended to determine the amount of regulatory capital (core capital plus
allowance for losses) that Farmer Mac would need to maintain positive capital
during a ten-year period in which:
o losses occur at a rate of default and severity "reasonably related" to
the rates of the highest sequential two years in a limited U.S.
geographic area; and
o there is an initial interest rate shock at the lesser of 600 basis
points or 50 percent of the ten-year U.S. Treasury rate, and interest
rates remain at such level for the remainder of the period.
The risk-based capital stress test then adds an additional 30 percent to the
resulting capital requirement for management and operational risk.
Farmer Mac was in compliance with the risk-based capital standards under
the regulation as of March 31, 2004. As of March 31, 2004, the risk-based
capital stress test generated a regulatory capital requirement of $42.1 million.
Farmer Mac's regulatory capital of $245.7 million exceeded that amount by
approximately $203.6 million. The increase in the risk-based capital requirement
from December 31, 2003 ($38.8 million) to March 31, 2004 ($42.1 million) was a
result of changes in the interest rate environment. Farmer Mac is required to
hold capital at the higher of the statutory minimum capital requirement or the
amount required by the risk-based capital stress test.
Off-Balance Sheet Program Activities
Farmer Mac offers approved agricultural and rural residential mortgage
lenders two off-balance sheet alternatives to increase their liquidity or
lending capacity while retaining the cash flow benefits of their loans: (1)
Farmer Mac Guaranteed Securities, which are available through either the Farmer
Mac I program or the Farmer Mac II program, and (2) LTSPCs, which are available
only through the Farmer Mac I program. 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 ultimate 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 substantially the same and considers the effects of all on- and
off-balance sheet activities on its overall portfolio diversification and credit
risk. See Note 3 to Farmer Mac's condensed consolidated financial statements
above for more detail on the Corporation's off-balance sheet program activities.
Quantitative and Qualitative Disclosures About Market Risk Management
Interest Rate Risk. Farmer Mac is subject to interest rate risk on all
assets held for investment because of possible timing differences in the cash
flows of the assets and related liabilities. This risk is primarily related to
loans held and on-balance sheet Farmer Mac Guaranteed Securities because of the
ability of borrowers to prepay their mortgages before the scheduled maturities,
thereby increasing the risk of asset and liability cash flow mismatches. Cash
flow mismatches in a changing interest rate environment can reduce the earnings
of the Corporation if assets repay sooner than expected and the resulting cash
flows must be reinvested in lower-yielding investments when Farmer Mac's funding
costs cannot be correspondingly reduced, or if assets repay more slowly than
expected and the associated debt must be replaced by higher-cost debt.
Yield maintenance provisions and other prepayment penalties contained in
many agricultural mortgage loans reduce, but do not eliminate, this prepayment
risk, particularly in the case of a defaulted loan where yield maintenance 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. Those provisions create
a disincentive to prepayment and compensate the Corporation for its interest
rate risks to a large degree. As of March 31, 2004, 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. Of the Farmer Mac I new and current loans purchased in
first quarter 2004, 12 percent had yield maintenance or another form of
prepayment protection. None of the USDA-guaranteed portions underlying Farmer
Mac II Guaranteed Securities had yield maintenance provisions.
Taking into consideration the prepayment provisions and the default
probabilities associated with its mortgage assets, Farmer Mac uses prepayment
models to project and value cash flows associated with these assets. Because
borrowers' behavior in various interest rate environments may change over time,
Farmer Mac periodically evaluates the effectiveness of these models compared to
actual prepayment experience and adjusts and refines the models as necessary to
improve the precision of subsequent prepayment forecasts. In addition, Farmer
Mac consults with independent prepayment experts as part of the model evaluation
process.
The goal of Farmer Mac's interest rate risk management is to create 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 $336.2 million of cash and cash equivalents as of March 31,
2004 mature within three months and are match-funded with discount notes having
similar maturities. Investment securities of $1.1 billion as of March 31, 2004
consist of $792.0 million (72 percent) of floating rate securities that all have
rates that adjust within one year. These floating rate investments are funded
using:
o 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;
o floating-rate notes having similar rate reset provisions as the
related investment; or
o 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 by:
o purchasing mortgage assets in the ordinary course of business;
o refunding existing liabilities; or
o using derivatives to alter the characteristics of existing assets or
liabilities.
The most strenuous measure of the 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 March 31,
2004 and December 31, 2003 to an immediate and instantaneous parallel shift in
the yield curve.
Percentage Change in MVE from
Base Case
------------------------------------
Interest Rate March 31, December 31,
Scenario 2004 2003
--------------- ----------------- ----------------
+ 300 bp -0.2% -0.4%
+ 200 bp 0.4% 0.2%
+ 100 bp 0.5% 0.4%
- 100 bp -0.8% 0.0%
- 200 bp N/A* N/A*
- 300 bp N/A* N/A*
* As of the dates indicated, a -200 bp parallel shift of the
U. S. Treasury yield curve produced negative interest rates
for maturities of 2 years and shorter.
During first quarter 2004, Farmer Mac maintained a relatively low level of
interest rate sensitivity through ongoing asset and liability management
activities. As of March 31, 2004, a uniform or "parallel" increase of 100 basis
points would have increased NII, a shorter-term measure of interest rate risk,
by 2.8 percent, while a parallel decrease of 100 basis points would have
decreased NII by 4.3 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 March 31, 2004, both MVE
and NII showed similar sensitivity to non-parallel shocks as to the parallel
shocks. As of March 31, 2004, Farmer Mac's effective duration gap, another
standard measure of interest rate risk, was minus 0.5 months, compared to minus
0.1 months as of December 31, 2003. The sensitivity of Farmer Mac's MVE and NII
to both parallel and non-parallel interest rate shocks, and its duration gap,
are indicators of the effectiveness of the Corporation's approach to managing
its interest rate risk exposures.
The economic effects of financial derivatives, including interest rate
swaps, are included in the MVE, NII and duration gap analyses. Farmer Mac
generally enters into various interest rate swaps to reduce interest rate risk
as follows:
o "floating-to-fixed interest rate swaps" in which it pays fixed rates
of interest to, and receives floating rates of interest from,
counterparties; these swaps adjust the characteristics of short-term
debt to match more closely the cash flow and duration characteristics
of longer-term reset and fixed-rate mortgages and other assets and may
provide an overall lower effective cost of borrowing than would
otherwise be available in the conventional debt market;
o "fixed-to-floating interest rate swaps" in which it receives fixed
rates of interest from, and pays floating rates of interest to,
counterparties; these swaps adjust the characteristics of long-term
debt to match more closely the cash flow and duration characteristics
of short-term assets; and
o "basis swaps" in which it pays variable rates of interest based on one
index to, and receives variable rates of interest based on another
index from, counterparties; these swaps alter interest rate indices of
liabilities to match those of assets, and vice versa.
As of March 31, 2004, Farmer Mac had $1.5 billion combined notional amount of
interest rate swaps with terms ranging from 1 to 15 years. Of those interest
rate swaps, $663.7 million were floating-to-fixed rate interest rate swaps,
$576.4 million were basis swaps, $240.0 million were fixed-to-floating interest
rate swaps, and $25 million fell under the category of other swaps.
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 statements of operations. All
of Farmer Mac's financial derivative transactions are conducted under standard
collateralized agreements that limit Farmer Mac's potential credit exposure to
any counterparty. As of March 31, 2004, Farmer Mac had no uncollateralized net
exposure to any counterparty.
Credit Risk. Farmer Mac's primary exposure to credit risk is the risk of
loss resulting from the inability of 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 costs of liquidation. Farmer Mac is
exposed to credit risk on:
o loans held for investment;
o loans underlying pre-1996 Act Farmer Mac I Guaranteed Securities;
o loans underlying post-1996 Act Farmer Mac I Guaranteed Securities or
LTSPCs; and
o USDA-guaranteed portions underlying Farmer Mac II Guaranteed
Securities.
For loans underlying pre-1996 Act Farmer Mac I Guaranteed Securities, ten
percent first-loss subordinated interests mitigate Farmer Mac's credit risk
exposure. Before Farmer Mac incurs a credit loss, full recourse must first be
taken against the subordinated interest. The 1996 Act eliminated the
subordinated interest requirement. As a result, Farmer Mac generally assumes 100
percent of the credit risk on loans held for investment and loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs. Farmer Mac's credit
exposure on USDA-guaranteed portions is covered by the full faith and credit of
the United States. Farmer Mac believes it has little or no credit risk exposure
to loans underlying pre-1996 Act Farmer Mac I Guaranteed Securities because of
the subordinated interests, or to USDA-guaranteed portions because of the USDA
guarantee. The outstanding principal balance of loans held and loans underlying
Farmer Mac Guaranteed Securities (including AgVantage bonds) or LTSPCs is
summarized in the table below.
March 31, December 31,
2004 2003
---------------- ---------------
(in thousands)
Farmer Mac I:
Post-1996 Act $ 4,949,060 $ 5,045,232
Pre-1996 Act 22,261 24,734
Farmer Mac II:
USDA-guaranteed portions 722,978 729,470
---------------- ---------------
$ 5,694,299 $ 5,799,436
---------------- ---------------
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.
Farmer Mac I credit underwriting standards require that the loan-to-value
("LTV") ratio for any loan not exceed 70 percent, except that a loan secured by
a livestock facility and supported by a contract with an integrator (e.g., a
food processing company) may have an LTV ratio of up to 75 percent, a part-time
farm loan supported by private mortgage insurance may have an LTV ratio of up to
85 percent and a rural housing loan supported by private mortgage insurance may
have an LTV ratio of up to 97 percent. Farmer Mac also has a loan product for
borrowers with high credit scores whose loans are secured by collateral with low
LTV ratios. For those borrowers, loan processing has been simplified and
documentation of the credit ratios described below 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 (that is, giving
effect to the new loan):
o credit score of 660 or more;
o debt-to-asset ratio of 50 percent or less;
o cash flow debt service coverage ratio on the mortgaged property of not
less than 1:1;
o total debt service coverage ratio, including farm and non-farm income,
of not less than 1.25:1; and
o ratio of current assets to current liabilities of not less than 1:1.
Farmer Mac's underwriting standards provide for acceptance of loans that do
not conform to one or more of the standard underwriting ratios, other than LTV
ratio, when those loans:
o exceed 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 March 31, 2004, a
total of $1.7 billion (35.3 percent) of the outstanding balance of loans held
and loans underlying LTSPCs and post-1996 Act Farmer Mac I Guaranteed Securities
were approved based upon compensating strengths. During first quarter 2004,
$78.4 million (45.4 percent) of the loans purchased or added under LTSPCs were
approved based upon compensating strengths.
In the case of a seasoned loan, Farmer Mac considers sustained performance
to be a reliable alternative indicator of a borrower's ability to pay the loan
according to its terms. A seasoned loan generally will be deemed an eligible
loan if:
o it has been outstanding for at least five years and has a
loan-to-value ratio of 60 percent or less;
o there have been no payments on the loan more than 30 days past due
during the previous three years; and
o there have been no material restructurings or modifications for credit
reasons during the previous five years.
A seasoned loan that has been outstanding for more than one year but less
than five years must substantially comply with the underwriting standards for
newly originated loans as of the date the loan was originated by the lender. The
loan must also have a payment history that shows no payment more than 30 days
past due during the three-year period immediately prior to the date the loan is
either purchased by Farmer Mac or made subject to an LTSPC. As with the
secondary market for residential mortgages, there is no requirement that each
loan's compliance with the underwriting standards be re-evaluated after Farmer
Mac accepts the loan into its program.
The due diligence Farmer Mac performs before purchasing, guaranteeing
securities backed by, or committing to purchase, loans includes:
o evaluation of loan database information to determine conformity to the
criteria described above;
o confirmation that loan file data conform to database information;
o validation of supporting credit information in the loan files; and
o review of loan collateral appraisals.
All of the foregoing are performed through methods that give due regard to the
size, age, leverage and nature of the collateral for the loans.
In the case of rural housing and part-time farm loans, the borrower may
finance up to 97 percent and 85 percent, respectively, of the appraised value of
the property if the amount above 80 percent is covered by private mortgage
insurance. For newly originated part-time farm loans, the borrower must generate
sufficient income from all sources to repay all creditors. A borrower's capacity
to repay debt obligations generally is determined by three tests:
o the borrower's credit score should be 660 or more;
o the borrower's monthly mortgage payment-to-income ratio should be 28
percent or less; and
o the borrower's total monthly debt payment-to-income ratio should be 36
percent or less.
Farmer Mac's appraisal standards for newly originated loans require, among
other things, that the appraisal function be performed independently of the
credit decision-making process and conform to the Uniform Standards of
Professional Appraisal Practice promulgated by the Appraisal Standards Board.
Farmer Mac's appraisal standards require the appraisal function to be conducted
or administered by an individual meeting specific qualification and competence
criteria and who:
o is not associated, except by the engagement for the appraisal, with
the credit underwriters making the loan decision, though both the
appraiser and the credit underwriter may be directly or indirectly
employed by a common employer;
o receives no financial or professional benefit of any kind by virtue of
the report content, valuation or credit decision made or based on the
appraisal product; and
o has no present or contemplated future direct or indirect interest in
the appraised property.
The appraisal standards also require uniform reporting of reliable and credible
opinions of the market value, market rent and property net income
characteristics of the mortgaged property and the relative market forces.
Farmer Mac requires current collateral valuations in conformance with the
Uniform Standards of Professional Appraisal Practice for newly originated loans
purchased or placed under a Farmer Mac I Guaranteed Security or LTSPC. For
seasoned loans, Farmer Mac obtains appraisal updates as considered necessary by
its assessment of collateral risk determined in the due diligence process.
Farmer Mac maintains an allowance for losses to cover estimated probable
losses on loans held 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, as amended ("SFAS 114"). The methodology for
determining the allowance for losses is the same for loans held for investment
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs
because Farmer Mac believes the ultimate credit risk is 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."
Farmer Mac's provision for losses is presented in two components on its
consolidated statement of operations:
o a "Provision for loan losses," which represents estimated probable
losses on Farmer Mac's loans held for investment; and
o a "Provision for losses," which represents estimated probable losses
on loans underlying post-1996 Act Farmer Mac I Guaranteed Securities
and LTSPCs and real estate owned.
Farmer Mac estimates probable losses using a systematic process that begins
with management's evaluation of the results of its proprietary loan pool
simulation and guarantee fee model (the "Model"). The Model draws upon
historical information from a data set of agricultural mortgage loans recorded
over a longer period of time than Farmer Mac's own experience to date, screened
to include only those loans with credit characteristics similar to those on
which Farmer Mac has assumed credit risk. The results generated by the Model are
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 for investment, 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)
for impairment 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 allocates an allowance for the loan for the difference between the
recorded investment and its fair value, less estimated costs to liquidate the
collateral.
Management believes that the general allowance, which is the difference
between the total allowance for losses (generated through use of the Model) and
the specific allowances, adequately covers any probable losses inherent in the
portfolio of performing loans under SFAS 5.
Farmer Mac believes that the methodology described above produces a
reliable estimate of the total probable losses inherent in the Farmer Mac
portfolio. The Model:
o uses historical agricultural real estate loan origination and
servicing data that reflect varied economic conditions and stress
levels in the agricultural sector;
o contains features that allow variations for changes in loan portfolio
characteristics to make the data set representative of Farmer Mac's
portfolio and credit underwriting standards; and
o considers the effects of the ageing of the loan portfolio along the
expected loss curves associated with individual cohort origination
years, including the segments that are entering into or coming out of
their peak default years.
Farmer Mac analyzes various iterations of the Model data and considers
various configurations of loan types, terms, economic conditions and borrower
eligibility criteria to generate a distribution of loss exposures over time for
all loans in the portfolio, all to evaluate its overall allowance for losses,
and back tests the results to validate the Model. Such tests use prior period
data to project losses expected in a current period and compare those
projections to actual losses incurred during the current period.
The allowance for losses is increased through periodic provisions for loan
losses that are charged against net interest income and provisions for losses
charged to operating expense and reduced by charge-offs for actual losses, net
of recoveries. 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. Charge-offs represent losses
on the outstanding principal balance, any interest payments previously accrued
or advanced and expected costs of liquidation. 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 the three months ended March 31, 2004 and 2003:
Three Months Ended March 31, 2004
-------------------------------------------------------------------------
Contingent
Allowance REO Obligation Total
for Loan Valuation Reserve for Probable Allowance
Losses Allowance for Losses Losses for Losses
-------------- -------------- ------------- -------------- -------------
(in thousands)
Beginning balance $ 5,967 $ 238 $ 13,172 $ 2,676 $ 22,053
Provision for losses 2,793 375 (1,220) (333) 1,615
Net charge-offs (1,089) (420) - - (1,509)
-------------- -------------- ------------- -------------- -------------
Ending balance $ 7,671 $ 193 $ 11,952 $ 2,343 $ 22,159
-------------- -------------- ------------- -------------- -------------
Three Months Ended March 31, 2003
-------------------------------------------------------------------------
Contingent
Allowance REO Obligation Total
for Loan Valuation Reserve for Probable Allowance
Losses Allowance for Losses Losses for Losses
-------------- -------------- ------------- -------------- -------------
(in thousands)
Beginning balance $ 2,662 $ 592 $ 16,757 $ - $ 20,011
Provision for losses 1,208 123 895 - 2,226
Net charge-offs (842) (123) (180) - (1,145)
-------------- -------------- ------------- -------------- -------------
Ending balance $ 3,028 $ 592 $ 17,472 $ - $ 21,092
-------------- -------------- ------------- -------------- -------------
Farmer Mac's total provision for losses was $1.6 million for first quarter
2004, compared to $2.2 million for first quarter 2003. During first quarter
2004, Farmer Mac charged off $1.5 million in losses against the allowance for
losses and had $37,000 in recoveries. During first quarter 2003, Farmer Mac
charged off $1.3 million in losses against the allowance for losses and
recovered $0.2 million from previously charged off losses, for net charge-offs
of $1.1 million. The net charge-offs for first quarter 2004 and 2003 did not
include previously accrued or advanced interest on loans and Farmer Mac I
Guaranteed Securities. As of March 31, 2004, Farmer Mac's allowance for losses
totaled $22.2 million, or 45 basis points of the outstanding principal balance
of loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs, compared to $22.1 million (44 basis points) as of
December 31, 2003.
As of March 31, 2004, Farmer Mac's 90-day delinquencies totaled $57.4
million and represented 1.17 percent of the principal balance of all loans held
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs, compared to $76.2 million (1.58 percent) as of March 31, 2003. As of
March 31, 2004, Farmer Mac's non-performing assets (which includes 90-day
delinquencies, loans performing under either their original loan terms or a
court-approved bankruptcy plan, and real estate owned) totaled $91.3 million and
represented 1.86 percent of the principal balance of all loans held and loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, compared
to $94.8 million (1.97 percent) as of March 31, 2003. Loans that have been
restructured after delinquency were insignificant and are included within the
reported 90-day delinquency and non-performing asset disclosures. From quarter
to quarter, Farmer Mac anticipates that 90-day delinquencies and non-performing
assets will fluctuate, both in dollars and as a percentage of the outstanding
portfolio, with higher levels likely at the end of the first and third quarters
of each year corresponding to the semi-annual (January 1st and July 1st) payment
characteristics of most Farmer Mac I loans.
The following table presents historical information regarding Farmer Mac's
non-performing assets and 90-day delinquencies:
Outstanding
Post-1996 Act Less:
Loans, Non- REO and
Guarantees and performing Performing 90-Day
LTSPCs Assets Percentage Bankruptcies Delinquencies Percentage
------------------ -------------- ------------- --------------- ------------------ --------------
(dollars in thousands)
As of:
March 31, 2004 $ 4,922,759 $ 91,326 1.86% $ 33,951 $ 57,375 1.17%
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%
As of March 31, 2004, approximately $1.6 billion (32.9 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 (approximately years three through five after origination) compared to
$1.8 billion (37.4 percent) of such loans as of March 31, 2003. 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 March 31, 2004, Farmer Mac analyzed the following three categories of
assets for impairment, based on the fair vale of the underlying collateral:
o $91.3 million of non-performing assets;
o $29.8 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 $59.1 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 $180.2 million of assets
measured for impairment against updated appraised values, other updated
collateral valuations or discounted values. Of the $180.2 million of assets
analyzed, $154.0 million were adequately collateralized. For the $26.2 million
that were not adequately collateralized, individual collateral shortfalls
totaled $4.4 million. Accordingly, Farmer Mac allocated specific allowances of
$4.4 million to those under-collateralized assets as of March 31, 2004. As of
March 31, 2004, after the allocation of specific allowances to
under-collateralized loans, Farmer Mac had additional non-specific or general
allowances of $17.8 million, bringing the total allowance for losses to $22.2
million.
The following table summarizes Farmer Mac's assets specifically reviewed
for impairment and allowance for losses:
Farmer Mac I Post-1996 Act Assets Specifically Reviewed
for Impairment and Allowance for Losses
- --------------------------------------------------------------------------------------------------------------
As of March 31, 2004 As of December 31, 2003
------------------------------------ -----------------------------------
(in thousands)
Specific Specific
Non-performing Allowance Non-performing Allowance
Assets for Losses Assets for Losses
------------------- --------------- ------------------- --------------
Loans 90 days or more past due $ 28,458 $ 575 $ 5,185 $ 100
Loans in foreclosure 9,360 229 11,016 119
Loans in bankruptcy * 41,031 2,304 38,047 2,769
Real estate owned 12,477 193 15,716 238
Other loans specifically reviewed 88,860 1,077 102,736 536
------------------- --------------- ------------------- --------------
Total $ 180,186 $ 4,378 $ 172,700 $ 3,762
------------------- --------------- ------------------- --------------
Allowance Allowance
for Losses for Losses
--------------- --------------
Specific allowance for losses $ 4,378 $ 3,762
General allowance for losses 17,781 18,291
--------------- --------------
Total allowance for losses $ 22,159 $ 22,053
--------------- --------------
* Includes loans that are performing under either their original loan terms
or a court-approved bankruptcy plan.
Original LTV ratios (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) are one of many factors Farmer Mac considers
in evaluating loss severity. Other factors include, but are not limited to,
other underwriting standards, commodity and farming forecasts and regional
economic and agricultural conditions. Loans in the Farmer Mac I program are all
first mortgage agricultural real estate loans. Accordingly, Farmer Mac's
exposure on a loan is limited to the difference between the total of the accrued
interest, advances and principal balance of a loan and the value of the
property. Measurement of that excess or shortfall is the best predictor and
determinant of loss compared to other measures that evaluate the efficiency of a
particular farm operator.
LTV 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 March 31, 2004, the weighted-average original LTV ratio for all loans
held and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs was 49 percent, and the weighted-average original LTV ratio for all
post-1996 Act non-performing assets was 54 percent.
The following table summarizes the post-1996 Act non-performing assets by
original LTV ratio:
Distribution of Post-1996 Act Non-performing
Assets by Original LTV Ratio
as of March 31, 2004
----------------------------------------------------
(dollars in thousands)
Post-1996 Act
Non-performing
Original LTV Ratio Assets Percentage
-------------------- ---------------- ------------
0.00% to 40.00% $ 11,371 13%
40.01% to 50.00% 12,777 14%
50.01% to 60.00% 38,242 42%
60.01% to 70.00% 26,695 29%
70.01% to 80.00% 2,001 2%
80.01% + 240 0%
----------------- ------------
Total $ 91,326 100%
----------------- ------------
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 March 31, 2004 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 12% $ 617,356 $ 5,887 0.95% $ -
1994 3% 150,479 1,643 1.09% -
1995 3% 146,700 3,207 2.19% 650
1996 6% 329,371 13,175 4.00% 864
1997 8% 391,307 15,712 4.02% 338
1998 13% 626,592 15,601 2.49% 578
1999 13% 641,798 15,895 2.48% 646
2000 8% 376,695 10,047 2.67% 1,255
2001 12% 578,184 8,286 1.43% 47
2002 13% 621,655 1,597 0.26% -
2003 8% 411,144 276 0.07% -
2004 1% 31,478 - 0.00% -
------------------- ------------------ ---------------- ---------------- --------------
Total 100% $ 4,922,759 $ 91,326 1.86% $ 4,378
------------------- ------------------ ---------------- ---------------- --------------
By geographic region (2):
Northwest 21% $ 1,024,459 $ 49,818 4.86% $ 2,023
Southwest 46% 2,286,343 25,746 1.13% 737
Mid-North 13% 644,628 5,272 0.82% -
Mid-South 6% 274,749 7,930 2.89% 1,463
Northeast 8% 382,789 1,653 0.43% 42
Southeast 6% 309,791 907 0.29% 113
------------------- ------------------ ---------------- ---------------- --------------
Total 100% $ 4,922,759 $ 91,326 1.86% $ 4,378
------------------- ------------------ ---------------- ---------------- --------------
By commodity:
Crops 44% $ 2,186,479 $ 38,701 1.77% $ 69
Permanent plantings 26% 1,297,113 35,014 2.70% 2,641
Livestock 22% 1,073,523 13,540 1.26% 1,533
Part-time farm 7% 334,105 4,071 1.22% 135
Other 1% 31,539 - 0.00% -
------------------- ------------------ ---------------- ---------------- --------------
Total 100% $ 4,922,759 $ 91,326 1.86% $ 4,378
------------------- ------------------ ---------------- ---------------- --------------
(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 credit losses and
current specific allowances relative to the cumulative original balance for all
loans purchased and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs. This information is presented by year of origination,
geographic region and commodity. The purpose of this table is to present
information regarding losses and collateral deficiencies relative to original
guarantees and commitments.
Farmer Mac I Post-1996 Credit Losses and Specific Allowance for
Losses Relative to all Cumulative Original Loans, Guarantees and LTSPCs
- ----------------------------------------------------------------------------------------------------------------------
Cumulative Cumulative Combined
Original Loans, Net Credit Cumulative Current Credit Loss
Guarantees Losses / Loss Specific and Specific
and LTSPCs (Gains) Rate Allowances Allowance Rate
---------------- ---------------- ----------------- ----------------- -----------------
(dollars in thousands)
By year of origination:
Before 1994 $ 1,990,771 $ - 0.00% $ - 0.00%
1994 367,516 - 0.00% - 0.00%
1995 326,523 411 0.13% 650 0.32%
1996 634,103 1,673 0.26% 864 0.40%
1997 719,362 3,260 0.45% 338 0.50%
1998 1,081,561 3,336 0.31% 578 0.36%
1999 1,072,307 1,304 0.12% 646 0.18%
2000 657,117 1,105 0.17% 1,255 0.36%
2001 899,084 650 0.07% 47 0.08%
2002 890,335 - 0.00% - 0.00%
2003 519,140 - 0.00% - 0.00%
2004 32,823 - 0.00% - 0.00%
---------------- ---------------- ----------------- ----------------- -----------------
Total $ 9,190,642 $ 11,739 0.13% $ 4,378 0.18%
---------------- ---------------- -----------------
By geographic region (1):
Northwest $ 1,996,870 $ 5,543 0.28% $ 2,023 0.38%
Southwest 4,039,262 5,476 0.14% 737 0.15%
Mid-North 1,135,715 38 0.00% - 0.00%
Mid-South 480,579 572 0.12% 1,463 0.42%
Northeast 757,592 (7) 0.00% 42 0.00%
Southeast 780,624 117 0.01% 113 0.03%
---------------- ---------------- ----------------- ----------------- -----------------
Total $ 9,190,642 $ 11,739 0.13% $ 4,378 0.18%
---------------- ---------------- -----------------
By commodity:
Crops $ 3,968,965 $ 2,186 0.06% $ 69 0.06%
Permanent plantings 2,343,276 7,642 0.33% 2,641 0.44%
Livestock 2,131,657 1,549 0.07% 1,533 0.14%
Part-time farm 648,650 362 0.06% 135 0.08%
Other 98,094 - 0.00% - 0.00%
---------------- ---------------- ----------------- ----------------- -----------------
Total $ 9,190,642 $ 11,739 0.13% $ 4,378 0.18%
---------------- ---------------- -----------------
(1) Geographic regions - Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY);
Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO,
WI); Mid-South (KS, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ,
NY, OH, PA, RI, TN, VA, VT, WV); and Southeast (AL, AR, FL, GA, LA, MS,
SC).
An analysis of Farmer Mac's historical losses and identified specific
collateral deficiencies within the portfolio (by origination year) indicates
that Farmer Mac has experienced peak loss years as loans have aged between
approximately their third and fifth years subsequent to origination, regardless
of the year the loans were added to the Farmer Mac's portfolio. As a consequence
of the combination of principal amortization and collateral value appreciation,
there are few loans in the portfolio originated prior to 1996 with known
collateral deficiencies. While Farmer Mac expects that there will be loans that
have aged past their fifth year that will become delinquent and possibly
default, Farmer Mac does not anticipate significant losses on such loans.
Analysis of 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. 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, for particular commodity groups, certain geographic areas offer better
growing conditions than others and consequently produce more successful farms
relative to the commodity group. This consequence tends to be consistent, even
though those farms are exposed to the economic cycles of the commodity group.
Other geographic areas offer suitable growing conditions for a wider range of
commodities and consequently produce more versatile farms that have the ability
to vary crop plantings among commodity groups in accordance with expected
economic returns.
Farmer Mac's methodologies for pricing its guarantee and commitment fees,
managing credit risks and providing adequate allowances for losses consider all
of the foregoing factors and information.
Liquidity and Capital Resources
Farmer Mac has sufficient liquidity and capital resources to support its
operations for the next twelve months and has a contingency funding plan to
handle unanticipated disruptions in its access to 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 operations primarily by issuing debt obligations of
various maturities in the public capital markets. Farmer Mac's debt obligations
consist of discount notes and medium-term notes issued to obtain funds
principally to cover the costs of purchasing and holding loans and securities
(including Farmer Mac Guaranteed Securities). Farmer Mac also issues discount
notes and medium-term notes to obtain funds for investments, transaction costs
and guarantee payments. The Corporation's discount notes and medium-term notes
are obligations of Farmer Mac only, are not rated by any rating agency and the
interest and principal thereon are not guaranteed by and do not constitute debts
or obligations of FCA or the United States or any agency or instrumentality of
the United States other than Farmer Mac. Farmer Mac is an institution of the
Farm Credit System, but is not liable for any debt or obligation of any other
institution of the Farm Credit System. Likewise, neither the Farm Credit System
nor any other individual institution of the Farm Credit System is liable for any
debt or obligation of Farmer Mac. Income on Farmer Mac's discount notes and
medium-term notes has no tax exemption under federal law from federal, state or
local taxation.
Farmer Mac's board of directors has authorized the issuance of up to $5.0
billion of discount notes and medium-term notes (of which $3.6 billion was
outstanding as of March 31, 2004), subject to periodic review of the adequacy of
that level relative to Farmer Mac's borrowing requirements. Farmer Mac invests
the proceeds of such issuances in loans, Farmer Mac Guaranteed Securities and
non-program investment assets in accordance with guidelines established by its
board of directors.
Liquidity. The funding and liquidity needs of Farmer Mac's business
programs are driven by the purchase and retention of eligible loans and Farmer
Mac Guaranteed Securities, the maturities of Farmer Mac's discount notes and
medium-term notes and payment of principal and interest on Farmer Mac Guaranteed
Securities. Farmer Mac's primary sources of funds to meet these needs are:
o principal and interest payments and ongoing guarantee and commitment
fees received on loans, Farmer Mac Guaranteed Securities and LTSPCs;
o principal and interest payments received from investment securities;
and
o the issuance of discount notes and medium-term notes.
Farmer Mac projects its expected cash flows from loans and securities,
other earnings and the sale of assets and matches those with its obligations to
retire debt and pay other liabilities as they come due. Farmer Mac issues
discount notes and medium-term notes to meet the needs associated with its
business operations, including liquidity, and also to increase its presence in
the capital markets in order to enhance the liquidity and pricing efficiency of
its discount notes and medium-term notes and Farmer Mac Guaranteed Securities
transactions and so improve the mortgage rates available to farmers, ranchers
and rural homeowners.
Though Farmer Mac's mortgage purchases do not currently necessitate daily
debt issuance, the Corporation continued its strategy of using its non-program
investment portfolio (referred to as Farmer Mac's liquidity portfolio) to
facilitate increasing its ongoing presence in the capital markets during 2004.
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 March 31, 2004, Farmer Mac was in compliance with the investment
authorizations set forth in its investment guidelines.
As a result of Farmer Mac's regular issuance of discount notes and
medium-term notes and its status as a federally chartered instrumentality of the
United States, Farmer Mac has been able to access the capital markets at
favorable rates. 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 March 31, 2004, Farmer Mac's cash and cash equivalents and
investment securities totaled $336.2 million and $1.1 billion, respectively, a
combined 36.6 percent of total assets. For first quarter 2004, exclusive of
daily overnight discount note issuances that were invested overnight, the
average discount note issuance term and re-funding frequency was approximately
84 days.
Other Matters
In recent developments:
o the Committee on Agriculture of the U.S. House of Representatives has
announced its plan to hold a hearing for review of the Corporation on
June 2, 2004; and
o the FCA Board, at a public meeting held on April 22, 2004, approved
(pending 30 day Congressional review) proposed rules that would, among
other things, require Farmer Mac to hold sufficient high-quality
marketable investments to provide liquidity adequate to fund its
maturing obligations and operations for a minimum of 60 days, and set
standards for the quality of those investments, with an effective date
2 years after the final regulation is adopted.
Farmer Mac currently has a 60-day minimum liquidity policy and conservative
investment policies, established and periodically reviewed by its Board. After a
preliminary review of details received from FCA on May 7, 2004, Farmer Mac
believes that the proposed regulations would not be largely inconsistent with
the Corporation's current policies. Farmer Mac continues to analyze those
details and expects to provide FCA with comments on the proposal during a 90 day
public comment period following the anticipated mid-June 2004 publication of the
proposed regulations in the Federal Register.
Always conscious of the importance of oversight and sound regulation in the
performance of its mission for the farmers, ranchers and rural homeowners of
America, Farmer Mac looks forward to participating in the hearing and the
regulatory process.
Supplemental Information
The following tables present quarterly and annual information regarding
loan purchases, guarantees and LTSPCs and outstanding guarantees and LTSPCs.
Farmer Mac Purchases, Guarantees and LTSPCs
- --------------------------------------------------------------------------------------------------
Farmer Mac I
-----------------------------------
Loans and
Guaranteed
Securities LTSPCs Farmer Mac II Total
---------------- ----------------- ----------------- -----------------
(in thousands)
For the quarter ended:
March 31, 2004 $ 25,444 $ 147,273 $ 34,483 $ 207,200
December 31, 2003 25,148 218,097 44,971 288,216
September 30, 2003 42,760 199,646 106,729 349,135
June 30, 2003 65,615 179,025 77,636 322,276
March 31, 2003 59,054 166,574 41,893 267,521
December 31, 2002 62,841 395,597 38,714 497,152
September 30, 2002 58,475 140,157 37,374 236,006
June 30, 2002 551,690 280,904 57,769 890,363
March 31, 2002 74,875 338,821 39,154 452,850
For the year ended:
December 31, 2003 192,577 763,342 271,229 1,227,148
December 31, 2002 747,881 1,155,479 173,011 2,076,371
Outstanding Balance of Farmer Mac Loans and
On- and Off-Balance Sheet Guarantees and LTSPCs (1)
- ----------------------------------------------------------------------------------------------------------------------
Farmer Mac I
--------------------------------------------------
Post-1996 Act
---------------------------------
Loans and
Guaranteed
Securities LTSPCs Pre-1996 Act Farmer Mac II Total
---------------- ---------------- ---------------- ---------------- ----------------
(in thousands)
As of:
March 31, 2004 $ 2,566,412 $ 2,382,648 $ 22,261 $ 722,978 $ 5,694,299
December 31, 2003 2,696,530 2,348,702 24,734 729,470 5,799,436
September 30, 2003 (2) 2,721,775 2,174,182 25,588 720,584 5,642,129
June 30, 2003 2,108,180 2,790,480 28,057 668,899 5,595,616
March 31, 2003 2,111,861 2,732,620 29,216 650,152 5,523,849
December 31, 2002 2,168,994 2,681,240 31,960 645,790 5,527,984
September 30, 2002 2,127,460 2,407,469 35,297 630,452 5,200,678
June 30, 2002 2,180,948 2,336,886 37,873 617,503 5,173,210
March 31, 2002 1,655,485 2,126,485 41,414 592,836 4,416,220
(1) Farmer Mac assumes 100 percent of the credit risk on post-1996 Act loans.
Pre-1996 Act loans back securities that are supported by unguaranteed first
loss subordinated interests representing approximately 10 percent of the
balance of the loans. Farmer Mac II loans are guaranteed by the USDA.
(2) The Loans and Guaranteed Securities and LTSPCs amounts reflect the
conversion of $722.3 million of existing LTSPCs to a Farmer Mac I
Guaranteed Security during third quarter 2003 at the request of a program
participant, Farm Credit West, ACA, of which Farmer Mac director Kenneth A.
Graff is President.
Outstanding Balance of Loans Held and Loans Underlying
On-Balance Sheet Farmer Mac Guaranteed Securities
- ----------------------------------------------------------------------------------------------------------------------------
Total
Fixed Rate 5-to-10-Year 1-Month-to-3-Year Held in
(10-yr. wtd. avg. term) ARMs & Resets ARMs Portfolio
--------------------- ---------------------- ---------------------- ----------------------
(in thousands)
As of:
March 31, 2004 $ 818,497 $ 978,263 $ 548,134 $ 2,344,894
December 31, 2003 860,874 1,045,217 542,024 2,448,115
September 30, 2003 865,817 1,037,168 535,915 2,438,900
June 30, 2003 889,839 1,064,824 511,700 2,466,363
March 31, 2003 880,316 1,057,310 515,910 2,453,536
December 31, 2002 1,003,434 981,548 494,713 2,479,695
September 30, 2002 1,000,518 934,435 498,815 2,433,768
June 30, 2002 1,016,997 892,737 516,892 2,426,626
March 31, 2002 751,222 797,780 350,482 1,899,484
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Farmer Mac is exposed to market risk attributable to changes in interest
rates. Farmer Mac manages this market risk by entering into various financial
transactions, including financial derivatives, and by monitoring its exposure to
changes in interest rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quantitative and Qualitative
Disclosures About Market Risk Management--Interest Rate Risk" for more
information about Farmer Mac's exposure to interest rate risk and strategies to
manage such risk. For information regarding Farmer Mac's use of and accounting
policies for financial derivatives, see Note 1(c) to the condensed consolidated
financial statements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" for
further information regarding Farmer Mac's debt issuance and liquidity risks.
Item 4. Controls and Procedures
Farmer Mac maintains disclosure controls and procedures designed to ensure
that information required to be disclosed in the Corporation's periodic filings
under the Securities Exchange Act of 1934 (the "Exchange Act"), including this
report, is recorded, processed, summarized and reported on a timely basis. These
disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed under the Exchange Act is
accumulated and communicated to the Corporation's management on a timely basis
to allow decisions regarding required disclosure. Farmer Mac's Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of the
design and operation of the Corporation's disclosure controls and procedures (as
defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31,
2004. 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 March 31, 2004,
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 II - OTHER INFORMATION
Item 1. Legal Proceedings
Farmer Mac is not a party to any material pending legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Farmer Mac is a federally chartered instrumentality of the United
States and its Common Stock is exempt from registration pursuant to
Section 3(a)(2) of the Securities Act of 1933.
Pursuant to Farmer Mac's policy that permits Directors of Farmer Mac
to elect to receive shares of Class C Non-Voting Common Stock in lieu
of their annual cash retainers, on January 2, 2004, Farmer Mac issued
an aggregate of 594 shares of its Class C Non-Voting Common Stock, at
an issue price of $31.96 per share, to the ten Directors who elected
to receive such stock in lieu of their cash retainers.
(d) Not applicable.
(e) Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
* 3.1 - Title VIII of the Farm Credit Act of 1971, as most recently amended
by the Farm Credit System Reform Act of 1996, P.L. 104-105 (Form
10-K filed March 29, 1996).
** 3.2 - Amended and restated By-Laws of the Registrant
* 4.1 - Specimen Certificate for Farmer Mac Class A Voting Common Stock
(Form 10-Q filed May 15, 2003).
* 4.2 - Specimen Certificate for Farmer Mac Class B Voting Common Stock
(Form 10-Q filed May 15, 2003).
* 4.3 - Specimen Certificate for Farmer Mac Class C Non-Voting Common Stock
(Form 10-Q filed May 15, 2003).
* 4.4 - Certificate of Designation of Terms and Conditions of Farmer Mac
6.40% Cumulative Preferred Stock, Series A (Form 10-Q filed May 15,
2003).
+* 10.1 - Stock Option Plan (Previously filed as Exhibit 19.1 to Form 10-Q
filed August 14, 1992).
+* 10.1.1 - Amendment No. 1 to Stock Option Plan (Previously filed as Exhibit
10.2 to Form 10-Q filed August 16, 1993).
+* 10.1.2 - 1996 Stock Option Plan (Form 10-Q filed August 14, 1996).
+* 10.1.3 - Amended and Restated 1997 Incentive Plan (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)
_________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 10.2.2 - Amendment to Employment Contract dated as of June 1, 1993 between
Henry D. Edelman and the Registrant (Previously filed as Exhibit
10.5 to Form 10-Q filed November 15, 1993).
+* 10.2.3 - Amendment No. 3 dated as of June 1, 1994 to Employment Contract
between Henry D. Edelman and the Registrant (Previously filed as
Exhibit 10.6 to Form 10-Q filed August 15, 1994).
+* 10.2.4 - Amendment No. 4 dated as of February 8, 1996 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-K filed
March 29, 1996).
+* 10.2.5 - Amendment No. 5 dated as of June 13, 1996 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed August
14, 1996).
+* 10.2.6 - Amendment No. 6 dated as of August 7, 1997 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
November 14, 1997).
+* 10.2.7 - Amendment No. 7 dated as of June 4, 1998 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed August
14, 1998).
+* 10.2.8 - Amendment No. 8 dated as of June 3, 1999 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed August
12, 1999).
+* 10.2.9 - Amendment No. 9 dated as of June 1, 2000 to Employment Contract
between Henry D. Edelman and the Registrant Form 10-Q filed August
14, 2000).
+* 10.2.10 - Amendment No. 10 dated as of June 7, 2001 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed August
14, 2001).
+* 10.2.11 - Amendment No. 11 dated as of June 6, 2002 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed August
14, 2002).
_________________
* 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.
+* 10.2.12 - 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).
+* 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).
_________________
* 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.
+* 10.3.9 - 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).
_________________
* 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.
* 10.7 - Farmer Mac I Seller/Servicer Agreement dated as of August 7, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
* 10.8 - Medium-Term Notes U.S. Selling Agency Agreement dated as of October
1, 1998 between Zions First National Bank and the Registrant (Form
10-Q filed November 14, 2002).
* 10.9 - Discount Note Dealer Agreement dated as of September 18, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
*# 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).
_________________
* 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.
* 10.13.2 - Amendment No. 2 dated as of September 1, 2002 to Long Term
Standby Commitment to Purchase dated as of August 1, 1998, as
amended by Amendment No. 1 dated as of January 1, 2000, between
AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed
November 14, 2002).
* 10.14 - Lease Agreement, dated June 28, 2001 between EOP - Two Lafayette,
L.L.C. and the Registrant (Previously filed as Exhibit 10.10 to Form
10-K filed March 27, 2002).
+* 10.15 - Employment Contract dated October 31, 2003 between Michael P.
Morris and the Registrant (Form 10-K filed March 15, 2004).
21 - Farmer Mac Mortgage Securities Corporation, a Delaware corporation.
** 31.1 - Certification of Chief Executive Officer relating to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004, pursuant to Rule 13a-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
** 31.2 - Certification of Chief Financial Officer relating to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004, pursuant to Rule 13a-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
** 32 - Certification of Chief Executive Officer and Chief Financial Officer
relating to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004, 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.
January 28, 2004, 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 fourth quarter 2003.
On February 6, 2004, Farmer Mac filed with the Securities and Exchange
Commission a Current Report on Form 8-K announcing that, on February 5, 2004,
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
May 10, 2004
By: /s/ Henry D. Edelman
--------------------------------------------------
Henry D. Edelman
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Nancy E. Corsiglia
--------------------------------------------------
Nancy E. Corsiglia
Vice President - Finance
(Principal Financial Officer)