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As filed with the Securities and Exchange Commission
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on November 9, 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 September 30, 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 20036
Washington, D.C. (Zip code)
(Address of principal executive offices)
(202) 872-7700
(Registrant's telephone number, including area code)
-----------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of November 2, 2004, there were 1,030,780 shares of Class A Voting
Common Stock, 500,301 shares of Class B Voting Common Stock and 10,410,643
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 September 30, 2004 and
December 31, 2003..................................................3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2004 and 2003.................4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2004 and 2003..........................5
Notes to Condensed Consolidated Financial Statements.................6
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
September 30, December 31,
2004 2003
------------------- ------------------
Assets:
Cash and cash equivalents $ 499,806 $ 623,674
Investment securities 949,391 1,064,782
Farmer Mac Guaranteed Securities 1,349,256 1,508,134
Loans held for sale 13,863 46,662
Loans held for investment 886,409 942,929
Allowance for loan losses (5,225) (5,967)
------------------- ------------------
Loans, net 895,047 983,624
Real estate owned, net of valuation allowance of
zero and $0.2 million 7,279 15,478
Financial derivatives 940 961
Interest receivable 37,820 58,423
Guarantee and commitment fees receivable 18,894 16,885
Deferred tax asset, net 10,800 10,891
Prepaid expenses and other assets 15,687 16,798
------------------- ------------------
Total Assets $ 3,784,920 $ 4,299,650
------------------- ------------------
Liabilities and Stockholders' Equity:
Liabilities:
Notes payable:
Due within one year $ 2,201,229 $ 2,799,384
Due after one year 1,222,609 1,136,110
------------------- ------------------
Total notes payable 3,423,838 3,935,494
Financial derivatives 57,873 67,670
Accrued interest payable 25,689 26,342
Guarantee and commitment obligation 17,751 14,144
Accounts payable and accrued expenses 17,146 29,574
Reserve for losses 14,521 13,172
------------------- ------------------
Total Liabilities 3,556,818 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,
10,501,584 and 10,522,513 shares issued and outstanding
as of September 30, 2004 and December 31, 2003 10,502 10,523
Additional paid-in capital 89,146 88,652
Accumulated other comprehensive income/(loss) (5,487) (2,295)
Retained earnings 97,410 79,843
------------------- ------------------
Total Stockholders' Equity 228,102 213,254
------------------- ------------------
Total Liabilities and Stockholders' Equity $ 3,784,920 $ 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 Nine Months Ended
---------------------------------- -----------------------------------
Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003
---------------- ---------------- ----------------- -----------------
Interest income:
Investments and cash equivalents $ 9,412 $ 7,994 $ 25,857 $ 26,490
Farmer Mac Guaranteed Securities 16,689 17,783 49,555 55,984
Loans 12,285 13,543 38,974 39,679
---------------- ---------------- ------------------ ----------------
Total interest income 38,386 39,320 114,386 122,153
Interest expense 30,417 30,402 89,112 93,995
---------------- ---------------- ------------------ ----------------
Net interest income 7,969 8,918 25,274 28,158
Provision for loan losses 144 (3,391) (2,420) (6,015)
---------------- ---------------- ------------------ ----------------
Net interest income after provision
for loan losses 8,113 5,527 22,854 22,143
Guarantee and commitment fees 5,269 5,056 15,742 15,261
Gains/(Losses) on financial derivatives
and trading assets 5,350 (3,348) 2,446 3,653
Gain on sale of Farmer Mac Guaranteed Securities - - 367 -
Gains/(Losses) on the sale of
real estate owned 133 79 (120) (23)
Miscellaneous income 703 354 3,185 743
---------------- ---------------- ------------------ ----------------
Total revenues 19,568 7,668 44,474 41,777
---------------- ---------------- ------------------ ----------------
Expenses:
Compensation and employee benefits 1,715 1,582 5,227 4,488
General and administrative 2,038 1,550 5,929 3,949
Regulatory fees 504 383 1,565 1,148
REO operating costs, net (52) - 290 -
Provision for losses 1,759 (1,190) 2,426 300
---------------- ---------------- ------------------ ----------------
Total operating expenses 5,964 2,325 15,437 9,885
---------------- ---------------- ------------------ ----------------
Income before income taxes 13,604 5,343 29,037 31,892
Income tax expense 4,440 1,438 8,966 10,073
---------------- ---------------- ------------------ ----------------
Net income 9,164 3,905 20,071 21,819
---------------- ---------------- ------------------ ----------------
Preferred stock dividends (560) (560) (1,680) (1,680)
---------------- ---------------- ------------------ ----------------
Net income available to common stockholders $ 8,604 $ 3,345 $ 18,391 $ 20,139
---------------- ---------------- ------------------ ----------------
Earnings per common share:
Basic earnings per common share $ 0.71 $ 0.28 $ 1.52 $ 1.72
Diluted earnings per common share $ 0.70 $ 0.28 $ 1.50 $ 1.68
See accompanying notes to condensed consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine Months Ended
------------------------------------------
Sept. 30, 2004 Sept. 30, 2003
-------------------- --------------------
Cash flows from operating activities:
Net income $ 20,071 $ 21,819
Adjustments to reconcile net income to net cash provided by
operating activities:
Net amortization of investment premiums and discounts 1,714 (75)
Amortization of debt premiums, discounts and issuance costs 21,358 26,716
Proceeds from repayment of trading investment securities 3,641 5,207
Net change in fair value of trading securities and derivatives (1,027) (4,144)
Amortization of settled financial derivatives contracts 805 1,297
Gain on sale of Farmer Mac Guaranteed Securities (367) -
Losses on the sale of real estate owned 120 23
Total provision for losses 4,846 6,315
Decrease in interest receivable 20,603 22,986
Increase in guarantee and commitment fees receivable (2,009) (8,791)
Increase in other assets (4,799) (24,676)
Increase/(decrease) in accrued interest payable (653) 26
Increase/(decrease) in other liabilities (17,455) 9,233
--------------------- ---------------------
Net cash provided by operating activities 46,848 55,936
Cash flows from investing activities:
Purchases of available-for-sale investment securities (434,708) (635,165)
Purchases of Farmer Mac II Guaranteed Securities and
AgVantage bonds (146,538) (251,387)
Purchases of loans (88,718) (243,034)
Proceeds from repayment of investment securities 549,957 380,679
Proceeds from repayment of Farmer Mac Guaranteed Securities 219,309 317,085
Proceeds from repayment of loans 138,043 154,275
Proceeds from sale of loans and Farmer Mac Guaranteed Securities 117,812 78,167
Proceeds from sale of real estate owned 11,004 2,243
-------------------- --------------------
Net cash provided by/(used in) investing activities 366,161 (197,137)
Cash flows from financing activities:
Proceeds from issuance of discount notes 44,287,878 47,811,390
Proceeds from issuance of medium-term notes 675,783 264,027
Payments to redeem discount notes (45,255,947) (48,036,827)
Payments to redeem medium-term notes (241,460) (106,940)
Settlement of financial derivatives (1,100) (1,485)
Proceeds from common stock issuance 1,063 2,286
Repurchase of common stock (1,414) -
Preferred stock dividends (1,680) (1,680)
-------------------- --------------------
Net cash used in financing activities (536,877) (69,229)
-------------------- --------------------
Net decrease in cash and cash equivalents (123,868) (210,430)
Cash and cash equivalents at beginning of period 623,674 723,800
-------------------- --------------------
Cash and cash equivalents at end of period $ 499,806 $ 513,370
-------------------- --------------------
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Accounting Policies
(a) Cash and Cash Equivalents
Farmer Mac considers highly liquid investment securities with remaining
maturities of three months or less at the time of purchase to be cash
equivalents. Changes in the balance of cash and cash equivalents are reported in
the Condensed Consolidated Statements of Cash Flows. The following table sets
forth information regarding certain cash and non-cash transactions for the nine
months ended September 30, 2004 and 2003.
Nine Months Ended
September 30,
-------------------------
2004 2003
----------- -----------
(in thousands)
Cash paid for:
Interest $ 45,159 $ 44,008
Income taxes 8,000 10,500
Non-cash activity:
Real estate owned acquired through foreclosure 6,969 24,350
Loans acquired and securitized as Farmer Mac
Guaranteed Securities 88,479 78,254
Loans acquired from on-balance sheet Farmer Mac
Guaranteed Securities 7,886 35,516
Loans previously under LTSPCs exchanged
for Farmer Mac Guaranteed Securities - 722,315
(b) Allowance for Losses
As of September 30, 2004, Farmer Mac maintained a $22.5 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 Standards No. 5, Accounting for Contingencies ("SFAS 5")
and Statement of Financial Accounting Standards 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.
The table below summarizes the components of Farmer Mac's allowance for
losses, which includes its contingent obligation for probable losses, as of
September 30, 2004 and December 31, 2003.
September 30, December 31,
2004 2003
----------------- -----------------
(in thousands)
Allowance for loan losses $ 5,225 $ 5,967
Real estate owned valuation allowance - 238
Reserve for losses:
On-balance sheet Farmer Mac I Guaranteed Securities 2,572 2,861
Off-balance sheet Farmer Mac I Guaranteed Securities 1,329 1,070
LTSPCs 10,620 9,241
Contingent obligation for probable losses 2,716 2,676
----------------- -----------------
Total $ 22,462 $ 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 structured 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 September 30, 2004 and December 31, 2003:
September 30, 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 $ 611,984 $ (50,717) $ - $ - $ 25,695 $ (261) $ 637,679 $ (50,978)
Receive-fixed - - 105,000 (2,049) 100,000 128 205,000 (1,921)
Basis 261,985 (4,291) - - 390,655 195 652,640 (4,096)
Other - - - - 25,000 12 25,000 12
Agency forwards 62,035 49 - - 4,228 1 66,263 50
------------ ------------ ------------ ------------ ------------ ------------ ------------ -------------
Total $ 936,004 $ (54,959) $ 105,000 $ (2,049) $ 545,578 $ 75 $ 1,586,582 $ (56,933)
------------ ------------ ------------ ------------ ------------ ------------ ------------ -------------
December 31, 2003
----------------------------------------------------------------------------------------------------------
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 September 30, 2004, Farmer Mac had approximately $41.6 million of net
after-tax unrealized losses on cash flow hedges included in accumulated other
comprehensive income/(loss). These amounts will be reclassified into earnings in
the same period or periods during which the hedged forecasted transactions
(either the payment of interest or 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 $7.4
million of the amount currently reported in accumulated other comprehensive
income/(loss) will be reclassified into earnings. For the quarter ended
September 30, 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 and nine months ended
September 30, 2004 and 2003:
September 30, 2004 September 30, 2003
----------------------------------------- -----------------------------------------
Dilutive Dilutive
stock Diluted stock Diluted
Basic EPS options EPS Basic EPS options EPS
----------------------------------------- -----------------------------------------
(in thousands, except per share amounts)
Three Months Ended:
Net income available to $ 8,604 8,604 $ 3,345 $ 3,345
common stockholders
Weighted average shares 12,091 132 12,223 11,793 301 12,094
Earnings per common share $ 0.71 $ 0.70 $ 0.28 $ 0.28
Nine Months Ended:
Net income available to $ 18,391 $ 18,391 $ 20,139 $ 20,139
common stockholder
Weighted average shares 12,082 157 12,239 11,710 296 12,006
Earnings per common share $ 1.52 $ 1.50 $ 1.72 $ 1.68
During third quarter 2004, Farmer Mac common stock repurchases reduced the
Corporation's capital by approximately $1.4 million. Farmer Mac repurchased
70,951 shares of its Class C Non-Voting Common Stock, at an average price of
$19.88 per share, pursuant to the Corporation's previously announced stock
repurchase program.
(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
third quarter 2004 or third quarter 2003 for employee stock options. Had Farmer
Mac elected to use the fair value method of accounting for employee stock
options, net income available to common stockholders and earnings per share for
the three and nine months ended September 30, 2004 and 2003 would have been
reduced to the pro forma amounts indicated in the following table:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ----------------------------------
2004 2003 2004 2003
---------------- --------------- ----------------- ----------------
(in thousands, except per share amounts)
Net income available to common
stockholders, as reported $ 8,604 $ 3,345 $ 18,391 $ 20,139
Add back: Restricted stock
compensation expense included in
reported net income, net of taxes 4 19 15 301
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method
for all awards, net of tax (1,155) (19) (1,646) (2,656)
Pro forma net income available to ---------------- --------------- ----------------- ----------------
common stockholders $ 7,453 $ 3,345 $ 16,760 $ 17,784
---------------- --------------- ----------------- ----------------
Earnings per common share:
Basic - as reported $ 0.71 $ 0.28 $ 1.52 $ 1.72
Basic - pro forma $ 0.62 $ 0.28 $ 1.39 $ 1.52
Diluted - as reported $ 0.70 $ 0.28 $ 1.50 $ 1.68
Diluted - pro forma $ 0.61 $ 0.28 $ 1.37 $ 1.48
The following table summarizes stock option activity for the three and nine
months ended September 30, 2004 and 2003:
September 30, 2004 September 30, 2003
----------------------------------- ------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
----------------- ---------------- ---------------- ------------------
Three Months Ended:
Outstanding, beginning of period 1,586,656 $ 23.01 1,817,049 $ 20.86
Granted 251,984 19.91 - -
Exercised (6,000) 15.33 (4,666) 15.13
Canceled (501) 26.54 - -
----------------- ---------------- ---------------- ------------------
Outstanding, end of period 1,832,139 $ 22.61 1,812,383 $ 20.86
----------------- ---------------- ---------------- ------------------
Nine Months Ended:
Outstanding, beginning of period 1,575,980 $ 22.92 1,637,111 $ 19.45
Granted 341,984 20.49 343,104 22.40
Exercised (48,124) 17.69 (164,500) 9.66
Canceled (37,701) 22.84 (3,332) 29.10
----------------- ---------------- ---------------- ------------------
Outstanding, end of period 1,832,139 $ 22.61 1,812,383 $ 20.87
----------------- ---------------- ---------------- ------------------
Options exercisable at end of period 1,363,676 1,502,311
----------------- ----------------
(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 03-1,
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. The guidance in EITF 03-1 is effective for
reporting periods beginning after June 15, 2004, with the exception of certain
sections, which have been deferred. Farmer Mac has the intent and ability to
hold to recovery any securities that may fall under the scope of this amendment.
Farmer Mac is evaluating the impact of the amendment, and will adopt it when
effective in full.
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. 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
The following table sets forth information about Farmer Mac Guaranteed
Securities retained by Farmer Mac as of September 30, 2004 and December 31,
2003.
September 30, 2004 December 31, 2003
------------------------------------------------- ------------------------------------------------
Available- Held-to- Available- Held-to-
for-Sale Maturity Total for-Sale Maturity Total
-------------- ----------------- ---------------- ---------------- --------------- ---------------
(in thousands)
Farmer Mac I $ 614,388 $ 49,179 $ 663,567 $ 779,560 $ 49,901 $ 829,461
Farmer Mac II - 685,689 685,689 - 678,673 678,673
-------------- ----------------- ---------------- ---------------- --------------- ---------------
Total $ 614,388 $ 734,868 $ 1,349,256 $ 779,560 $ 728,574 $ 1,508,134
-------------- ----------------- ---------------- ---------------- --------------- ---------------
Amortized cost $ 575,335 $ 734,868 $ 1,310,203 $ 725,674 $ 728,574 $ 1,454,248
Unrealized gains 39,053 8,849 47,902 53,902 14,434 68,336
Unrealized losses - - - (16) - (16)
-------------- ----------------- ---------------- ---------------- --------------- ---------------
Fair value $ 614,388 $ 743,717 $ 1,358,105 $ 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 September 30, 2004.
September 30, 2004
-----------------------
(dollars in thousands)
Fair value of beneficial interests retained
in Farmer Mac Guaranteed Securities $ 1,358,105
Weighted-average remaining life (in years) 5.0
Weighted-average prepayment speed (annual rate) 8.8%
Effect on fair value of a 10% adverse change $ (417)
Effect on fair value of a 20% adverse change $ (796)
Weighted-average discount rate 4.9%
Effect on fair value of a 10% adverse change $ (18,506)
Effect on fair value of a 20% adverse change $ (36,996)
These sensitivities are hypothetical. As the figures indicate, changes in
fair value based on 10 percent or 20 percent variations 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.
The table below presents the outstanding principal balances, 90-day
delinquencies and net credit losses as of and for the periods indicated for
Farmer Mac Guaranteed Securities, loans, and LTSPCs.
Outstanding Principal 90-Day
Balances Delinquencies (1) Net Credit Losses
---------------------------- ------------------------------- -------------------------------
As of As of As of As of For the Nine Months Ended
September 30, December 31, September 30, December 31, September 30,
-------------- ------------- --------------- --------------- ------------------------------
2004 2003 2004 2003 2004 2003
-------------- ------------- --------------- --------------- -------------- ---------------
(in thousands)
On-balance sheet assets:
Farmer Mac I:
Loans $ 884,814 $ 976,280 $ 46,052 $ 28,089 $ 3,161 $ 842
Guaranteed Securities 625,846 777,134 - - - 180
Farmer Mac II:
Guaranteed Securities 685,293 678,229 - - - -
-------------- ------------- --------------- --------------- -------------- ---------------
Total on-balance sheet $ 2,195,953 $ 2,431,643 $ 46,052 $ 28,089 $ 3,161 $ 1,022
-------------- ------------- --------------- --------------- -------------- ---------------
Off-balance sheet assets:
Farmer Mac I:
LTSPCs $ 2,381,006 $ 2,348,703 $ 1,532 $ 1,967 $ - $ -
Guaranteed Securities 907,103 952,134 - - - -
Farmer Mac II:
Guaranteed Securities 57,180 51,241 - - - -
-------------- ------------- --------------- --------------- -------------- ---------------
Total off-balance sheet $ 3,345,289 $ 3,352,078 $ 1,532 $ 1,967 $ - $ -
-------------- ------------- --------------- --------------- -------------- ---------------
Total $ 5,541,242 $ 5,783,721 $ 47,584 $ 30,056 $ 3,161 $ 1,022
-------------- ------------- --------------- --------------- -------------- ---------------
(1) Includes loans and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs 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.
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.
Nine Months Ended September 30,
-------------------------------------
2004 2003
------------------ -----------------
(in thousands)
Proceeds from new securitizations $ 88,479 $ 78,254
Guarantee fees received 1,222 1,306
Purchases of assets from the trusts 2,826 33,550
Servicing advances 33 321
Repayment of servicing advances 38 84
The following table presents the maximum principal amount of potential
undiscounted future payments that Farmer Mac could be required to make under
off-balance sheet Farmer Mac Guaranteed Securities as of September 30, 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
- ------------------------------------------------------------------------
September 30, December 31,
2004 2003
----------------- ---------------
(in thousands)
Farmer Mac I Guaranteed Securities $ 907,103 $ 952,134
Farmer Mac II Guaranteed Securities 57,180 51,241
----------------- ---------------
Total Farmer Mac I and II $ 964,283 $ 1,003,375
----------------- ---------------
As of September 30, 2004, the weighted-average remaining maturity of all
loans underlying off-balance sheet Farmer Mac Guaranteed Securities was 15.0
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 $1.3 million as of September 30, 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 $5.1 million as of September 30, 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.
As of September 30, 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. For all LTSPC
transactions to date, Farmer Mac has incurred a charge-off on two loans.
As of September 30, 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 $10.6 million as of September 30, 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 $9.9
million as of September 30, 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
and nine months ended September 30, 2004 and 2003.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ---------------------------------
2004 2003 2004 2003
--------------- --------------- ----------------- ---------------
(in thousands)
Net income $ 9,164 $ 3,905 $ 20,071 $ 21,819
Other comprehensive income/(loss):
Available-for-sale securities:
Change in net unrealized gains 8,238 (21,015) (11,054) (12,477)
Tax effect (2,883) 7,355 3,869 4,367
--------------- --------------- ----------------- ---------------
Net change from available-for-sale securities 5,355 (13,660) (7,185) (8,110)
Cash flow hedges:
Change in fair value, net of
reclassification adjustments (16,349) 17,734 6,145 9,509
Tax effect 5,722 (6,207) (2,151) (3,328)
--------------- --------------- ----------------- ---------------
Net change from cash flow hedges (10,627) 11,527 3,994 6,181
--------------- --------------- ----------------- ---------------
Other comprehensive income/(loss) (5,272) (2,133) (3,191) (1,929)
--------------- --------------- ----------------- ---------------
Comprehensive income $ 3,892 $ 1,772 $ 16,880 $ 19,890
--------------- --------------- ----------------- ---------------
Note 5. Investments
As of the dates indicated below, Farmer Mac's investment portfolio was
comprised of the following:
September 30, December 31,
2004 2003
------------- -------------
(in thousands)
Held-to-maturity $ 10,604 $ 10,604
Available-for-sale 928,024 1,039,673
Trading 10,763 14,505
------------- -------------
$ 949,391 $ 1,064,782
------------- -------------
The amortized cost and estimated fair values of investments as of September
30, 2004 and December 31, 2003 were as follows. Fair value was estimated based
on quoted market prices.
September 30, 2004 December 31, 2003
---------------------------------------------------- --------------------------------------------------
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gain Loss Fair Value Cost Gain Loss Fair Value
------------ ------------ ------------ ------------- ----------- ------------ ----------- ------------
(in thousands)
Held-to-maturity:
Cash investment in
fixed rate guaranteed
investment contract $ 10,604 $ 480 $ - $ 11,084 $ 10,604 $ 342 $ - $ 10,946
------------ ------------ ------------ ------------- ----------- ------------ ----------- ------------
Total held-to-maturity $ 10,604 $ 480 $ - $ 11,084 $ 10,604 $ 342 $ - $ 10,946
------------ ------------ ------------ ------------- ----------- ------------ ----------- ------------
Available-for-sale:
Floating rate
asset-backed securities $ 113,465 $ 463 $ (724) $ 113,204 $ 78,817 $ 682 $ - $ 79,499
Floating rate corporate
debt securities 372,306 198 (49) 372,455 370,145 573 (100) 370,618
Fixed rate preferred
stock 185,498 16,509 - 202,007 186,253 12,196 - 198,449
Fixed rate
commercial paper - - - - 120,452 - - 120,452
Floating rate
municipal bonds - - - - 2,820 - - 2,820
Floating rate mortgage-
backed securities 240,313 166 (121) 240,358 268,522 198 (885) 267,835
------------ ------------ ------------ ------------- ----------- ------------ ----------- ------------
Total available-for-sale $ 911,582 $ 17,336 $ (894) $ 928,024 $ 1,027,009 $ 13,649 $ (985) $ 1,039,673
------------ ------------ ------------ ------------- ----------- ------------ ----------- ------------
Trading:
Adjustable rate mortgage-
backed securities $ 10,655 $ 108 $ - $ 10,763 $ 14,296 $ 209 $ - $ 14,505
------------ ------------ ------------ ------------- ----------- ------------ ----------- ------------
Total trading $ 10,655 $ 108 $ - $ 10,763 $ 14,296 $ 209 $ - $ 14,505
------------ ------------ ------------ ------------- ----------- ------------ ----------- ------------
The amortized cost, fair value and yield of investments by remaining
contractual maturity as of September 30, 2004 are set forth below. Asset- and
mortgage-backed securities are included based on their final maturities,
although the actual maturities may differ due to prepayments of the underlying
assets or mortgages. As of September 30, 2004 Farmer Mac owned one
held-to-maturity investment that matures in 2006 with an amortized cost of $10.6
million, a fair value of $11.1 million, and a yield of 6.15 percent.
Note 6. Subsequent Event
On October 7, 2004, Farmer Mac's Board of Directors declared a quarterly
dividend on the Corporation's three classes of common stock - Class A Voting
Common Stock, Class B Voting Common Stock, and Class C Non-Voting Common
Stock. The quarterly dividend of $0.10 per common share will be payable on
December 31, 2004 to common stockholders of record as of December 15, 2004.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Please read the following Management's Discussion and Analysis of Financial
Condition and Results of Operations in conjunction with: (1) the condensed
consolidated financial statements and the related notes that appear elsewhere in
this report; and (2) Farmer Mac's Annual Report on Form 10-K for the fiscal year
ended December 31, 2003.
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 trends in expenses;
o changes in capital position; and
o other business and financial matters.
Management's expectations for Farmer Mac's future necessarily involve a
number of assumptions and estimates and the evaluation of risks and
uncertainties. Various factors could cause Farmer Mac's actual results or events
to differ materially from the expectations as expressed or implied by the
forward-looking statements, including uncertainties regarding:
o the rate and direction of development of the secondary market for
agricultural mortgage loans;
o the possible establishment of additional statutory or regulatory
restrictions or constraints on Farmer Mac that could hamper its
growth or diminish its profitability;
o legislative or regulatory developments or interpretations of
Farmer Mac's statutory charter that could adversely affect Farmer
Mac or the ability or motivation of certain lenders to
participate in its programs or the terms of any such
participation, or increase the cost of regulation and related
corporate activities;
o possible reaction in the financial markets to events involving
government-sponsored enterprises other than Farmer Mac;
o Farmer Mac's access to the debt markets at favorable rates and
terms;
o the possible effect of the risk-based capital requirement, which
could, under certain circumstances, be in excess of the statutory
minimum capital requirement;
o the rate of growth in agricultural mortgage indebtedness;
o lender interest in Farmer Mac credit products and the Farmer Mac
secondary market;
o borrower preferences for fixed-rate agricultural mortgage
indebtedness;
o competitive pressures in the purchase of agricultural mortgage
loans and the sale of agricultural mortgage-backed securities 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 Policy and 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. For
a discussion of Farmer Mac's critical accounting policy, as well as Farmer Mac's
use of estimates and assumptions that affect the amounts reported in the
condensed consolidated financial statements and related notes for the periods
presented, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Critical Accounting Policy and Estimates" in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2003,
filed with the SEC on March 15, 2004.
Results of Operations
Overview. Net income available to common stockholders for third quarter
2004 was $8.6 million or $0.70 per diluted common share, compared to $3.3
million or $0.28 per diluted common share for third quarter 2003. This increase
was due principally to the increase in the fair value of financial derivatives
as accounted for in accordance with SFAS 133, as explained below. During third
quarter 2004, Farmer Mac:
o added $84.1 million of Farmer Mac I eligible loans under LTSPCs;
o purchased $23.2 million of newly originated Farmer Mac I eligible
loans; and
o purchased $49.8 million of Farmer Mac II eligible USDA-guaranteed
portions of loans.
As of September 30, 2004, Farmer Mac's outstanding program volume was $5.5
billion, which represented approximately 12 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
expand.
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 Farmer
Mac 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.
As discussed below in Expenses, compensation and employee benefits, general
and administrative expenses, and regulatory fees for third quarter 2004
continued their upward trends of prior quarters. This upward trend has been
generated by greater staffing levels and consultants' fees necessary for
increased corporate governance and regulatory compliance activities, including
requirements of the Sarbanes-Oxley Act of 2002 and FCA, as well as the
heightened focus on the regulatory environment for government-sponsored
enterprises generally. Farmer Mac expects its expenses and regulatory fees to
continue at or above current levels through 2005.
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. 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.
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 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.
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 $8.0 million for third quarter 2004 and $25.3 million for the nine months
ended September 30, 2004, compared to $8.9 million and $28.2 million,
respectively, for the same periods in 2003. The net interest yield was 86 basis
points for the nine months ended September 30, 2004, compared to 93 basis points
for the nine months ended September 30, 2003. The effect of the adoption of SFAS
140 was the classification of approximately $3.2 million (11 basis points) of
guarantee fee income as interest income for the nine months ended September 30,
2004, compared to $3.3 million (11 basis points) for the nine months ended
September 30, 2003.
Farmer Mac classifies the net interest income and expense realized on
financial derivatives that are not in fair value or cash flow hedge
relationships as gains and losses on financial derivatives and trading assets.
For the nine months ended September 30, 2004 and 2003, this reclassification
resulted in the decrease of the net interest yield of 5 basis points and an
increase of 1 basis point, respectively.
The net interest yields for the nine months ended September 30, 2004 and
2003 included the benefits of yield maintenance payments received of 14 basis
points and 12 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 nine months ended September 30, 2004 and 2003, the effects of yield
maintenance payments on net income and diluted earnings per share were $2.7
million or $0.22 per diluted share and $2.4 million or $0.20 per diluted share,
respectively.
The following table provides information regarding the average balances and
rates of interest-earning assets and funding for the nine months ended September
30, 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 low average rate earned on cash
and cash equivalents reflects the low level of short-term rates in both periods,
with generally higher average short-term rates during the 2004 period offset by
tighter market spreads. The decrease in the average rate for investments
reflects tighter market spreads on new floating rate investments acquired during
2004 and the maturity of higher yielding investments outstanding during the
prior period. The lower average rate on loans and Farmer Mac Guaranteed
Securities reflects the paydown of older, higher yielding fixed rate loans. The
increase in the average rate for notes payable due within one year reflects the
general increase in average short-term rates during the 2004 period compared to
the 2003 period. The decrease in the average rate for notes payable due after
one year reflects the retirement of older, higher rate debt and the issuance of
new debt at lower rates.
Nine Months Ended September 30,
----------------------------------------------------------------------------
2004 2003
-------------------------------------- -------------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
-------------- ----------- ----------- -------------- ----------- ----------
(dollars in thousands)
Interest-earning assets:
Cash and cash equivalents $ 635,091 $ 6,005 1.26% $ 713,838 $ 6,631 1.24%
Investments 981,404 19,852 2.70% 894,322 19,859 2.96%
Loans and Farmer Mac Guaranteed Securities 2,299,931 88,529 5.13% 2,420,310 95,663 5.27%
-------------- ----------- ----------- -------------- ----------- ----------
Total interest-earning assets 3,916,426 114,386 3.89% 4,028,470 122,153 4.04%
-------------- ----------- -------------- -----------
Funding
Notes payable due within one year 2,149,271 38,664 2.40% 2,737,923 46,766 2.28%
Notes payable due after one year 1,577,442 50,448 4.26% 1,148,251 47,229 5.48%
-------------- ----------- ----------- -------------- ----------- ----------
Total interest-bearing liabilities 3,726,713 89,112 3.19% 3,886,174 93,995 3.22%
Net non-interest-bearing funding 189,713 142,296
-------------- ----------- ----------- -------------- ----------- ----------
Total funding $ 3,916,426 89,112 3.03% $ 4,028,470 93,995 3.11%
-------------- ----------- ----------- -------------- ----------- ----------
Net interest income/yield $ 25,274 0.86% $ 28,158 0.93%
----------- ----------- ----------- ----------
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.
Nine Months Ended September 30, 2004
Compared to Nine Months Ended
September 30, 2003
---------------------------------------------------------
Increase/(Decrease) Due to
---------------------------------------------------------
Rate Volume Total
------------------- ------------------- -----------------
(in thousands)
Income from interest-earning assets
Cash and cash equivalents $ 117 $ (743) $ (626)
Investments (1,851) 1,844 (7)
Loans and Farmer Mac Guaranteed Securities (2,458) (4,676) (7,134)
------------------- ------------------- -----------------
Total (4,192) (3,575) (7,767)
Expense from interest-bearing liabilities (1,060) (3,823) (4,883)
------------------- ------------------- -----------------
Change in net interest income $ (3,132) $ 248 $ (2,884)
------------------- ------------------- -----------------
See "--Regulatory Matters" for actions by Farmer Mac's federal regulator,
the Farm Credit Administration ("FCA"), that may potentially affect future net
interest income.
Guarantee and Commitment Fees. Guarantee and commitment fees were $5.3
million for third quarter 2004, compared to $5.1 million for third quarter 2003.
The effects of the adoption of SFAS 140 were $1.0 million of guarantee fee
income being classified as interest income for third quarter 2004 and third
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 if the asset were sold, except to the extent attributable to any
retained interest-only strip.
Other Income. Miscellaneous income was $0.7 million for third quarter 2004,
compared to $0.4 million for third quarter 2003. The increase was due to the
collection of late fees. During the nine months ended September 30, 2004,
through a competitive bid process, the Corporation sold Farmer Mac Guaranteed
Securities in the amount of $26.9 million to a related party in a transaction
that resulted in a $0.4 million gain on sale of Farmer Mac Guaranteed Securities
in second quarter 2004. Also during the nine months ended September 30, 2004,
Farmer Mac received $1.8 million from two sellers (one of which was a related
party) for breaches of representations and warranties associated with prior
sales of agricultural mortgage loans to Farmer Mac. This amount was reported as
miscellaneous income in second quarter 2004. Farmer Mac had previously charged
off these amounts as losses on the associated loans.
Expenses. Compensation and employee benefits for third quarter 2004 were
$1.7 million, compared to $1.6 million for third quarter 2003. General and
administrative expenses for third quarter 2004 were $2.0 million, compared to
$1.6 million for third quarter 2003. The increases in compensation and employee
benefits and general and administrative expenses were due, in large part, to
greater staffing levels and consultants' fees necessary for increased corporate
governance and regulatory compliance activities, including requirements of the
Sarbanes-Oxley Act of 2002 and FCA, as well as the heightened focus on the
regulatory environment for government-sponsored enterprises generally.
Regulatory fees assessed by FCA for third quarter 2004 and 2003 were $0.5
million and $0.4 million, respectively. FCA's regulatory fees charged to Farmer
Mac for the federal fiscal year ended September 30, 2004 were $2.0 million, and
FCA has advised the Corporation that its estimated fees for the federal fiscal
year ending September 30, 2005 will be $2.3 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 expects all of the above-mentioned expenses and
regulatory fees to continue at or above current levels through 2005.
Farmer Mac's net REO operating costs for third quarter 2004 resulted in
income of $0.1 million. For the nine months ended September 30, 2004, net REO
operating costs were $0.3 million. Net REO operating costs in prior periods were
nominal.
Farmer Mac's total provision for losses was $1.6 million for third quarter
2004, compared to $2.2 million for third 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 September 30, 2004, Farmer Mac's total allowance for
losses totaled $22.5 million, or 0.47 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 and Losses on Financial Derivatives and Trading Assets. For third
quarter 2004, the gain on financial derivatives and trading assets was $5.4
million, compared to a loss of $3.3 million for third quarter 2003. The gain in
third quarter 2004 and the loss in third quarter 2003 resulted primarily from
fluctuations in the fair values of financial derivatives, resulting from
movements in interest rates, that have not been designated in either fair value
or cash flow hedge relationships in accordance with SFAS 133.
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 economic performance,
and to set incentive compensation. In management's view the non-GAAP measures
provide a more accurate representation of Farmer Mac's economic performance,
transaction economics and business trends. Not all of Farmer Mac's financial
derivatives are specifically identified as hedges under SFAS 133. Thus, GAAP
requires Farmer Mac to apply a mixed attribute accounting model that does not
reflect the economics for those transactions. 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.
Farmer Mac developed non-GAAP core earnings to present net income less the
after-tax effects of SFAS 133. Core earnings for the three and nine months ended
September 30, 2004 were $5.4 million and $17.5 million, respectively, compared
to $5.5 million and $17.2 million for the three and nine months ended September
30, 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 Nine Months Ended
---------------------------------------- --------------------------------------
Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003
------------------- ------------------ ------------------ -----------------
(in thousands)
GAAP net income available
to common stockholders $ 8,604 $ 3,345 $ 18,391 $ 20,139
Less the effects of SFAS 133:
Unrealized gains/(losses)
on financial derivatives and
trading assets, net of tax 3,144 (2,269) 633 2,695
Benefit from non-amortization
of premium payments
on financial derivatives,
net of tax 76 76 228 238
------------------- ------------------ ------------------ -----------------
Core earnings $ 5,384 $ 5,538 $ 17,530 $ 17,206
------------------- ------------------ ------------------ -----------------
Business Volume. New business volume for third quarter 2004 was $157.1 million,
down $192.0 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 liquidity of agricultural borrowers;
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.
Both FCA, the federal regulator of Farmer Mac and the primary lenders in the
Farm Credit System ("FCS"), and the Farm Credit System Insurance Corporation
("FCSIC"), a U.S. Government controlled corporation managed by a three-member
board of directors composed of the members of the FCA Board, have cautioned
other FCS institutions against doing business with GSEs, including Farmer Mac,
and FCSIC has raised objections to other FCS institutions' use of Farmer Mac
swaps; those communications diminished Farmer Mac's business volume and may have
an ongoing effect. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Regulatory Matters" for other actions by
FCA that may potentially affect existing and future business volume.
Looking ahead, Farmer Mac is implementing a new strategic alliance with a
Farm Credit System institution and sees additional longer-term opportunities
that could lead to renewed growth in business volume as a result of the
Corporation's marketing efforts.
The following tables set forth the amount of all Farmer Mac I and Farmer
Mac II loan purchase and guarantee activities for newly originated and current
seasoned loans during the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
2004 2003 2004 2003
------------- -------------- ------------- --------------
(in thousands)
Loan purchase and guarantee and
commitment activity:
Farmer Mac I:
Loans $ 23,229 $ 42,760 $ 76,193 $ 167,429
LTSPCs 84,097 199,646 358,468 545,245
Farmer Mac II Guaranteed Securities 49,798 106,729 118,952 226,258
------------- -------------- ------------- --------------
Total purchases, guarantees
and commitments $ 157,124 $ 349,135 $ 553,613 $ 938,932
------------- -------------- ------------- --------------
Farmer Mac I Guaranteed Securities issuances:
Retained $ - $ - $ - $ -
Sold 24,783 43,082 76,691 78,254
Loans previously under LTSPCs
exchanged for Farmer Mac
Guaranteed Securities - 722,315 - 722,315
------------- -------------- ------------- --------------
Total $ 24,783 $ 765,397 $ 76,691 $ 800,569
------------- -------------- ------------- --------------
To fulfill its guarantee and commitment obligations, Farmer Mac purchases
delinquent loans underlying Farmer Mac Guaranteed Securities and LTSPCs. The
following table presents Farmer Mac's loan purchases of newly originated and
current seasoned loans and defaulted loans purchased underlying Farmer Mac I
Guaranteed Securities and LTSPCs.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- ---------------
(in thousands)
Farmer Mac I newly originated
and current seasoned loan purchases $ 23,229 $ 42,760 $ 76,193 $ 167,429
Defaulted loans purchased from
off-balance sheet Farmer Mac I
Guaranteed Securities 393 9,549 2,826 33,550
Defaulted loans transferred from
on-balance sheet Farmer Mac I
Guaranteed Securities 2,222 15,523 8,115 37,936
Defaulted loans purchased
from LTSPCs 911 1,021 1,584 4,119
-------------- -------------- -------------- ---------------
Total loan purchases $ 26,755 $ 68,853 $ 88,718 $ 243,034
-------------- -------------- -------------- ---------------
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 third quarter 2004 and third quarter 2003 was
less than one month. Of the Farmer Mac I newly originated and current seasoned
loans purchased during third quarter 2004 and third quarter 2003, 45 percent and
54 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 15.0 years,
respectively. The weighted-average age of delinquent loans purchased out of
securitized pools and LTSPCs during third quarter 2004 and third quarter 2003
was 4.7 years and 4.2 years, respectively.
Approximately 285 lenders were actively participating either directly or
indirectly in one or both of the Farmer Mac I or Farmer Mac II programs as of
September 30, 2004, with loans to approximately 20,000 borrowers.
As of September 30, 2004, there were 152 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 September
30, 2004, more than 75 lenders were participating in those networks, bringing
the total Farmer Mac I program participants to more than 200 as of September 30,
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 September 30, 2004, there were
122 active sellers in the Farmer Mac II program, compared to 150 as of December
31, 2003 and 193 as of September 30, 2003. Sellers in the Farmer Mac II program
consist mostly of community and regional banks.
As of September 30, 2004, outstanding commitments to purchase Farmer Mac I
loans totaled $5.1 million, compared to $6.5 million as of September 30, 2003.
Of the total Farmer Mac I commitments outstanding as of September 30, 2004 and
2003, $5.1 million and $2.1 million, respectively, were mandatory commitments.
Loans submitted for approval or approved but not yet committed to purchase
totaled $28.2 million as of September 30, 2004, compared to $45.9 million as of
September 30, 2003. Not all of these loans will be purchased, as some will
ultimately be denied for credit reasons or withdrawn by the seller.
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 $1.09 trillion in 2003. 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.
These 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
long-term 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's
ability to recover in foreclosures.
Balance Sheet Review
During the nine months ended September 30, 2004, there were $248.2 million
of net principal paydowns in program assets (Farmer Mac Guaranteed Securities
and loans) and a $239.3 million reduction in the portfolio of investment
securities and cash and cash equivalents. Consistent with the decrease in assets
during the period, outstanding debt was paid down by $511.7 million from
December 31, 2003 to September 30, 2004. For further information regarding
off-balance sheet program activities, see "--Off-Balance Sheet Program
Activities" below.
During the nine months ended September 30, 2004, accumulated other
comprehensive income/(loss) decreased $3.2 million, which is the net after-tax
effect of a $7.2 million decrease in unrealized gains on securities available
for sale and a $4.0 million increase in the fair value of financial derivatives
classified as cash flow hedges. Accumulated other comprehensive income/(loss) is
not a component of Farmer Mac's core capital or regulatory capital.
As of September 30, 2004, Farmer Mac's core capital totaled $233.6 million,
compared to $215.5 million as of December 31, 2003. As of September 30, 2004,
core capital exceeded Farmer Mac's statutory minimum capital requirement of
$128.1 million by $105.5 million.
Farmer Mac was in compliance with its risk-based capital standards as of
September 30, 2004. As of September 30, 2004, the risk-based capital stress test
generated a regulatory capital requirement of $43.5 million. Farmer Mac's
regulatory capital of $256.1 million as of September 30, 2004 exceeded that
amount by approximately $212.6 million. The increase in the risk-based capital
requirement from December 31, 2003 ($38.8 million) to September 30, 2004 ($43.5
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. See Note 3 to the condensed
consolidated financial statements for further information regarding Farmer Mac'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 September 30, 2004, 58 percent of the
outstanding balance of all loans held and loans underlying on-balance sheet
Farmer Mac I Guaranteed Securities (including 95 percent of all loans with fixed
interest rates) were covered by yield maintenance provisions and other
prepayment penalties. Of the Farmer Mac I new and current loans purchased in
third quarter 2004, 5 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.
As of September 30, 2004, Farmer Mac had $499.8 million of cash and cash
equivalents and $949.4 million of investment securities. Cash equivalents and
investment securities pose only limited interest rate risk to Farmer Mac, due to
their closely matched funding. Farmer Mac's cash equivalents mature within three
months and are match-funded with discount notes having similar maturities. As of
September 30, 2004, Farmer Mac's investment securities consisted of $736.8
million (77.6 percent) of floating rate securities that 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
interest rate reset 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.
The most comprehensive stress test of the long-term interest rate risk in
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
September 30, 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 September 30, December 31,
Scenario 2004 2003
------------------- -------------------- --------------------
+ 300 bp -4.4% -0.4%
+ 200 bp -2.1% 0.2%
+ 100 bp -0.5% 0.4%
- 100 bp -1.0% 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 third quarter 2004, Farmer Mac maintained a relatively low level of
interest rate sensitivity through ongoing asset and liability management
activities. As of September 30, 2004, a uniform or "parallel" increase of 100
basis points would have increased NII, a shorter-term measure of interest rate
risk, by 9.4 percent, while a parallel decrease of 100 basis points would have
decreased NII by 7.6 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 September 30, 2004, both
MVE and NII showed similar or lesser sensitivity to non-parallel shocks as to
the parallel shocks. As of September 30, 2004, Farmer Mac's effective duration
gap, another standard measure of interest rate risk that measures the expected
life of assets compared to that of liabilities, was minus 0.2 months, compared
to minus 0.1 months as of December 31, 2003. Duration matching helps to maintain
the correlation of cash flows and stable portfolio earnings even when interest
rates are not stable. The relative insensitivity 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.
As of September 30, 2004, Farmer Mac had $1.52 billion combined notional
amount of interest rate swaps with terms ranging from 1 to 15 years. Of those
interest rate swaps, $637.7 million were floating-to-fixed rate interest rate
swaps, $205.0 million were fixed-to-floating interest rate swaps and $677.6
million were basis and 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 September 30, 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'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 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 Statement of Financial Accounting Standards
No. 5, Accounting for Contingencies ("SFAS 5").
The following table summarizes the changes in the components of Farmer
Mac's allowance for losses for the three and nine months ended September 30,
2004 and 2003:
September 30, 2004
-------------------------------------------------------------------------------------------
Contingent
Allowance REO Obligation Total
for Loan Valuation Reserve for Probable Allowance
Losses Allowance for Losses Losses for Losses
------------------ ------------------ ---------------- ------------------ -----------------
(in thousands)
Three Months Ended:
Beginning balance $ 5,565 $ 545 $ 13,187 $ 2,501 $ 21,798
Provision for losses (144) 210 1,334 215 1,615
Net charge-offs (196) (755) - - (951)
------------------ ------------------ ---------------- ------------------ -----------------
Ending balance $ 5,225 $ - $ 14,521 $ 2,716 $ 22,462
------------------ ------------------ ---------------- ------------------ -----------------
Nine Months Ended:
Beginning balance $ 5,967 $ 238 $ 13,172 $ 2,676 $ 22,053
Provision for losses 2,420 1,037 1,349 40 4,846
Net charge-offs (3,162) (1,275) - - (4,437)
------------------ ------------------ ---------------- ------------------ -----------------
Ending balance $ 5,225 $ - $ 14,521 $ 2,716 $ 22,462
------------------ ------------------ ---------------- ------------------ -----------------
September 30, 2003
-------------------------------------------------------------------------------------------
Contingent
Allowance REO Obligation Total
for Loan Valuation Reserve for Probable Allowance
Losses Allowance for Losses Losses for Losses
------------------ ------------------ ---------------- ------------------ -----------------
(in thousands)
Three Months Ended:
Beginning balance $ 3,102 $ 592 $ 18,169 $ - $ 21,863
Provision for losses 3,391 1,447 (7,577) 4,940 2,201
Net charge-offs (322) (999) - - (1,321)
------------------ ------------------ ---------------- ------------------ -----------------
Ending balance $ 6,171 $ 1,040 $ 10,592 $ 4,940 $ 22,743
------------------ ------------------ ---------------- ------------------ -----------------
Nine Months Ended:
Beginning balance $ 2,662 $ 592 $ 16,757 $ - $ 20,011
Provision for losses 6,015 1,345 (5,985) 4,940 6,315
Net charge-offs (2,506) (897) (180) - (3,583)
------------------ ------------------ ---------------- ------------------ -----------------
Ending balance $ 6,171 $ 1,040 $ 10,592 $ 4,940 $ 22,743
------------------ ------------------ ---------------- ------------------ -----------------
Farmer Mac's total provision for losses was $1.6 million for third quarter
2004, compared to $2.2 million for third quarter 2003. During third quarter
2004, Farmer Mac charged off $1.1 million in losses against the allowance for
losses and had $0.1 million in recoveries for net charge-offs of $1.0 million.
During third quarter 2003, Farmer Mac charged off $1.4 million in losses against
the allowance for losses and had $0.1 million in recoveries for a net
charge-offs of $1.3 million. The net charge-offs for third quarter 2004 and 2003
did not include previously accrued or advanced interest on loans and Farmer Mac
I Guaranteed Securities. During second quarter 2004, Farmer Mac received $1.8
million from two sellers (one of which was a related party) for breaches of
representations and warranties associated with prior sales of agricultural
mortgage loans to Farmer Mac, which amount Farmer Mac had previously charged off
as losses on the associated loans. This recovery was reported as miscellaneous
income and is not reflected in the net charge-offs for the nine months ended
September 30, 2004 presented above. As of September 30, 2004, Farmer Mac's
allowance for losses totaled $22.5 million, or 47 basis points of the
outstanding principal balance of loans held and loans underlying post-1996 Act
Farmer Mac I Guaranteed Securities and LTSPCs, compared to $22.1 million (44
basis points) as of December 31, 2003.
As of September 30, 2004, Farmer Mac's 90-day delinquencies totaled $47.6
million and represented 1.01 percent of the principal balance of all loans held
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs, compared to $47.1 million (0.98 percent) as of September 30, 2003. As of
September 30, 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 $75.0 million and
represented 1.58 percent of the principal balance of all loans held and loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, compared
to $84.6 million (1.74 percent) as of September 30, 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:
September 30, 2004 $ 4,756,839 $ 75,022 1.58% $ 27,438 $ 47,584 1.01%
June 30, 2004 4,882,505 69,751 1.43% 36,978 32,773 0.68%
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%
As of September 30, 2004, approximately $1.8 billion (31.0 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 $1.5 billion (36.1 percent) of such loans as of September 30, 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 September 30, 2004, Farmer Mac analyzed the following three
categories of assets for impairment, based on the fair value of the underlying
collateral:
o $75.0 million of non-performing assets;
o $27.2 million of loans for which Farmer Mac has adjusted the
timing of borrowers' payment schedules, but still expects to
collect all amounts due and has not made economic concessions;
and
o $35.9 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 $138.1 million of assets
measured for impairment against updated appraised values, other updated
collateral valuations or discounted values. Of the $138.1 million of assets
analyzed, $126.6 million were adequately collateralized. For the $11.5 million
that were not adequately collateralized, individual collateral shortfalls
totaled $1.3 million. Accordingly, Farmer Mac allocated specific allowances of
$1.3 million to those under-collateralized assets as of September 30, 2004. As
of September 30, 2004, after the allocation of specific allowances to
under-collateralized loans, Farmer Mac had additional non-specific or general
allowances of $21.2 million, bringing the total allowance for losses to $22.5
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 September 30, 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 $ 20,907 $ 195 $ 5,185 $ 100
Loans in foreclosure 11,106 - 11,016 119
Loans in bankruptcy * 35,730 119 38,047 2,769
Real estate owned 7,279 - 15,716 238
Other loans specifically reviewed 63,102 965 102,736 536
---------------------- ------------------ ----------------------- -------------------
Total $ 138,124 $ 1,279 $ 172,700 $ 3,762
---------------------- ------------------ ----------------------- -------------------
Allowance Allowance
for Losses for Losses
------------------ -------------------
Specific allowance for losses $ 1,279 $ 3,762
General allowance for losses 21,183 18,291
------------------ -------------------
Total allowance for losses $ 22,462 $ 22,053
------------------ -------------------
* Includes loans that are performing under either their original loan terms
or a court-approved bankruptcy plan.
As of September 30, 2004, the weighted-average original loan-to-value
("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 56 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 September 30, 2004
- ---------------------------------------------------------------
(dollars in thousands)
Post-1996 Act
Non-performing
Original LTV Ratio Assets Percentage
- ------------------------ ------------------ -------------------
0.00% to 40.00% $ 5,311 7%
40.01% to 50.00% 15,588 21%
50.01% to 60.00% 33,714 45%
60.01% to 70.00% 16,815 22%
70.01% to 80.00% 3,417 5%
80.01% + 177 0%
------------------ -------------------
Total $ 75,022 100%
------------------ -------------------
The following table presents outstanding loans held and loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, post-1996 Act
non-performing assets and specific allowances for losses as of September 30,
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% $ 568,782 $ 2,897 0.51% $ -
1994 3% 138,240 656 0.47% -
1995 3% 131,427 2,589 1.97% 90
1996 6% 308,956 8,745 2.83% 295
1997 8% 366,158 12,488 3.41% 390
1998 12% 581,270 12,205 2.10% 395
1999 12% 589,876 16,035 2.72% 109
2000 7% 348,122 8,755 2.51% -
2001 11% 542,357 7,025 1.30% -
2002 13% 596,243 3,048 0.51% -
2003 10% 464,513 579 0.12% -
2004 3% 120,895 - 0.00% -
----------------- ------------------- ---------------- ------------- ---------------
Total 100% $ 4,756,839 $ 75,022 1.58% $ 1,279
----------------- ------------------- ---------------- ------------- ---------------
By geographic region (2):
Northwest 20% $ 973,564 $ 38,737 3.98% $ 1,003
Southwest 47% 2,212,531 18,878 0.85% 270
Mid-North 13% 608,624 9,516 1.56% 6
Mid-South 6% 285,153 5,818 2.04% -
Northeast 8% 387,338 1,341 0.35% -
Southeast 6% 289,629 732 0.25% -
----------------- ------------------- ---------------- ------------- ---------------
Total 100% $ 4,756,839 $ 75,022 1.58% $ 1,279
----------------- ------------------- ---------------- ------------- ---------------
By commodity:
Crops 43% $ 2,073,262 $ 30,855 1.49% $ -
Permanent plantings 27% 1,266,820 29,174 2.30% 1,236
Livestock 23% 1,087,800 10,841 1.00% 43
Part-time farm 6% 299,808 4,152 1.38% -
Other 1% 29,149 - 0.00% -
----------------- ------------------- ---------------- ------------- ---------------
Total 100% $ 4,756,839 $ 75,022 1.58% $ 1,279
----------------- ------------------- ---------------- ------------- ---------------
(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 as of September 30, 2004. This information is presented by
year of origination, geographic region and commodity. The purpose of this table
is to present information regarding losses and collateral deficiencies relative
to original guarantees and commitments.
Farmer Mac I Post-1996 Act 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 $ 1,999,263 0.00% $ - 0.00%
1994 370,222 - 0.00% - 0.00%
1995 325,541 986 0.30% 90 0.33%
1996 633,560 1,722 0.27% 295 0.32%
1997 724,099 2,984 0.41% 390 0.47%
1998 1,076,730 3,596 0.33% 395 0.37%
1999 1,064,125 1,196 0.11% 109 0.12%
2000 666,022 2,245 0.34% - 0.34%
2001 891,345 695 0.08% - 0.08%
2002 834,237 - 0.00% - 0.00%
2003 537,481 - 0.00% - 0.00%
2004 134,581 - 0.00% - 0.00%
--------------- ----------------- -------------- --------------- -----------------
Total $ 9,257,206 $ 13,424 0.15% $ 1,279 0.16%
--------------- ----------------- ---------------
By geographic region (1):
Northwest $ 2,016,493 $ 5,992 0.30% $ 1,003 0.35%
Southwest 4,065,325 5,292 0.13% 270 0.14%
Mid-North 1,137,387 38 0.00% 6 0.00%
Mid-South 483,509 1,839 0.38% - 0.38%
Northeast 773,794 38 0.00% - 0.00%
Southeast 780,698 225 0.03% - 0.03%
--------------- ----------------- -------------- --------------- -----------------
Total $ 9,257,206 $ 13,424 0.15% $ 1,279 0.16%
--------------- ----------------- ---------------
By commodity:
Crops $ 3,989,597 $ 1,399 0.04% $ - 0.04%
Permanent plantings 2,387,371 8,323 0.35% 1,236 0.40%
Livestock 2,165,526 3,187 0.15% 43 0.15%
Part-time farm 619,191 515 0.08% - 0.08%
Other 95,521 - 0.00% - 0.00%
--------------- ----------------- -------------- --------------- -----------------
Total $ 9,257,206 $ 13,424 0.15% $ 1,279 0.16%
--------------- ----------------- --------------
(1) Geographic regions - Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY);
Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO,
WI); Mid-South (KS, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ,
NY, OH, PA, RI, TN, VA, VT, WV); and Southeast (AL, AR, FL, GA, LA, MS,
SC).
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. 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,
including floating rate 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 interest and principal on Farmer Mac's debt 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. The Corporation's discount notes and
medium-term notes are not currently rated by a nationally recognized statistical
rating organization (NRSRO), although Farmer Mac intends to obtain a rating.
(See "--Regulatory Matters" below.)
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 $3.4 billion was
outstanding as of September 30, 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.
As a result of Farmer Mac's regular issuance of discount notes and
medium-term notes, as well as its status as a federally chartered
instrumentality of the United States, Farmer Mac has been able to issue debt
securities in the capital markets at favorable rates of interest. Farmer Mac has
also used fixed-to-floating interest rate swaps, combined with medium-term
notes, as a source of floating rate funding, and 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 maintaining the flexibility to
adjust the required net yield on program asset purchases to reflect the change
in the discount note to LIBOR relationship, as necessary. Farmer Mac also
maintains a practice of issuing floating rate notes to fund its floating rate
assets.
For liquidity, Farmer Mac maintains an investment portfolio of cash and
cash equivalents (including commercial paper and other short-term money market
instruments) and investment securities consisting mostly of floating rate
securities whose rates reset within one year, and a Farmer Mac II portfolio of
USDA Guaranteed Portions (full faith and credit of the U.S. Government). As of
September 30, 2004, Farmer Mac's cash and cash equivalents, investment
securities and USDA Guaranteed Portions, were $499.8 million, $949.4 million,
and $685.7 million, respectively, a combined 60.0 percent of total liabilities.
Farmer Mac has a policy of maintaining a minimum of 60 days of liquidity and a
target of 90 days of liquidity. For third quarter 2004, Farmer Mac maintained an
average of greater than 90 days of liquidity.
Capital. During third quarter 2004, Farmer Mac repurchased 70,951 shares of
its Class C Non-Voting Common Stock, at an average price of $19.88 per share,
pursuant to the Corporation's previously announced stock repurchase program.
These repurchases reduced the Corporation's capital by approximately $1.4
million.
Regulatory Matters
Regulatory actions continue to affect Farmer Mac's business outlook. Both
FCA and FCSIC have cautioned FCS institutions about doing business with GSEs,
including Farmer Mac, and FCSIC has raised technical objections to FCS
institutions' use of Farmer Mac AMBS swaps.
During second quarter 2004, FCA published a proposed regulation relating to
Farmer Mac's investments and liquidity. Farmer Mac expects to be able to comply
with the regulation if it is adopted in its current form, though analysis
indicates it could limit future increases in Farmer Mac's non-program investment
portfolio and the related net interest income. The Corporation disagrees with
certain aspects of the proposed regulation and submitted comments on the
proposal to FCA accordingly.
On August 6, 2004, FCA published a proposed regulation that, if adopted as
proposed, could adversely affect Farmer Mac's business by establishing a new
risk-weight allocation of capital applicable to Farmer Mac transactions with FCS
institutions, a major segment of Farmer Mac's customer base. The proposed
regulation would require FCS institutions to risk-weight assets on their books
that are guaranteed by a GSE based on the financial strength rating of the GSE,
as determined by an NRSRO. Under the proposed regulation: (a) the 20 percent
risk-weight would apply to such assets only if the GSE guarantor had a AAA or AA
rating from an NRSRO; (b) an A rating would result in a 50 percent risk-weight;
and (c) a lower rating (or no rating) would result in a 100 percent risk-weight.
Farmer Mac is currently unrated. Currently, all banking regulators and FCA
accord a 20 percent risk-weight to assets backed by guarantees of government
sponsored enterprises (GSEs) such as Fannie Mae, Freddie Mac or Farmer Mac. The
proposed regulation is subject to a 90-day public comment period and, as
drafted, would have an effective date eighteen months after the final regulation
is published.
If the proposed regulation is adopted as a final rule in its current form
and Farmer Mac does not receive a rating of at least AA within the period
provided for in the proposed regulation, not only would the benefit to an FCS
institution of doing business with Farmer Mac be diminished after the adoption
of the regulation, but also, based on the language of the proposed regulation, a
significant portion of the current $2.8 billion of outstanding Farmer Mac I
guarantees and commitments currently in place with FCS institutions might be
subject to early termination. There can be no assurance that the regulation will
not be adopted as a final rule in its current form, or in a modified form with
substantially the same effect. Likewise, Farmer Mac currently is not rated, and
there can be no assurance that Farmer Mac would receive a AAA or AA rating from
an NRSRO. As set forth in prior disclosures, Farmer Mac disagrees with the
proposed regulation as it would affect the Corporation, and has submitted a
comment letter to FCA setting forth its position.
While Farmer Mac intends to obtain a rating from an NRSRO, the Corporation
believes it is prudent to wait to pursue a rating until FCA concludes its
consideration of the above-mentioned two proposed FCA regulations, as the
outcome may be influenced by the regulatory process.
Other Matters
On October 7, 2004, for the first time Farmer Mac's Board of Directors
declared a quarterly dividend on the Corporation's three classes of common stock
- - Class A Voting Common Stock, Class B Voting Common Stock, and Class C Non -
Voting Common Stock. The quarterly dividend of $0.10 per common share will be
payable on December 31, 2004 to common stockholders of record as of December 15,
2004.
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:
September 30, 2004 $ 23,229 $ 84,097 $ 49,798 $ 157,124
June 30, 2004 27,520 127,098 34,671 189,289
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
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,
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:
September 30, 2004 $ 2,406,133 $ 2,381,006 $ 18,909 $ 742,474 $ 5,548,522
June 30, 2004 2,521,026 2,390,779 22,155 715,750 5,649,710
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
(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:
September 30, 2004 $ 753,205 $ 929,641 $ 520,246 $ 2,203,092
June 30, 2004 782,854 978,531 529,654 2,291,039
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
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 September
30, 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
September 30, 2004, there were no significant changes in Farmer Mac's internal
controls, or in other factors that have materially affected or are reasonably
likely materially to affect the Corporation's internal controls over financial
reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Farmer Mac is not a party to any material pending legal proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Farmer Mac is a federally chartered instrumentality of the United
States and its Common Stock is exempt from registration pursuant to
Section 3(a)(2) of the Securities Act of 1933.
Pursuant to Farmer Mac's policy that permits Directors of Farmer Mac
to elect to receive shares of Class C Non-Voting Common Stock in lieu
of their annual cash retainers, on July 2, 2004, Farmer Mac issued an
aggregate of 667 shares of its Class C Non-Voting Common Stock, at an
issue price of $23.93 per share, to the ten Directors who elected to
receive such stock in lieu of their cash retainers.
During third quarter 2004, Farmer Mac granted options under its 1997
Stock Option Plan to purchase an aggregate of 251,984 shares of Class
C Non-Voting Common Stock to officers and employees. 218,984 of the
options granted have an exercise price of $19.86 per share, 28,000 of
the options granted have an exercise price of $20.32 per share, and
5,000 of the options granted have an exercise price of $20.01 per
share.
(b) Not applicable.
(c) As shown in the table below, Farmer Mac repurchased 70,951 shares of
its Class C Non-Voting Common Stock during third quarter 2004 at an
average price of $19.88 per share. All of the repurchased shares were
purchased in open market transactions and were retired to become
authorized but unissued shares available for future issuance.
Issuer Purchases of Equity Securities
|---------------------|---------------|------------|----------------|--------------------|
| | | | Total Number | |
| | | | of Class C | |
| | | | Shares | |
| | | | Purchased as | Maximum Number |
| | Total Number | Average | Part of | of Class C |
| | of Class C | Price Paid | Publicly | Shares that May |
| | Shares | per Class C| Announced | Yet Be Purchased |
| Period | Purchased | Share | Program* | Under the Program |
|---------------------|---------------|------------|----------------|--------------------|
| July 1, 2004 - | 0 | 0 | 0 | 1,055,500 |
| July 31, 2004 | | | | ||
|---------------------|---------------|------------|----------------|--------------------|
| August 1, 2004 - | 5,000 | $19.32 | 5,000 | 1,050,500 |
| August 31, 2004 | | | | ||
|---------------------|---------------|------------|----------------|--------------------|
| September 1, 2004 | 65,951 | $19.93 | 65,951 | 984,549 |
| - September 30, | | | | |
| 2004 | | | | ||
|---------------------|---------------|------------|----------------|--------------------|
| Total | 70,951 | $19.88 | 70,951 | 984,549 |
|---------------------|---------------|------------|----------------|--------------------|
* On August 9, 2004, Farmer Mac publicly announced that its Board of
Directors had authorized a program to repurchase up to 10 percent of the
Corporation's outstanding Class C Non-Voting Common Stock. The authority
for this stock repurchase program expires in August 2006.
Item 3. Defaults Upon Senior Securities
(a) Not applicable.
(b) Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
(a) None.
(b) Not applicable.
Item 6. Exhibits
* 3.1 - Title VIII of the Farm Credit Act of 1971, as most recently
amended by the Farm Credit System Reform Act of 1996, P.L.
104-105 (Form 10-K filed March 29, 1996).
* 3.2 - Amended and restated By-Laws of the Registrant (Form 10-Q
filed August 9, 2004).
* 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).
+** 10.2.13 - Amendment No. 13 dated as of August 3, 2004 to
Employment Contract between Henry D. Edelman and the Registrant.
+* 10.3 - Employment Agreement dated May 11, 1989 between Nancy E.
Corsiglia and the Registrant (Previously filed as Exhibit 10.5 to
Form 10-K filed February 14, 1990).
+* 10.3.1 - Amendment dated December 14, 1989 to Employment
Agreement between Nancy E. Corsiglia and the Registrant
(Previously filed as Exhibit 10.5 to Form 10-K filed February 14,
1990).
+* 10.3.2 - Amendment No. 2 dated February 14, 1991 to Employment
Agreement between Nancy E. Corsiglia and the Registrant
(Previously filed as Exhibit 10.7 to Form 10-K filed April 1,
1991).
+* 10.3.3 - Amendment to Employment Contract dated as of June 1,
1993 between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.9 to Form 10-Q filed November 15, 1993).
+* 10.3.4 - Amendment No. 4 dated June 1, 1993 to Employment
Contract between Nancy E. Corsiglia and the Registrant
(Previously filed as Exhibit 10.10 to Form 10-K filed March 31,
1994).
+* 10.3.5 - Amendment No. 5 dated as of June 1, 1994 to Employment
Contract between Nancy E. Corsiglia and the Registrant
(Previously filed as Exhibit 10.12 to Form 10-Q filed August 15,
1994).
+* 10.3.6 - Amendment No. 6 dated as of June 1, 1995 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q
filed August 14, 1995).
+* 10.3.7 - Amendment No. 7 dated as of February 8, 1996 to
Employment Contract between Nancy E. Corsiglia and the Registrant
(Form 10-K filed March 29, 1996).
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 10.3.8 - Amendment No. 8 dated as of June 13, 1996 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q
filed August 14, 1996).
+* 10.3.9 - Amendment No. 9 dated as of August 7, 1997 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q
filed November 14, 1997).
+* 10.3.10 - Amendment No. 10 dated as of June 4, 1998 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q
filed August 14, 1998).
+* 10.3.11 - Amendment No. 11 dated as of June 3, 1999 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q
filed August 12, 1999).
+* 10.3.12 - Amendment No. 12 dated as of June 1, 2000 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q
filed August 14, 2000).
+* 10.3.13 - Amendment No. 13 dated as of June 7, 2001 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q
filed August 14, 2001).
+* 10.3.14 - Amendment No. 14 dated as of June 6, 2002 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q
filed August 14, 2002).
+* 10.3.15 - Amendment No. 15 dated as of June 5, 2003 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q
filed August 14, 2003).
+** 10.3.16 - Amendment No. 16 dated as of August 3, 2004 to
Employment Contract between Nancy E. Corsiglia and the
Registrant.
+* 10.4 - Employment Contract dated as of September 1, 1997 between
Tom D. Stenson and the Registrant (Previously filed as Exhibit
10.8 to Form 10-Q filed November 14, 1997).
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 10.4.1 - Amendment No. 1 dated as of June 4, 1998 to Employment
Contract between Tom D. Stenson and the Registrant (Previously
filed as Exhibit 10.8.1 to Form 10-Q filed August 14, 1998).
+* 10.4.2 - Amendment No. 2 dated as of June 3, 1999 to Employment
Contract between Tom D. Stenson and the Registrant (Form 10-Q
filed August 12, 1999).
+* 10.4.3 - Amendment No. 3 dated as of June 1, 2000 to Employment
Contract between Tom D. Stenson and the Registrant (Form 10-Q
filed August 14, 2000).
+* 10.4.4 - Amendment No. 4 dated as of June 7, 2001 to Employment
Contract between Tom D. Stenson and the Registrant (Form 10-Q
filed August 14, 2001).
+* 10.4.5 - Amendment No. 5 dated as of June 6, 2002 to Employment
Contract between Tom D. Stenson and the Registrant (Form 10-Q
filed August 14, 2002).
+* 10.4.6 - Amendment No. 6 dated as of June 5, 2003 to Employment
Contract between Tom D. Stenson and the Registrant (Form 10-Q
filed August 14, 2003).
+** 10.4.7 - Amendment No. 7 dated as of August 3, 2004 to Employment
Contract between Tom D. Stenson and the Registrant.
+* 10.5 - Employment Contract dated February 1, 2000 between Jerome
G. Oslick and the Registrant (Previously filed as Exhibit 10.6 to
Form 10-Q filed May 11, 2000).
+* 10.5.1 - Amendment No. 1 dated as of June 1, 2000 to Employment
Contract between Jerome G. Oslick and the Registrant (Previously
filed as Exhibit 10.6.1 to Form 10-Q filed August 14, 2000).
+* 10.5.2 - Amendment No. 2 dated as of June 7, 2001 to Employment
Contract between Jerome G. Oslick and the Registrant (Previously
filed as Exhibit 10.6.2 to Form 10-Q filed August 14, 2001).
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 10.5.3 - Amendment No. 3 dated as of June 6, 2002 to Employment
Contract between Jerome G. Oslick and the Registrant (Form 10-Q
filed August 14, 2002).
+* 10.5.4 - Amendment No. 4 dated as of June 5, 2003 to Employment
Contract between Jerome G. Oslick and the Registrant (Form 10-Q
filed August 14, 2003).
+* 10.6 - Employment Contract dated June 5, 2003 between Timothy L.
Buzby and the Registrant (Form 10-Q filed August 14, 2003).
+** 10.6.1 - Amendment No. 1 dated as of August 3, 2004 to Employment
Contract between Timothy L. Buzby and the Registrant.
* 10.7 - Farmer Mac I Seller/Servicer Agreement dated as of August
7, 1996 between Zions First National Bank and the Registrant
(Form 10-Q filed November 14, 2002).
* 10.8 - Medium-Term Notes U.S. Selling Agency Agreement dated as
of October 1, 1998 between Zions First National Bank and the
Registrant (Form 10-Q filed November 14, 2002).
* 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).
*# 10.11.2 - Amended and Restated Master Central Servicing Agreement
dated as of May 1, 2004 between Zions First National Bank and the
Registrant (Form 10-Q filed August 9, 2004).
* 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.
*# 10.12 - Loan File Review and Underwriting Agreement dated as of
December 17, 1996 between Zions First National Bank and the
Registrant (Form 10-Q filed November 14, 2002).
*# 10.12.1 - Amendment No. 1 dated as of January 20, 2000 to Loan
File Review and Underwriting Agreement dated as of December 17,
1996 between Zions First National Bank and the Registrant (Form
10-Q filed November 14, 2002).
*# 10.13 - Long Term Standby Commitment to Purchase dated as of
August 1, 1998 between AgFirst Farm Credit Bank and the
Registrant (Form 10-Q filed November 14, 2002).
*# 10.13.1 - Amendment No. 1 dated as of January 1, 2000 to Long
Term Standby Commitment to Purchase dated as of August 1, 1998
between AgFirst Farm Credit Bank and the Registrant (Form 10-Q
filed November 14, 2002).
* 10.13.2 - Amendment No. 2 dated as of September 1, 2002 to Long
Term Standby Commitment to Purchase dated as of August 1, 1998,
as amended by Amendment No. 1 dated as of January 1, 2000,
between AgFirst Farm Credit Bank and the Registrant (Form 10-Q
filed November 14, 2002).
* 10.14 - Lease Agreement, dated June 28, 2001 between EOP - Two
Lafayette, L.L.C. and the Registrant (Previously filed as Exhibit
10.10 to Form 10-K filed March 27, 2002).
+* 10.15 - Employment Contract dated October 31, 2003 between
Michael P. Morris and the Registrant (Form 10-K filed March 15,
2004).
+** 10.15.1- Amendment No. 1 dated August 3, 2004 to Employment
Contract between Michael P. Morris and the Registrant.
**# 10.16 - Long Term Standby Commitment to Purchase dated as of June
1, 2003 between Farm Credit Bank of Texas and the Registrant.
**# 10.17 - Central Servicer Delinquent Loan Servicing Transfer
Agreement dated as of July 1, 2004 between AgFirst Farm Credit
Bank and the Registrant.
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
** 31.1 - Certification of Chief Executive Officer relating to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 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
September 30, 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 September 30, 2004, pursuant to 18
U.S.C. ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
November 9, 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)