As filed with the Securities and Exchange Commission on
March 27, 2003
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number 0-17440
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FEDERAL AGRICULTURAL MORTGAGE CORPORATION
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(Exact name of registrant as specified in its charter)
Federally chartered
instrumentality 52-1578738
of the United States
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(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
1133 21st Street, N.W., Suite
600,
Washington, D.C. 20036
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(Address of principal executive (Zip code)
offices)
(202) 872-7700
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Exchange on Which Registered
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Class A voting common stock New York Stock Exchange
Class C non-voting common stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Class B voting
common stock
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (17 C.F.R. ss.229.405) is not contained herein, and will
not be contained, to the best of the Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market values of the Class A voting common stock and Class C
non-voting common stock held by non-affiliates of the Registrant were
$22,677,160 and $269,629,603 respectively, based upon the closing prices for the
respective classes on June 28, 2002, as reported by the New York Stock Exchange.
The aggregate market value of the Class B voting common stock is not
ascertainable due to the absence of publicly available quotations or prices for
the Class B voting common stock as a result of the limited market for, and
infrequency of trades in, Class B voting common stock and the fact that any such
trades are privately negotiated transactions.
There were 1,030,780 shares of Class A voting common stock, 500,301 shares
of Class B voting common stock and 10,107,470 shares of Class C non-voting
common stock outstanding as of March 14, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement to be filed on or about April 18, 2003 in connection with
the Annual Meeting of Stockholders to be held on June 5, 2003 (portions of which
are incorporated by reference into Part II and Part III of this Annual Report on
Form 10-K).
_____________________________________________
PART I
Item 1. Business
General
The Federal Agricultural Mortgage Corporation ("Farmer Mac" or the
"Corporation") was chartered by the U.S. Congress in the Agricultural Credit Act
of 1987 (12 U.S.C. ss.ss. 2279aa et seq.), which amended the Farm Credit Act of
1971 (collectively, as amended, the "Act"). Farmer Mac is a stockholder-owned
instrumentality of the United States that was created to establish a secondary
market for agricultural real estate and rural housing mortgage loans and to
increase the availability of long-term credit at stable interest rates to
American farmers, ranchers and rural homeowners. The Farmer Mac secondary market
for agricultural mortgage loans accomplishes that mission by providing liquidity
and lending capacity to agricultural mortgage lenders by:
o purchasing newly originated and pre-existing ("seasoned") eligible
mortgage loans directly from lenders through its "cash window" and
seasoned eligible mortgage loans from lenders and other third parties
in negotiated transactions;
o exchanging newly issued agricultural mortgage-backed securities
guaranteed by Farmer Mac ("Farmer Mac Guaranteed Securities") for
newly originated and seasoned eligible mortgage loans that back those
securities in "swap" transactions;
o issuing long-term standby purchase commitments ("LTSPCs") for newly
originated and seasoned eligible mortgage loans; and
o purchasing and guaranteeing mortgage-backed bonds secured by eligible
mortgage loans, which are referred to as AgVantage bonds.
Farmer Mac conducts these activities through two programs--Farmer Mac I and
Farmer Mac II. Under the Farmer Mac I program, Farmer Mac:
o purchases eligible mortgage loans;
o securitizes eligible mortgage loans purchased and guarantees the
timely payment of principal and interest on the agricultural
mortgage-backed securities backed by such loans; and
o commits to purchase eligible mortgage loans under LTSPCs for such
loans.
To be eligible for the Farmer Mac I program, loans must meet Farmer Mac's
underwriting, appraisal and documentation standards that are discussed in
"Farmer Mac Programs--Farmer Mac I--Loan Eligibility."
Under the Farmer Mac II program, Farmer Mac purchases the guaranteed
portions of loans guaranteed by the United States Department of Agriculture (the
"USDA-guaranteed portions") pursuant to the Consolidated Farm and Rural
Development Act (7 U.S.C. ss.ss. 1921 et seq.) and guarantees securities backed
by those USDA-guaranteed portions purchased by Farmer Mac.
Farmer Mac may retain Farmer Mac Guaranteed Securities in its portfolio or
sell them to third parties.
As of December 31, 2002, outstanding loans held by Farmer Mac and loans
that either back Farmer Mac Guaranteed Securities or are subject to LTSPCs
totaled $5.5 billion. For more information about Farmer Mac's securities and its
financial performance, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Farmer Mac's two principal sources of revenue are:
o fees received in connection with outstanding Farmer Mac Guaranteed
Securities and LTSPCs; and
o net interest income earned on its portfolio of Farmer Mac Guaranteed
Securities, mortgage loans, AgVantage bonds and investments.
Farmer Mac funds its program purchases primarily by issuing debt
obligations of various maturities. As of December 31, 2002, Farmer Mac had
outstanding $2.9 billion of discount notes and $1.0 billion of medium-term
notes. During 2002, the Corporation continued its strategy of regularly issuing
debt to increase its presence in the capital markets in order to reduce the
rates it pays on its debt, which allows Farmer Mac to accept lower rates on
mortgages it purchases from lenders to farmers, ranchers and rural homeowners.
To the extent the proceeds of the debt issuances exceed Farmer Mac's need to
fund program assets, those proceeds are invested in high quality non-program
assets.
Farmer Mac is an institution of the Farm Credit System, but is not liable
for any debt or obligation of any other institution of the Farm Credit System.
Likewise, neither the Farm Credit System nor any other individual institution of
the Farm Credit System is liable for any debt or obligation of Farmer Mac.
The Farm Credit Administration ("FCA"), acting through its Office of
Secondary Market Oversight, has general regulatory and enforcement authority
over Farmer Mac, including the authority to promulgate rules and regulations
governing the activities of Farmer Mac and to apply FCA's general enforcement
powers to Farmer Mac and its activities. For a discussion of Farmer Mac's
statutory capital requirements and its capital levels, see "Government
Regulation of Farmer Mac--Regulation--Capital Standards" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Balance Sheet Review--Capital" and "--Liquidity and Capital
Resources--Capital Requirements."
Farmer Mac has three classes of common stock outstanding--Class A voting,
Class B voting and Class C non-voting. See "Market for Registrant's Common
Equity and Related Stockholder Matters" for information regarding Farmer Mac's
common stock. Farmer Mac issued $35 million of preferred stock in May 2002.
As of December 31, 2002, Farmer Mac employed 33 persons, located primarily
at its principal executive offices at 1133 Twenty-First Street, N.W., Suite 600,
Washington, D.C. 20036. Farmer Mac's main telephone number is (202) 872-7700.
Farmer Mac makes available free of charge at www.farmermac.com (under the
"Investors" section) copies of materials it files with, or furnishes to, the
U.S. Securities and Exchange Commission ("SEC"), including Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports, as soon as reasonably practicable after
electronically filing of such materials with, or furnishing to, the SEC. Please
note that all references to www.farmermac.com in this report are inactive
textual references only and that the information contained on Farmer Mac's
website is not incorporated by reference into this report.
FARMER MAC PROGRAMS
Farmer Mac I
Loan Eligibility
Under the Farmer Mac I program, Farmer Mac purchases, or commits to
purchase, eligible mortgage loans and guarantees the timely payment of principal
and interest on securities backed by, or representing interests in, eligible
mortgage loans. A loan is eligible for the Farmer Mac I program if it is:
o secured by a fee simple mortgage or a long-term leasehold mortgage,
with status as a first lien on agricultural real estate or rural
housing (as defined below) located within the United States;
o an obligation of a citizen or national of the United States, an alien
lawfully admitted for permanent residence in the United States or a
private corporation or partnership that is majority-owned by U.S.
citizens, nationals or legal resident aliens;
o an obligation of a person, corporation or partnership having training
or farming experience that is sufficient to ensure a reasonable
likelihood that the loan will be repaid according to its terms; and
o in conformance with Farmer Mac's underwriting, appraisal,
documentation and other specified standards to be eligible for
participation in the Farmer Mac I program. See "--Underwriting and
Appraisal Standards" and "--Sellers" for a description of these
standards.
For purposes of the Farmer Mac I program, agricultural real estate is one
or more parcels of land, which may be improved by permanently affixed buildings
or other structures, that:
o is used for the production of one or more agricultural commodities or
products; and
o consists of a minimum of five acres or generates minimum annual
receipts of $5,000.
Currently, the maximum principal amount of an eligible loan secured by
agricultural real estate is $3.9 million, as adjusted annually for inflation,
for loans secured by more than 1,000 acres of land and $12.0 million for loans
secured by 1,000 acres or less.
For purposes of the Farmer Mac I program, rural housing is a one- to
four-family, owner-occupied, moderately priced principal residence located in a
community with a population of 2,500 or less. As of March 2003, the maximum
purchase price or current appraised value for a dwelling, excluding the land to
which the dwelling is affixed, that secures a rural housing loan is $191,286, as
adjusted for inflation. In addition to the dwelling itself, an eligible rural
housing loan can be secured by land associated with the dwelling having an
appraised value of no more than 50 percent of the total appraised value of the
combined property. To date, loans meeting the eligibility criteria under the
rural housing segment of Farmer Mac's requirements have not represented a
significant part of Farmer Mac's business.
Purchases
Loan Purchases. Farmer Mac offers credit products that are intended to
increase the secondary market liquidity of agricultural mortgage loans and the
lending capacity of financial institutions that originate agricultural mortgage
loans, while permitting Farmer Mac to efficiently securitize eligible mortgage
loans acquired through its secondary market activities. Farmer Mac enters into
mandatory and optional delivery commitments to purchase loans and prices such
commitments daily through its cash window. Because the securitization process
requires the grouping of loans into uniform pools, Farmer Mac emphasizes the
importance of conformity to its program requirements, including the interest
rate, amortization, maturity and payment frequency specifications. Farmer Mac
also purchases portfolios of newly originated and seasoned loans on a negotiated
basis through its cash window. Farmer Mac purchases fixed- and adjustable-rate
loans primarily, but also may purchase other types of loans, including
convertible mortgage loans. Loans purchased by Farmer Mac have a variety of
maturities and often include balloon payments. Loans purchased or subject to
purchase commitments also may include provisions that require a yield
maintenance payment or some other form of prepayment penalty in the event a
borrower prepays a loan (depending upon the level of interest rates at the time
of prepayment).
During 2002, Farmer Mac purchased $747.9 million of loans through its cash
window, including a $489.5 million loan portfolio in second quarter 2002. Of the
loans purchased during 2002, 76 percent included balloon payments and 54 percent
included yield maintenance prepayment protection. Excluding the second quarter
loan portfolio purchase transaction, during 2002 Farmer Mac's top ten sellers
generated 73.8 percent of the total Farmer Mac I cash window loan volume, of
which Zions First National Bank, Farmer Mac's largest combined Class A and Class
C stockholder, accounted for 29.9 percent. Including the second quarter loan
portfolio purchase transaction, the top ten sellers generated 90.0 percent of
the total Farmer Mac I loan purchase volume, of which Zions First National Bank
accounted for 10.3 percent. For more information regarding loan volume, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Business Volume."
Mortgage-Backed Bond Purchases. Farmer Mac purchases and guarantees timely
payment of principal and interest on mortgage-backed bonds, referred to as
AgVantage bonds, issued by institutions approved by Farmer Mac. Farmer Mac
assesses an institution's agricultural loan underwriting and servicing
capabilities as well as its creditworthiness in approving an institution for
AgVantage bond sales to Farmer Mac.
Each AgVantage bond is a general obligation of the issuing institution and
is secured by eligible collateral in an amount ranging from 120 percent to 150
percent of the bond's outstanding principal amount. Eligible collateral consists
of loans that meet the same loan eligibility criteria applied by Farmer Mac in
its loan purchases and commitments and have an outstanding aggregate principal
balance equal to at least 100 percent of the bond's outstanding principal amount
plus cash or securities issued by the U.S. Treasury or guaranteed by an agency
or instrumentality of the United States that make up any remaining required
collateral. During 2002, Farmer Mac purchased nine AgVantage bonds with
maturities ranging from one month to three years (most of which were less than
one year) from five institutions resulting in Farmer Mac guarantees of $13.5
million. As of December 31, 2002, the outstanding principal amount of AgVantage
bonds was $28.6 million. To date, Farmer Mac has experienced no losses, nor has
it been called upon to make a guarantee payment, on any of its AgVantage bonds.
Off-Balance Sheet Guarantees and Commitments
Farmer Mac offers two Farmer Mac I credit enhancement alternatives that
allow approved agricultural and rural residential mortgage lenders both to
retain the cash flow benefits of their loans and increase their liquidity and
lending capacity. These alternatives are:
o a swap transaction, in which Farmer Mac acquires eligible loans from
sellers in exchange for Farmer Mac Guaranteed Securities backed by
those loans. As consideration for its assumption of the credit risk on
loans underlying the Farmer Mac Guaranteed Securities, Farmer Mac
receives an annual guarantee fee payable in arrears out of the
periodic loan interest payments and based on the outstanding balance
of the Farmer Mac Guaranteed Securities.
o an LTSPC, which is not a guarantee of loans or securities, but a
Farmer Mac commitment to purchase loans from a segregated pool of
loans on one or more undetermined future dates. As consideration for
its assumption of the credit risk on loans underlying an LTSPC, Farmer
Mac receives an annual commitment fee payable in arrears based on the
timing of payments on the underlying loans and the outstanding balance
of those loans, in an amount approximating what would have been the
guarantee fee if the transaction were structured as a swap for Farmer
Mac Guaranteed Securities.
An LTSPC or a swap for Farmer Mac Guaranteed Securities may involve loans
with payment, maturity and interest rate characteristics that differ from those
purchased through the cash window. Both a swap and an LTSPC permit a seller to
nominate from its portfolio a segregated pool of loans, subject to review by
Farmer Mac for conformance with its underwriting and appraisal standards. Upon
Farmer Mac's acceptance of the eligible loans, whether under a swap transaction
or an LTSPC, the seller effectively transfers the credit risk on those loans to
Farmer Mac, thereby reducing the seller's credit and concentration risk
exposures and, consequently, its regulatory capital and its loss reserve
requirements. Only the LTSPC structure permits the seller to retain the
segregated loan pool in its portfolio until such time, if ever, as the seller
delivers some or all of the segregated loans to Farmer Mac for purchase under
the LTSPC. An LTSPC commits Farmer Mac to a future purchase of loans that met
Farmer Mac's underwriting standards at the time the loans first became subject
to the LTSPC and Farmer Mac assumed the credit risk on loans.
Farmer Mac generally purchases loans subject to an LTSPC at:
o par plus accrued interest, for any loans that become four months
delinquent;
o a mark-to-market price, for any loan that is not delinquent, is a
standard Farmer Mac cash window loan product and that the seller
offers to sell to Farmer Mac for cash or Farmer Mac Guaranteed
Securities; or
o a mark-to-market negotiated price for cash or Farmer Mac Guaranteed
Securities for all (but not some) of the loans in the pool that are
not four months delinquent.
In 2002, LTSPCs continued to develop as a significant portion of the Farmer
Mac I program and were the preferred credit enhancement alternative for non-cash
transactions. As of December 31, 2002, Farmer Mac had committed to purchase
under its LTSPCs a cumulative total of 10,450 eligible mortgage loans with an
aggregate principal balance of $2.7 billion. For more information regarding
guarantee and LTSPC volume, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--Business
Volume."
Underwriting and Appraisal Standards
Farmer Mac has established underwriting and appraisal standards for
agricultural mortgage loans to mitigate the risk of loss from borrower defaults
and to provide guidance concerning the management, administration and conduct of
underwriting and appraisals to all participating sellers and potential sellers
in its programs. These standards were developed on the basis of industry norms
for agricultural mortgage loans and are designed to assess the creditworthiness
of the borrower, as well as the value of the mortgaged property relative to the
amount of the mortgage loan. Farmer Mac requires sellers to make representations
and warranties regarding the conformity of eligible mortgage loans to these
standards and other requirements it may impose from time to time.
Farmer Mac I credit underwriting standards require that the loan-to-value
ratio for any loan not exceed 70 percent, except that a loan secured by a
livestock facility and supported by a contract with an integrator may have an
LTV of up to 75 percent, a part-time farm loan supported by private mortgage
insurance may have an LTV of up to 85 percent and a rural housing loan supported
by private mortgage insurance may have an LTV of up to 97 percent. In the case
of newly originated loans that are not part-time farm or rural housing loans,
borrowers on the loans must, among other criteria set out in Farmer Mac's
underwriting standards, also meet the following standard pro forma (that is,
giving effect to the new loan) credit ratios:
o debt-to-asset ratio of 50 percent or less;
o cash flow debt service coverage ratio on the mortgaged property of not
less than 1:1;
o total debt service coverage ratio, including farm and non-farm income,
of not less than 1.25:1; and
o ratio of current assets to current liabilities of not less than 1:1.
Farmer Mac's underwriting standards provide for acceptance of loans that do
not conform to one or more of the standard underwriting ratios, other than
loan-to-value, when:
o those loans exceed one or more of the underwriting standards to a
degree that compensates for noncompliance with one or more other
standards, referred to as compensating strengths; and
o those loans are made to producers of particular agricultural
commodities in a segment of agriculture in which such compensating
strengths are typical of the financial condition of sound borrowers in
that segment.
Farmer Mac's use of compensating strengths is not intended to provide a basis
for waiving or lessening the requirement that eligible mortgage loans under the
Farmer Mac I program be of consistently high quality. In fact, loans approved on
the basis of compensating strengths show a lower rate of default than that of
loans that conformed to all of the standard credit ratios. As of December 31,
2002, a total of $1.4 billion (30 percent) of the outstanding balance of loans
held and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities issued
after the enactment of the Farm Credit System Reform Act of 1996 (the "1996
Act") were approved based upon compensating strengths ($30.8 million of which
had original loan-to-value ratios of greater than 70 percent). During 2002,
$327.7 million (28 percent) of the loans purchased or added under LTSPCs were
approved based upon compensating strengths ($9.3 million of which had original
loan-to-value ratios of greater than 70 percent).
In the case of a seasoned loan, Farmer Mac considers sustained performance
to be a reliable alternative indicator of a borrower's ability to pay the loan
according to its terms. A seasoned loan generally will be deemed an eligible
loan if:
o it has been outstanding for at least five years and has a
loan-to-value ratio of 60 percent or less;
o there have been no payments more than 30 days past due during the
previous three years; and
o there have been no material restructurings or modifications for credit
reasons during the previous five years.
A seasoned loan that has been outstanding for more than one year but less
than five years must substantially comply with the underwriting standards for
newly originated loans as of the date the loan was originated by the lender. The
loan must also have a payment history that shows no payment more than 30 days
past due during the three-year period immediately prior to the date the loan is
either purchased by Farmer Mac or made subject to an LTSPC. As with the
secondary market for residential mortgages, there is no requirement that each
loan's compliance with the underwriting standards be re-evaluated after Farmer
Mac accepts the loan into its program.
The due diligence Farmer Mac performs before purchasing, guaranteeing
securities backed by or committing to purchase seasoned loans includes:
evaluation of loan database information to determine conformity to the criteria
set forth in the preceding paragraphs; confirmation that loan file data conform
to database information; validation of supporting credit information in the loan
files; and review of loan collateral appraisals. All of the foregoing are
performed through methods that give due regard to the size, age, leverage and
nature of the collateral for the loans.
In the case of rural housing and part-time farm loans, the borrower may
finance up to 97 percent and 85 percent, respectively, of the appraised value of
the property if the amount above 80 percent is covered by private mortgage
insurance. For newly originated part-time farm loans, the borrower must generate
sufficient income from all sources to repay all creditors. A borrower's capacity
to repay debt obligations is determined by two tests:
o the borrower's monthly mortgage payment-to-income ratio should be 28
percent or less; and
o the borrower's monthly debt payment-to-income ratio should be 36
percent or less.
Farmer Mac's appraisal standards for newly originated loans require, among
other things, that the appraisal function be performed independently of the
credit decision-making process and conform to the Uniform Standards of
Professional Appraisal Practice promulgated by the Appraisal Standards Board.
Farmer Mac's appraisal standards require the appraisal function to be conducted
or administered by an individual meeting specific qualification and competence
criteria and who:
o is not associated, except by the engagement for the appraisal, with
the credit underwriters making the loan decision, though both the
appraiser and the credit underwriter may be directly or indirectly
employed by a common employer;
o receives no financial or professional benefit of any kind by virtue of
the report content, valuation or credit decision made or based on the
appraisal product; and
o has no present or contemplated future direct or indirect interest in
the appraised property.
The appraisal standards also require uniform reporting of reliable and credible
opinions of the market value, market rent and property net income
characteristics of the mortgaged property and the relative market forces.
Farmer Mac requires current collateral valuations in conformance with the
Uniform Standards of Professional Appraisal Practice for newly originated loans
purchased or placed under a Farmer Mac I Guaranteed Security or LTSPC. For
seasoned loans, Farmer Mac obtains appraisal updates as considered necessary by
its assessment of collateral risk determined in the due diligence process.
Farmer Mac personnel include experienced agricultural credit underwriters,
appraisers and servicers who perform those functions with respect to many loans
that come into the Farmer Mac I program. In addition, those personnel oversee
the activities of several servicing centers to which Farmer Mac outsources a
significant amount of its underwriting function in order to access the expertise
and specialized knowledge of several industry-recognized third-party service
providers throughout the country. The outsourcing agreements afford Farmer Mac
the benefits of those servicing centers at fees based upon marginal costs, which
allows Farmer Mac to avoid the fixed costs associated with such operations.
Farmer Mac supervises and monitors the performance of the outsourced functions.
Farmer Mac believes that the combined expertise of our third-party service
providers and our internal staff provides the Corporation with access to
adequate resources for performing the necessary underwriting functions.
Sellers
During 2002, there were 79 approved loan sellers active in the Farmer Mac I
program, as compared with 72 sellers during 2001. Sellers range 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. To be considered for
approval as a Farmer Mac I seller, a financial institution must meet the
criteria that Farmer Mac establishes, including:
o ownership of a requisite amount of Farmer Mac Class A or Class B
voting common stock according to a schedule prescribed for the size
and type of institution;
o demonstrated ability and experience to make or purchase and sell
agricultural mortgage loans of the type that will qualify for purchase
by Farmer Mac and service such mortgage loans in accordance with
Farmer Mac requirements either through its own staff or through
contractors and originators;
o maintenance of a minimum adjusted net worth of $1.0 million;
o maintenance of a fidelity bond and errors and omissions insurance
coverage (or acceptable substitute insurance coverage) in a prescribed
amount according to the size of the institution; and
o signing a Seller/Servicer Agreement to comply with the terms of the
Farmer Mac Seller/Servicer Guide, including representations and
warranties regarding the origination and sale of eligible loans.
Servicing
Farmer Mac generally does not directly service loans held in its portfolio,
although it does act as "master servicer" for pools of loans and loans
underlying Farmer Mac Guaranteed Securities and may assume direct servicing for
certain impaired loans. Farmer Mac's loans and the loans underlying its Farmer
Mac Guaranteed Securities are serviced only by Farmer Mac-approved servicing
entities that have entered into central servicing contracts with Farmer Mac.
Sellers of eligible mortgage loans sold into the Farmer Mac I program have a
right to retain certain "field servicing" functions (typically direct borrower
contacts) and may enter into contracts with Farmer Mac's central servicers that
specify such servicing functions.
Farmer Mac I Guaranteed Securities
Farmer Mac guarantees the timely payment of principal and interest on
Farmer Mac Guaranteed Securities. Farmer Mac Guaranteed Securities backed by
mortgage loans eligible for the Farmer Mac I program are referred to as "Farmer
Mac I Guaranteed Securities."
By statute, public offerings of Farmer Mac Guaranteed Securities are
required to be registered with the SEC under the federal securities laws.
Accordingly, Farmer Mac, through its subsidiary Farmer Mac Mortgage Securities
Corporation, maintains a shelf registration statement with the SEC through which
Farmer Mac Guaranteed Securities may be publicly offered from time to time.
Farmer Mac also may offer Farmer Mac Guaranteed Securities in private,
unregistered offerings. U.S. Bank National Association, a national banking
association based in Minneapolis, Minnesota, or Farmer Mac serves as trustee for
the trusts that acquire eligible loans and issue Farmer Mac Guaranteed
Securities.
Farmer Mac I Guaranteed Securities are agricultural mortgage pass-through
certificates guaranteed by Farmer Mac that represent beneficial interests in
pools of loans or in obligations backed by pools of loans. All Farmer Mac I
Guaranteed Securities issued during and since 1996 have been single class or
multiclass "grantor trust" pass-through certificates. These securities entitle
each investor in a class of securities to receive a portion of the payments of
principal and interest on the related underlying pool of loans equal to the
investor's proportionate interest in the pool. These securities also may support
other Farmer Mac I Guaranteed Securities, including real estate mortgage
investment conduit securities, commonly referred to as REMICs, and other
agricultural mortgage-backed securities. Farmer Mac I Guaranteed Securities
issued prior to the enactment of changes to Farmer Mac's statutory charter in
1996 are supported by unguaranteed first-loss subordinated interests that
represented ten percent of the balance of the loans underlying the securities at
issuance.
Farmer Mac I Guaranteed Securities are not assets of Farmer Mac, except
when acquired for investment purposes, nor are Farmer Mac I Guaranteed
Securities recorded as liabilities on Farmer Mac's consolidated financial
statements. Farmer Mac, however, is liable under its guarantee on the securities
to make timely payments to investors of principal (including balloon payments)
and interest based on the scheduled payments on the underlying loans, regardless
of whether the grantor trust has actually received such scheduled payments.
Because it guarantees timely payments on Farmer Mac I Guaranteed Securities,
Farmer Mac assumes the ultimate credit risk of borrower defaults on the
underlying loans, which are subject to the Farmer Mac's Underwriting Standards
described above in "--Underwriting and Appraisal Standards." See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Management--Credit Risk - Loans."
Farmer Mac receives guarantee fees in return for its guarantee obligations
on Farmer Mac I Guaranteed Securities. These fees are collected as installment
payments are made on the underlying loans until those loans have been repaid or
otherwise liquidated (generally as a result of default). The aggregate amount of
guarantee fees received on Farmer Mac I Guaranteed Securities depends upon the
amount of such securities outstanding and on the guarantee fee rate, which is
capped by statute at 50 basis points (0.50 percent) per annum. The Farmer Mac I
guarantee fee rate typically ranges from 40 to 50 basis points (0.40 to 0.50
percent) per annum, depending on the credit quality of and other criteria
regarding the loans. The amount of Farmer Mac I Guaranteed Securities
outstanding is influenced by the repayment rates on the underlying loans and by
the rate at which Farmer Mac issues new Farmer Mac I Guaranteed Securities. In
general, when the level of interest rates declines significantly below the
interest rates on loans underlying Farmer Mac I Guaranteed Securities, the rate
of prepayments is likely to increase; conversely, when interest rates rise above
the interest rates on the loans underlying Farmer Mac I Guaranteed Securities,
the rate of prepayments is likely to decrease. In addition to changes in
interest rates, the rate of principal payments on Farmer Mac I Guaranteed
Securities is also influenced by a variety of economic, demographic and other
considerations, including yield maintenance provisions that are associated with
many of the loans underlying Farmer Mac I Guaranteed Securities. For more
information regarding yield maintenance provisions, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Risk
Management--Interest Rate Risk."
For each of the years ended December 31, 2002 and 2001, the amount of
Farmer Mac I Guaranteed Securities sold to third parties totaled $47.7 million
and $77.4 million, respectively, at no gain or loss. The amount of Farmer Mac I
Guaranteed Securities added to Farmer Mac's consolidated balance sheet in 2001
was $33.9 million, none of which was purchased from third parties. Because loans
purchased and securitized during 2002 are accounted for as loans (see Note 2(e)
to the consolidated financial statements), there were no Farmer Mac I Guaranteed
Securities added to the consolidated balance sheet during 2002.
Farmer Mac I Transactions
During the year ended December 31, 2002, Farmer Mac purchased or placed
under guarantee or LTSPC $1.9 billion of loans under the Farmer Mac I program.
The 1996 Act revised Farmer Mac's statutory charter to eliminate the requirement
of a first-loss subordinated interest in Farmer Mac I Guaranteed Securities. As
of December 31, 2002, loans held and loans underlying Farmer Mac I Guaranteed
Securities and LTSPCs totaled $4.9 billion. In addition, as of December 31,
2002, $32.0 million of Farmer Mac I Guaranteed Securities issued prior to the
1996 Act were outstanding.
The following table summarizes loans purchased or placed under guarantees
or LTSPCs under the Farmer Mac I program for each of the years ended December
31, 2002, 2001 and 2000.
----------------------------------------------
For the Year Ended December 31,
----------------------------------------------
2002 2001 2000
--------------- -------------- ---------------
(in thousands)
New purchases and guarantees $ 747,881 $ 272,127 $ 442,246
LTSPCs 1,155,479 1,032,967 373,202
--------------- -------------- ---------------
Total $1,903,360 $1,305,094 $ 815,448
--------------- -------------- ---------------
The following table presents the outstanding balances of Farmer Mac I loans
and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs as of the
dates indicated:
Outstanding Balances
as of December 31,
--------------------------------
2002 2001
--------------- ---------------
(in thousands)
Post-1996 Act:
Loans and Guaranteed Securities $ 2,168,994 $ 1,658,716
LTSPCs 2,681,240 1,884,260
Pre-1996 Act 31,960 48,979
--------------- ---------------
Total Farmer Mac I program $ 4,882,194 $ 3,591,955
--------------- ---------------
Funding of Guarantee and Purchase Commitment Obligations
The principal sources of funding for the payment of Farmer Mac's
obligations under its guarantees and LTSPCs are the fees for its guarantees and
commitments, net interest income and the proceeds of debt issuance. Farmer Mac
satisfies its guarantee and purchase commitment obligations by purchasing
defaulted loans out of LTSPCs and from the related trusts for Farmer Mac
Guaranteed Securities. Farmer Mac typically recovers a significant portion of
the value of defaulted loans purchased either through borrower payments, loan
payoffs, payments by third parties or foreclosure and sale. Ultimate losses
arising from Farmer Mac's guarantees and commitments are reflected in the
Corporation's charge-offs against its allowance for losses. During 2002, Farmer
Mac's net charge-offs were $4.1 million, compared to $2.2 million in net
charge-offs during 2001. The Act requires Farmer Mac to set aside, as an
allowance for losses in a reserve account, a portion of the guarantee fees it
receives from its guarantee activities. Among other things, that reserve account
must be exhausted before Farmer Mac may issue obligations to the Secretary of
the Treasury against the $1.5 billion Farmer Mac is statutorily authorized to
borrow from the Secretary of the Treasury to fulfill its guarantee obligations.
This borrowing authority is not intended to be used as a routine funding source
and has never been used.
Although total outstanding guarantees exceed the amount held as an
allowance for losses and the amount it may borrow from the U.S. Treasury, Farmer
Mac does not expect its obligations under the guarantees to exceed amounts
available to satisfy those obligations. For information regarding the allowance
for losses, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Management--Credit Risk - Loans," Note 2(j) and Note
8 to the consolidated financial statements. For a more detailed discussion of
Farmer Mac's borrowing authority from the Treasury, see "Farmer Mac's Authority
to Borrow From The U.S. Treasury."
Portfolio Diversification
It is Farmer Mac's policy to diversify its portfolio of loans held and
loans underlying Farmer Mac Guaranteed Securities and LTSPCs both geographically
and by commodity. Farmer Mac directs its marketing efforts toward agricultural
lenders throughout the nation to achieve commodity and geographic
diversification in its exposure to credit risk. Farmer Mac measures its credit
exposure in particular geographic regions and commodities as a percentage of the
total principal amount of all loans outstanding, adjusted for the credit quality
of the loans in that particular geographic region or commodity group based on
the loan-to-value, debt service coverage, equity-to-asset and working
capital-to-current asset ratios.
Farmer Mac is not obligated to buy every loan submitted to it by eligible
sellers that meets its underwriting and appraisal standards. Farmer Mac
considers other factors such as its overall portfolio diversification, commodity
and farming forecasts and risk management objectives in deciding whether to
accept the loans into the Farmer Mac I program. For example, if industry
forecasts indicate possible weakness in a geographic area or commodity, Farmer
Mac may decide not to purchase or commit to purchase a loan as part of managing
its overall portfolio exposure to areas of possible heightened risk exposure.
Because Farmer Mac effectively assumes the credit risk on all loans under an
LTSPC, Farmer Mac's commodity and geographic diversification disclosures reflect
all loans under LTSPCs and any loans that have been purchased out of LTSPC
pools. For information regarding the diversification of Farmer Mac's existing
portfolio, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Management--Credit Risk - Loans" and Note 8 to the
consolidated financial statements.
Farmer Mac II
General
The Farmer Mac II program was initiated in 1992 and is authorized under
sections 8.0(3) and 8.0(9)(B) of the Farmer Mac's statutory charter (12 U.S.C.
ss.ss. 2279aa(3) and 2279aa(9)(B)), which provide that:
o USDA-guaranteed portions are statutorily included in the definition of
loans eligible for Farmer Mac's secondary market programs;
o USDA-guaranteed portions are exempted from the underwriting, appraisal
and repayment standards that all other loans must meet to be eligible
for Farmer Mac programs, and are exempted from any diversification and
internal credit enhancement that may be required of pools of other
loans eligible for Farmer Mac programs; and
o Farmer Mac is authorized to pool and issue Farmer Mac Guaranteed
Securities backed by USDA-guaranteed portions.
United States Department of Agriculture Guaranteed Loan Programs
The USDA, acting through its various agencies, currently administers the
federal rural credit programs first developed in the mid-1930s. The USDA makes
direct loans and guarantees portions of loans made and serviced by
USDA-qualified lenders for various purposes. The USDA's guarantee is supported
by the full faith and credit of the United States. USDA-guaranteed portions
represent up to 95 percent of the principal amount of guaranteed loans.
Through its Farmer Mac II program, Farmer Mac is one of several competing
purchasers of USDA-guaranteed portions of farm ownership loans, farm operating
loans, business and industry loans and other loans that are fully guaranteed as
to principal and interest by the USDA (collectively, the "guaranteed loans").
USDA Guarantees. Each USDA guarantee is a full faith and credit obligation
of the United States and becomes enforceable if a lender fails to repurchase the
USDA-guaranteed portion from its owner within 30 days after written demand from
the owner when:
o the borrower under the guaranteed loan is in default not less than 60
days in the payment of any principal or interest due on the
USDA-guaranteed portion; or
o the lender has failed to remit to the owner the payment made by the
borrower on the USDA-guaranteed portion or any related loan subsidy
within 30 days after the lender's receipt of the payment.
If the lender does not repurchase the USDA-guaranteed portion as provided
above, the USDA is required to purchase the unpaid principal balance of the
USDA-guaranteed portion together with accrued interest (including any loan
subsidy) to the date of purchase, less the servicing fee, within 30 days after
written demand upon the USDA by the owner. While the USDA guarantee will not
cover the note interest to the owner on USDA-guaranteed portions accruing after
90 days from the date of the original demand letter of the owner to the lender
requesting repurchase, Farmer Mac has established procedures to require prompt
tendering of USDA-guaranteed portions.
If in the opinion of the lender (with the concurrence of the USDA) or in
the opinion of the USDA, repurchase of the USDA-guaranteed portion is necessary
to service the related guaranteed loan adequately, the owner will sell the
USDA-guaranteed portion to the lender or USDA for an amount equal to the unpaid
principal balance and accrued interest (including any loan subsidy) on such
USDA-guaranteed portion less the lender's servicing fee. Federal regulations
prohibit the lender from repurchasing USDA-guaranteed portions for arbitrage
purposes.
Lenders. Any lender authorized by the USDA to obtain a USDA guarantee on a
loan may sell loans to Farmer Mac through the Farmer Mac II program. As of
December 31, 2002, there were 143 active lenders in the Farmer Mac II program,
consisting mostly of community and regional banks, an increase of 27 lenders
from December 31, 2001.
Loan Servicing. The lender on each guaranteed loan is required by
regulation to retain the unguaranteed portion of the guaranteed loan, to service
the entire underlying guaranteed loan, including the USDA-guaranteed portion,
and to remain mortgagee and/or secured party of record. The USDA-guaranteed
portion and the unguaranteed portion of the underlying guaranteed loan are to be
secured by the same security with equal lien priority. The USDA-guaranteed
portion cannot be paid later than or in any way be subordinated to the related
unguaranteed portion.
Farmer Mac II Guaranteed Securities
Farmer Mac guarantees the timely payment of principal and interest on
Farmer Mac II Guaranteed Securities backed by USDA-guaranteed portions. Farmer
Mac does not guarantee the repayment of the USDA-guaranteed portions, only the
Farmer Mac II Guaranteed Securities that are backed by USDA-guaranteed portions.
In addition to purchasing USDA-guaranteed portions for retention in its
portfolio, Farmer Mac offers Farmer Mac II Guaranteed Securities to lenders in
swap transactions or to other investors for cash.
Farmer Mac II Transactions
During the years ended December 31, 2002 and 2001, Farmer Mac issued $173.0
million and $198.2 million of Farmer Mac II Guaranteed Securities, respectively.
As of December 31, 2002, $645.8 million Farmer Mac II Guaranteed Securities were
outstanding. See Note 5 and Note 12 to the consolidated financial statements.
The following table presents Farmer Mac II Guaranteed Securities issued for each
of the years indicated:
----------------------------------------------
For the Year Ended December 31,
----------------------------------------------
2002 2001 2000
--------------- -------------- --------------
(in thousands)
Purchased and retained $ 173,011 $ 186,679 $ 124,693
Swaps (issued to third parties) - 11,492 68,812
--------------- -------------- --------------
Total $ 173,011 $ 198,171 $ 193,505
--------------- -------------- --------------
The following table presents the outstanding balance of Farmer Mac II
Guaranteed Securities as of the dates indicated:
Outstanding Balance of
Farmer Mac II Guaranteed Securities
as of December 31,
-----------------------------------------
2002 2001
------------------ -------------------
(in thousands)
On-balance sheet $ 578,681 $ 516,747
Off-balance sheet 67,109 78,409
------------------ -------------------
Total $ 645,790 $ 595,156
------------------ -------------------
To date, Farmer Mac has experienced no credit losses on any of its Farmer Mac II
transactions. As of December 31, 2002 and 2001, Farmer Mac had outstanding $1.2
million and $1.7 million of principal and interest advances, respectively, on
Farmer Mac II Guaranteed Securities.
Financing
Debt Issuance
Section 8.6(e) of Farmer Mac's statutory charter (12 U.S.C. ss.
2279aa-6(e)) authorizes Farmer Mac to issue debt obligations to purchase
eligible mortgage loans and Farmer Mac Guaranteed Securities and to maintain
reasonable amounts for business operations, including adequate liquidity. Farmer
Mac funds its program purchases primarily by issuing debt obligations,
consisting of discount notes and medium-term notes of various maturities, in the
public capital markets. Farmer Mac also issues discount notes and medium-term
notes to obtain monies to finance its investments, transaction costs and
guarantee and LTSPC payments.
The Corporation's discount notes and medium-term notes are obligations of
Farmer Mac only, are not rated by any rating agency and the interest and
principal thereon are not guaranteed by and do not constitute debts or
obligations of the Farm Credit Administration or the United States or any agency
or instrumentality of the United States other than Farmer Mac. Farmer Mac is an
institution of the Farm Credit System, but is not liable for any debt or
obligation of any other institution of the Farm Credit System. Likewise, neither
the Farm Credit System nor any other individual institution of the Farm Credit
System is liable for any debt or obligation of Farmer Mac. Income to the
purchaser of a Farmer Mac discount note or medium-term note has no tax exemption
under federal law from federal, state or local taxation.
Effective June 6, 2002, Farmer Mac's board of directors had authorized the
issuance of up to $5.0 billion of discount notes and medium-term notes, subject
to periodic review of the adequacy of that level relative to Farmer Mac's
borrowing requirements. Farmer Mac invests in loans, Farmer Mac Guaranteed
Securities and non-program investment assets in accordance with policies
established by its board of directors. The current policies authorize
non-program investments in:
o U.S. Treasury obligations;
o agency and instrumentality obligations;
o repurchase agreements;
o commercial paper;
o guaranteed investment contracts;
o certificates of deposit;
o federal funds and bankers acceptances;
o certain securities and debt obligations of corporate and municipal
issuers;
o asset-backed securities;
o corporate money market funds; and
o preferred stock of government-sponsored enterprises.
For more information about Farmer Mac's outstanding investments and
indebtedness, see Note 4 and Note 7 to the consolidated financial statements.
Equity Issuance
The Act authorizes Farmer Mac to issue voting common stock, non-voting
common stock and non-voting preferred stock. Only banks, other financial
entities, insurance companies and institutions of the Farm Credit System
eligible to participate in one or more of the Farmer Mac programs may hold
voting common stock. No holder of Class A voting common stock may directly or
indirectly be a beneficial owner of more than 33 percent of the outstanding
shares of Class A voting common stock. There are no ownership restrictions
applicable to Class C non-voting common stock or preferred stock.
On May 6, 2002 the Corporation issued 700,000 shares of 6.40 percent
Cumulative Preferred Stock, Series A, which has a redemption price and
liquidation preference of $50.00 per share, plus accrued and unpaid dividends.
The preferred stock does not have a maturity date. Beginning on June 30, 2012,
Farmer Mac has the option to redeem the preferred stock at any time, in whole or
in part, at the redemption price of $50.00 per share, plus accrued and unpaid
dividends through and including the redemption date. The costs of issuing the
preferred stock were charged to additional paid-in capital. Farmer Mac pays
cumulative dividends on the preferred stock quarterly in arrears, when and if
declared by the board of directors. The following table presents the dividends
that have been declared:
Date Per For For
Dividend Share Period Period Date
Declared Amount Beginning Ending Paid
----------------- -------- --------------- ---------------- ---------------
June 6, 2002 $ 0.48 May 6, 2002 June 30, 2002 July 1, 2002
August 1, 2002 0.80 July 1, 2002 September 30, 2002 September 30, 2002
December 5, 2002 0.80 October 1, 2002 December 31, 2002 December 31, 2002
February 6, 2003 0.80 January 1, 2003 March 31, 2003 *
* The dividend declared on February 6, 2003 is scheduled to be paid on March 31, 2003.
The Class C non-voting common stock and the preferred stock are freely
transferable. Upon liquidation, dissolution or winding up of the business of
Farmer Mac, after payment and provision for payment of outstanding debt of the
Corporation, the holders of preferred stock would be paid in full at par value,
plus all accrued dividends, before the holders of shares of common stock
received any payment. To date, Farmer Mac has not paid any dividends on its
common stock, nor does it expect to pay such dividends in the foreseeable
future. Farmer Mac's ability to declare and pay common stock dividends could be
restricted if it were to fail to comply with its regulatory capital
requirements. See Note 9 to the consolidated financial statements and
"Government Regulation of Farmer Mac--Regulation--Capital Standards--Enforcement
levels."
As of December 31, 2002, 1,030,780 shares of Class A common stock, 500,301
shares of Class B common stock and 10,106,903 shares of Class C non-voting
common stock were outstanding. Farmer Mac may obtain additional capital from
future issuances of voting and non-voting common stock and non-voting preferred
stock. Farmer Mac has no present intention to issue any additional shares of
common stock, except pursuant to programs in which employees, members of
management or the board of directors may be granted or may purchase Class C
non-voting common stock, or exercise options to purchase Class C non-voting
common stock granted as part of their compensation arrangements.
FARMER MAC'S AUTHORITY TO BORROW FROM THE U.S. TREASURY
Farmer Mac may, in extreme circumstances, issue obligations to the U.S.
Treasury in a cumulative amount not to exceed $1.5 billion. The proceeds of such
obligations may be used solely for the purpose of fulfilling Farmer Mac's
guarantee commitments under the Farmer Mac I and Farmer Mac II programs. The Act
provides that the U.S. Treasury is required to purchase such obligations of
Farmer Mac if Farmer Mac certifies that:
o a portion of the guarantee fees assessed by Farmer Mac has been set
aside as a reserve against losses arising out of Farmer Mac's
guarantee activities in an amount determined by Farmer Mac's board of
directors to be necessary and such reserve has been exhausted; and
o the proceeds of such obligations are needed to fulfill Farmer Mac's
guarantee obligations.
Such obligations would bear interest at a rate determined by the U.S. Treasury,
taking into consideration the average rate on outstanding marketable obligations
of the United States as of the last day of the last calendar month ending before
the date of the purchase of the obligations from Farmer Mac, and would be
required to be repaid to the U.S. Treasury within a "reasonable time."
The United States government does not guarantee payments due on Farmer Mac
Guaranteed Securities, funds invested in the equity or debt securities of Farmer
Mac, any dividend payments on shares of Farmer Mac stock or the profitability of
Farmer Mac.
GOVERNMENT REGULATION OF FARMER MAC
General
Public offerings of Farmer Mac Guaranteed Securities must be registered
with the SEC under the federal securities laws. Farmer Mac also is required to
file reports with the SEC pursuant to the SEC's periodic reporting requirements.
Regulation
Office of Secondary Market Oversight
As an institution of the Farm Credit System, Farmer Mac is subject to the
regulatory authority of FCA. FCA, acting through its Office of Secondary Market
Oversight, has general regulatory and enforcement authority over Farmer Mac,
including the authority to promulgate rules and regulations governing the
activities of Farmer Mac and to apply its general enforcement powers to Farmer
Mac and its activities. The Director of the Office of Secondary Market
Oversight, who was selected by and reports to the FCA board, is responsible for
the examination of Farmer Mac and the general supervision of the safe and sound
performance by Farmer Mac of the powers and duties vested in it by the Act. The
Act requires an annual examination of the financial transactions of Farmer Mac
and authorizes FCA to assess Farmer Mac for the cost of its regulatory
activities, including the cost of any examination. Farmer Mac is required to
file quarterly reports of condition with FCA, as well as copies of all documents
filed with the SEC under the federal securities laws.
Department of the Treasury
In connection with the passage of the 1996 Act, the Chairmen of the House
and Senate Agriculture Committees requested FCA, in a cooperative effort with
the Department of the Treasury, to "monitor and review the operations and
financial condition of Farmer Mac and to report in writing to the appropriate
subcommittees of the House Agriculture Committee, the House Financial Services
Committee and the Senate Agriculture, Nutrition and Forestry Committee at
six-month intervals during the capital deferral period and beyond, if
necessary." Although the "capital deferral period" expired on January 1, 1999
and the risk-based capital rule went into effect on May 23, 2002, it appears
that the FCA reports are ongoing.
Comptroller General/General Accounting Office
The Act permits the Comptroller General of the United States to perform a
review of the actuarial soundness and reasonableness of the guarantee fees
established by Farmer Mac.
Capital Standards
General. The Act, as amended by the 1996 Act, establishes three capital
standards for Farmer Mac:
o Minimum capital - Farmer Mac's minimum capital level is an amount of
core capital equal to the sum of 2.75 percent of Farmer Mac's
aggregate on-balance sheet assets, as calculated for regulatory
purposes, plus 0.75 percent of the aggregate off-balance sheet
obligations of Farmer Mac, specifically including:
o the unpaid principal balance of outstanding Farmer Mac Guaranteed
Securities;
o instruments issued or guaranteed by Farmer Mac that are
substantially equivalent to Farmer Mac Guaranteed Securities,
including LTSPCs; and
o other off-balance sheet obligations of Farmer Mac.
o Critical capital - Farmer Mac's critical capital level is an amount of
core capital equal to 50 percent of the total minimum capital
requirement at that time.
o Risk-based capital - The Act directs FCA to establish a risk-based
capital stress test for Farmer Mac, using specified stress-test
parameters. While the Act does not specify the required level of
risk-based capital, that level is permitted to exceed the statutory
minimum capital requirement applicable to Farmer Mac, if so indicated
by the risk-based capital stress test.
Farmer Mac is required to comply with the higher of the minimum capital
requirement or the risk-based capital requirement.
FCA issued its final risk-based capital regulation for Farmer Mac on April
12, 2001 and the Corporation was required to meet the risk-based capital
standards beginning on May 23, 2002. The risk-based capital stress test
promulgated by FCA is intended to determine the amount of regulatory capital
(core capital plus allowance for losses) that Farmer Mac would need to maintain
positive capital during a ten-year period in which:
o annual losses occur at a rate of default and severity "reasonably
related" to the rates of the highest sequential two-years in a limited
U.S. geographic area; and
o there is an initial interest rate shock at the lesser of 600 basis
points or 50 percent of the ten-year U.S. Treasury rate, and interest
rates remain at such level for the remainder of the period.
The risk-based capital stress test then adds an additional 30 percent to the
resulting capital requirement for management and operational risk.
As of December 31, 2002, Farmer Mac's minimum and critical capital
requirements were $137.1 million and $68.6 million, respectively, and its actual
core capital level was $184.0 million, $46.9 million above the minimum capital
requirement and $115.4 million above the critical capital requirement. Based on
the risk-based capital stress test, Farmer Mac's risk-based capital requirement
as of December 31, 2002 was $73.4 million and Farmer Mac's regulatory capital of
$204.0 million exceeded that amount by approximately $130.6 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Capital Requirements" for a
presentation of Farmer Mac's current regulatory capital position.
Enforcement levels. The Act directs FCA to classify Farmer Mac within one
of four enforcement levels for purposes of determining compliance with capital
standards. As of December 31, 2002, Farmer Mac was classified as within level
I--the highest compliance level.
Failure to comply with the applicable required capital level in the Act
would result in Farmer Mac being classified as within level II (below the
applicable risk-based capital level but above the minimum capital level), level
III (below the minimum but above the critical capital level) or level IV (below
the critical capital level). In the event that Farmer Mac were classified as
within level II, III or IV, the Act requires the Director of the Office of
Secondary Market Oversight to take a number of mandatory supervisory measures
and provides the Director with discretionary authority to take various optional
supervisory measures depending on the level in which Farmer Mac is classified.
The mandatory measures applicable to level II include:
o requiring Farmer Mac to submit and comply with a capital restoration
plan;
o prohibiting the payment of dividends if such payment would result in
Farmer Mac being reclassified as within level III or IV, and requiring
the pre-approval of any dividend payment even if such payment would
not result in reclassification as within level IV; and
o reclassifying Farmer Mac as within level III if it does not submit a
capital restoration plan that is approved by the Director or the
Director determines that Farmer Mac has failed to make, in good faith,
reasonable efforts to comply with such a plan and fulfill the schedule
for the plan approved by the Director.
The mandatory measures applicable to level III include:
o requiring Farmer Mac to submit (and comply with) a capital restoration
plan;
o prohibiting the payment of dividends if such payment would result in
Farmer Mac being reclassified as within level IV and requiring the
pre-approval of any dividend payment even if such payment would not
result in reclassification as within level IV; and
o reclassifying Farmer Mac as within a lower level if it does not submit
a capital restoration plan that is approved by the Director or the
Director determines that Farmer Mac has failed to make, in good faith,
reasonable efforts to comply with such a plan and fulfill the schedule
for the plan approved by the Director.
If Farmer Mac were classified as within level III, then, in addition to
the foregoing mandatory supervisory measures, the Director of the Office of
Secondary Market Oversight could take any of the following discretionary
supervisory measures:
o imposing limits on any increase in, or ordering the reduction of, any
obligations of Farmer Mac, including off-balance sheet obligations;
o limiting or prohibiting asset growth or requiring the reduction of
assets;
o requiring the acquisition of new capital in an amount sufficient to
provide for reclassification as within a higher level;
o terminating, reducing or modifying any activity the Director
determines creates excessive risk to Farmer Mac; or
o appointing a conservator or a receiver for Farmer Mac.
The Act does not specify any supervisory measures, either mandatory or
discretionary, to be taken by the Director in the event Farmer Mac were
classified as within level IV.
The Director of the Office of Secondary Market Oversight has the
discretionary authority to reclassify Farmer Mac to a level that is one level
below its then current level (for example, from level I to level II) if the
Director determines that Farmer Mac is engaging in any action not approved by
the Director that could result in a rapid depletion of core capital or if the
value of property subject to mortgages backing Farmer Mac Guaranteed Securities
has decreased significantly.
Item 2. Properties
On June 28, 2001, Farmer Mac entered into a long-term lease for its
principal offices, which are located at 1133 Twenty-First Street, N.W., Suite
600, Washington, D.C. 20036. The lease, which expires November 30, 2011, covers
approximately 13,500 square feet of office space. Farmer Mac's offices are
suitable and adequate for its needs.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Farmer Mac has three classes of common stock outstanding. Only banks,
insurance companies and other financial institutions or similar entities that
are not institutions of the Farm Credit System may hold Class A voting common
stock. Only institutions of the Farm Credit System may hold Class B voting
common stock. There are no ownership restrictions on the Class C non-voting
common stock.
The Class A and Class C common stocks trade on the New York Stock Exchange
under the symbols AGMA and AGM, respectively. The Class B voting common stock,
which has a limited market and trades infrequently, is not listed or quoted on
any exchange or other medium, and Farmer Mac is unaware of any publicly
available quotations or prices for that class.
The information below represents the high and low closing sale prices for
the Class A and Class C common stocks for the periods indicated as reported by
the New York Stock Exchange.
Sales Price
---------------------------------------------------
Class A Stock Class C Stock
------------------------- -------------------------
High Low High Low
------------ ------------ ------------ ------------
(dollars per share)
2003
First quarter (through March 14, 2003) $ 22.65 $ 15.50 $ 34.50 $ 20.25
2002
Fourth quarter 26.00 19.90 33.37 25.06
Third quarter 24.30 20.30 30.47 20.80
Second quarter 35.00 22.00 47.20 25.60
First quarter 34.55 28.60 47.80 38.95
2001
Fourth quarter 33.60 27.80 46.33 31.78
Third quarter 28.40 26.60 35.23 29.58
Second quarter 28.55 21.60 32.25 23.75
First quarter 23.25 19.00 27.94 22.50
As of March 14, 2003, it was estimated that there were 1,432 registered
owners of the Class A voting common stock, 103 registered owners of the Class B
voting common stock and 1,390 registered owners of the Class C non-voting common
stock outstanding.
To date, Farmer Mac has not paid any dividends on its common stock, nor
does it expect to pay dividends in the foreseeable future. Farmer Mac's ability
to declare and pay dividends could be restricted if it were to fail to comply
with regulatory capital requirements.
Information about securities authorized for issuance under Farmer Mac's
equity compensation plans appears under "Equity Compensation Plans" in Farmer
Mac's Proxy Statement to be filed on or about April 18, 2003. That portion of
the Proxy Statement is incorporated by reference into this report.
Item 6. Selected Financial Data
As of December 31,
----------------------------------------------------------------------
Summary of Financial Condition: 2002 2001 2000 1999 1998
------------- -------------- ------------ ------------- ------------
(dollars in thousands)
Cash and cash equivalents $ 723,800 $ 437,831 $537,871 $336,282 $540,626
Investment securities 830,409 1,007,954 836,757 847,220 643,562
Farmer Mac Guaranteed Securities 1,608,507 1,690,376 1,679,993 1,306,223 552,205
Loans, net 963,461 198,003 30,279 38,509 168,064
Total assets 4,222,915 3,415,856 3,160,899 2,590,410 1,935,971
Notes payable
Due within one year 2,895,746 2,233,267 2,141,548 1,722,061 1,473,688
Due after one year 985,318 968,463 827,635 750,337 366,122
Total liabilities 4,039,344 3,281,419 3,028,238 2,503,267 1,855,057
Stockholders' equity 183,571 134,437 132,661 87,143 80,914
Selected Financial Ratios:
Return on average assets 0.60% 0.50% 0.36% 0.31% 0.35%
Return on average common equity 15.04% 12.19% 9.50% 8.24% 7.36%
Average equity to assets 4.16% 4.06% 3.82% 3.71% 4.75%
For the Year Ended December 31,
----------------------------------------------------------------------
Summary of Operations: 2002 2001 2000 1999 1998
------------- -------------- ------------ ------------- ------------
(dollars in thousands, except per share amounts)
Net interest income after provision
for loan losses $ 33,686 $ 26,339 $ 17,398 $ 14,838 $ 10,569
Losses on financial derivatives
and trading assets (4,359) (726) - - -
Guarantee and commitment fees 19,277 15,807 11,677 7,396 3,727
Gain on sale of Farmer Mac
Guaranteed Securities - - - - 1,400
Miscellaneous 1,332 560 399 220 142
------------- -------------- ------------ ------------- ------------
Total revenues 49,936 41,980 29,474 22,454 15,838
Total operating expenses 18,744 16,555 13,288 11,863 9,323
------------- -------------- ------------ ------------- ------------
Income before income taxes,
cumulative effect of change in
accounting principles and
extraordinary gain 31,192 25,425 16,186 10,591 6,515
Income tax expense 9,330 8,419 5,749 3,670 772
Cumulative effect of change in
accounting principles, net of taxes - (726) - - -
Extraordinary gain, net of taxes 889 - - - -
------------- -------------- ------------ ------------- ------------
Net income 22,751 16,280 10,437 6,921 5,743
Preferred stock dividends (1,456) - - - -
------------- -------------- ------------ ------------- ------------
Net income available to common
stockholders $ 21,295 $ 16,280 $ 10,437 $ 6,921 $ 5,743
------------- -------------- ------------ ------------- ------------
Earnings Per Share:
Basic earnings per share $ 1.83 $ 1.44 $ 0.94 $ 0.64 $ 0.53
Diluted earnings per share $ 1.77 $ 1.38 $ 0.92 $ 0.62 $ 0.52
Earnings per share before cumulative
effect of change in accounting principles
and extraordinary gain
Basic earnings per share $ 1.76 $ 1.50 $ 0.94 $ 0.64 $ 0.53
Diluted earnings per share $ 1.69 $ 1.45 $ 0.92 $ 0.62 $ 0.52
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial information as of and for each of the years ended December 31,
2002, 2001 and 2000 is consolidated to include the accounts of Farmer Mac and
its wholly-owned subsidiary, Farmer Mac Mortgage Securities Corporation. The
following discussion should be read together with Farmer Mac's consolidated
financial statements and is not necessarily indicative of future results.
Forward-Looking Statements
Certain statements made in this Form 10-K are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995
pertaining to management's current expectations as to Farmer Mac's future
financial results, business prospects and business developments. Forward-looking
statements include, without limitation, any statement that may predict,
forecast, indicate or imply future results, performance or achievements, and
typically are accompanied by, and identified with, such terms as "anticipates,"
"believes," "expects," "intends," "should" and similar phrases. The following
management's discussion and analysis includes forward-looking statements
addressing Farmer Mac's:
o prospects for earnings;
o growth in loan purchase, guarantee, securitization and LTSPC volume;
o trends in net interest income;
o trends in provisions for losses;
o changes in capital position; and
o other business and financial matters.
Management's expectations for Farmer Mac's future necessarily involve a number
of assumptions and estimates and the evaluation of risks and uncertainties.
Various factors could cause Farmer Mac's actual results or events to differ
materially from the expectations as expressed or implied by the forward-looking
statements, including uncertainties regarding:
o the rate and direction of development of the secondary market for
agricultural mortgage loans;
o the possible establishment of additional statutory or regulatory
restrictions on Farmer Mac;
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;
o legislative or regulatory developments or interpretations of Farmer
Mac's statutory charter that could adversely affect Farmer Mac or the
ability of certain lenders to participate in its programs or the terms
of any such participation;
o Farmer Mac's access to the debt markets at favorable rates and terms;
o the possible effect of the risk-based capital requirement, which
could, under certain circumstances, be in excess of the statutory
minimum capital level;
o the outcome of the pending analysis of Farmer Mac by the General
Accounting Office;
o the growth rate of agricultural mortgage indebtedness;
o the size of the agricultural mortgage market;
o borrower preferences for fixed-rate agricultural mortgage
indebtedness;
o lender interest in Farmer Mac credit products and the Farmer Mac
secondary market;
o the willingness of investors to invest in agricultural mortgage-backed
securities;
o competitive pressures in the purchase of agricultural mortgage loans
and the sale of agricultural mortgage-backed and debt securities;
o the effects on the agricultural economy of the government payments
that are provided for in the Farm Bill signed into law May 13, 2002;
or
o changes in Farmer Mac's status as a government-sponsored enterprise.
The foregoing factors are not exhaustive. Other sections of this report may
include additional factors that could adversely impact Farmer Mac's business and
its financial performance. Furthermore, new risk factors emerge from time to
time and it is not possible for management to predict all such risk factors, nor
assess the effects of such factors on Farmer Mac's business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from the expectations expressed or implied by the forward-looking
statements. In light of these potential risks and uncertainties, no undue
reliance should be placed on any forward-looking statements expressed in this
report. Furthermore, Farmer Mac undertakes no obligation to release publicly the
results of revisions to any forward-looking statements that may be made to
reflect any future events or circumstances, except as otherwise mandated by the
SEC.
Critical Accounting Policy and Estimates
The preparation of the consolidated financial statements requires the use
of estimates and assumptions that affect the amounts reported in the
consolidated financial statements and related notes for the periods presented,
and actual results could differ from those estimates. The critical accounting
policy that is both important to the portrayal of Farmer Mac's financial
condition and results of operations and requires complex, subjective judgments
is the accounting policy for allowance for losses, referred to in Farmer Mac's
prior reports as reserve for losses. The allowance for losses is presented in
three components on the consolidated balance sheet:
o an "Allowance for loan losses" on loans held for investment;
o a valuation allowance on real estate owned, which is included in the
balance sheet under "Real estate owned (net of valuation allowance)";
and
o an allowance for losses on loans underlying post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs, which is included in the balance
sheet under "Reserve for losses."
The purpose of the allowance for losses is to provide for estimated losses
that are probable to have occurred as of the balance sheet date, and not to
predict or account for future potential losses. The determination of the
allowance for losses requires management to make significant estimates based on
information available as of the balance sheet date, including the amounts and
timing of losses and current market and economic conditions. These estimates are
subject to change in future reporting periods if such conditions and information
change. For example, a continued decline in the national or agricultural
economies could result in an increase in delinquencies or foreclosures, which
may require additional allowances for losses in future periods.
Farmer Mac maintains an allowance for losses to cover estimated probable
losses on its loans held for investment, real estate owned and loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs. In estimating
probable losses, management considers factors such as economic conditions,
geographic and agricultural commodity concentrations, the credit profile of the
portfolio, delinquency trends and historical charge-off and recovery activity
and evaluates the results of its proprietary loan pool simulation and guarantee
fee model. The allowance is increased through periodic provisions for loan
losses that are charged against net interest income and provisions for losses
that are charged to operating expense and reduced by charge-offs for actual
losses, net of recoveries.
No allowance for losses has been made for loans underlying Farmer Mac I
Guaranteed Securities issued prior to the 1996 Act or Farmer Mac II Guaranteed
Securities. Farmer Mac I Guaranteed Securities issued prior to the 1996 Act are
supported by unguaranteed first loss subordinated interests, which are expected
to exceed the estimated credit losses on those loans. USDA-guaranteed portions
collateralizing Farmer Mac II Guaranteed Securities are obligations backed by
the full faith and credit of the United States. To date, Farmer Mac has
experienced no losses on any pre-1996 Act Farmer Mac I Guaranteed Securities or
on any Farmer Mac II Guaranteed Securities and does not expect to incur any such
losses in the future.
Further information regarding the allowance for losses is included in
"--Risk Management--Credit Risk - Loans."
Results of Operations
Overview. 2002 was another year of solid growth and strong financial
performance for Farmer Mac. Net income available to common stockholders rose to
$21.3 million in 2002 from $16.3 million in 2001, marking the sixth consecutive
year during which Farmer Mac achieved significant increases in profitability.
Diluted earnings per share were $1.77 for 2002, a 28.3 percent increase over
2001 diluted earnings per share of $1.38.
The principal factors contributing to the year's record earnings were
increases in net interest income on retained cash window loan purchases and
non-program investments and guarantee and commitment fees on the higher
cumulative amount of guarantees and LTSPCs outstanding. Net interest income
increased $8.1 million to $35.0 million in 2002, from $26.9 million in 2001, as
interest-earning assets increased by $792.0 million to $4.1 billion in 2002,
from $3.3 billion in 2001. Guarantee and commitment fee income grew 22 percent
to $19.3 million in 2002 from $15.8 million in 2001, as outstanding guarantees
and LTSPCs increased $1.3 billion, or 32 percent, to $5.5 billion. The year's
increase in guarantee and commitment fee income is indicative of the
annuity-like nature of that income.
The increase in outstanding guarantee and LTSPC volume and asset growth was
achieved while maintaining a relatively consistent ratio of operating expenses
to total revenues, and despite the adverse effects of increased legal and
consulting fees attributable to the effects of certain inaccurate and misleading
publicity about Farmer Mac. During 2002, operating expenses were 38 percent of
total revenues, compared to 39 percent in 2001. The effects of gains and losses
on financial derivatives and trading assets increased the ratio of operating
expenses to total revenues for 2002 to 38 percent from 35 percent. The effect of
gains and losses on financial derivatives and trading assets on the ratio of
operating expenses to revenues was less than one percent for 2001.
In 1996, Farmer Mac's statutory charter was amended to allow Farmer Mac to
act as a first-loss guarantor. As of December 31, 2002, the percentage of Farmer
Mac I loans purchased or placed under Farmer Mac I Guaranteed Securities or
LTSPCs after changes to Farmer Mac's statutory charter in 1996 that were 90 days
or more past due, in foreclosure, restructured after delinquency, in bankruptcy
or classified as real estate owned, decreased to 1.56 percent, compared to 1.70
percent at the end of 2001.
As Farmer Mac's portfolio of loans held and loans underlying LTSPCs and
post-1996 Act Farmer Mac I Guaranteed Securities has had certain cohort years of
loan originations enter, and now start exiting, their peak default years,
certain segments of the portfolio are beginning to exhibit characteristics of a
mature portfolio. For example, during 2001 and 2002, the portfolio had its first
loans cycle through foreclosure and into the asset category real estate owned,
which completes the involuntary loan liquidation process. As of December 31,
2002, Farmer Mac had $5.0 million of real estate owned compared to $2.5 million
as of December 31, 2001. During the foreclosure process, the Corporation devises
a liquidation strategy that results in either an immediate sale of the property
or retention pending later sale. Farmer Mac evaluates these and other
alternatives based upon economics and local law. The portfolio also has
developed a core of loans that, though the borrowers on those loans have filed
for bankruptcy protection, are current under the original terms of the loans.
These trends are indicative of a maturing portfolio and management believes that
presenting non-performing assets as it has in the past is a more meaningful
measure of business trends when presented in conjunction with a measure of
90-day delinquencies. Non-performing assets are loans 90 days or more past due,
in foreclosure, restructured after delinquency, in bankruptcy, or real estate
owned. 90-day delinquencies are loans 90 days or more past due, in foreclosure,
restructured after delinquency, or in bankruptcy, excluding loans performing
under either their original loan terms or a court-approved bankruptcy plan. The
difference between the non-performing asset and 90-day delinquencies measures is
the exclusion of real estate owned and loans performing in bankruptcy from
90-day delinquencies.
As of December 31,
---------------------------
2002 2001
------------- ------------
(in thousands)
90-day delinquencies (including loans in $58,214 $ 54,536
foreclosure and loans restructured
after delinquency)
Loans performing in bankruptcy 11,471 1,286
Real estate owned 5,623 2,457
------------- ------------
Non-performing assets $75,308 $ 58,279
------------- ------------
The table below presents non-performing assets and 90-day delinquency data
as of the dates indicated:
Outstanding
Post-1996 Act Less:
Loans, Non- REO and
Guarantees and Performing Performing 90-day
LTSPCs Assets Percentage Bankruptcies Delinquencies Percentage
------------------ ----------------- ------------- ---------------- ----------------- ----------------
(dollars in thousands)
As of:
December 31, 2002 $ 4,821,634 $ 75,308 1.56% $ 17,094 $ 58,214 1.21%
September 30, 2002 4,506,330 91,286 2.03% 11,460 79,826 1.77%
June 30, 2002 4,489,735 65,196 1.45% 14,931 50,265 1.12%
March 31, 2002 3,754,171 87,097 2.32% 7,903 79,194 2.11%
December 31, 2001 3,428,176 58,279 1.70% 3,743 54,536 1.59%
September 30, 2001 3,318,796 71,686 2.16% 5,183 66,503 2.00%
June 30, 2001 3,089,460 53,139 1.72% 4,274 48,865 1.58%
March 31, 2001 2,562,374 67,134 2.62% 2,154 64,980 2.54%
Farmer Mac experienced $4.1 million in net losses charged against the
allowance for losses in 2002, compared with $2.2 million in net losses for 2001.
Through direct charges to earnings, Farmer Mac provided for $8.2 million in
total losses during 2002 compared to $6.7 million during 2001. Comparing 2002 to
2001, this increase in Farmer Mac's provision for losses is comparable to the
increase in the losses charged against the allowance. Farmer Mac's total
allowance for losses as of December 31, 2002 was $20.0 million, compared to
$15.9 million as of December 31, 2001.
In 2003, the dollar level of 90-day delinquencies could increase slightly
and higher charge-offs could follow. These trends correlate to the entry of a
growing percentage of Farmer Mac's portfolio into its peak loss years, price
pressures on certain commodities not supported by government payments (e.g.,
permanent plantings), drought in the mountain region of the United States and
the aftermath of a weak agricultural economy in 2002.
2003 Outlook. USDA is currently forecasting net cash income on farms for
2003 to be $51.3 billion, up 11 percent from 2002 forecasted levels of $46.3
billion. The forecasted net cash income on farms for 2003 includes government
payments of $17.6 billion as compared to the $13.1 billion in 2002 and increases
in total crop and livestock receipts. Farm real estate values are expected to
rise by approximately 1.5 percent in 2003, slowing slightly from their growth of
4 percent in 2002, 5.2 percent in 2001, and 6.8 percent in 2000. On average,
farm real estate values grew nearly 4 percent annually during the 1990s.
Regionally, farm real estate values may vary with differing rates of increase,
or even decrease, depending on differences in land quality and location,
commodities grown, credit conditions, non-farm investment opportunities,
government farm policies, and production risks and weather uncertainties unique
to each region's agriculture.
As management evaluates Farmer Mac's business prospects for 2003 and
beyond, certain factors and conditions remain that are likely to constrain
Farmer Mac's progress. As a matter of historical practice, and particularly in
the current interest rate environment, many institutions still prefer to retain
agricultural mortgage loans in portfolio rather than sell them into the
secondary market, notwithstanding the corporate finance and capital planning
benefits they might realize through participation in Farmer Mac's programs. Some
lending institutions subsidize their agricultural mortgage loan rates out of
higher rates on non-mortgage loans, or by low-return use of equity, both of
which generate uneconomic competition with Farmer Mac's loan rates.
While significant progress has been made in developing the secondary market
for agricultural mortgages, Farmer Mac continues to face the challenges of
establishing a new market where none previously existed. Acceptance of Farmer
Mac's programs is increasing among lenders, reflecting the competitive rates,
terms and products offered and the advantages Farmer Mac believes its programs
provide. As of December 31, 2002, Farmer Mac's outstanding program volume was
$5.5 billion, which represented approximately 12 percent of management's
estimate of a $47.5 billion market of eligible agricultural mortgage loans. For
Farmer Mac to succeed in realizing its business development and profitability
goals over the longer term, the use of Farmer Mac's programs and products by
agricultural mortgage lenders, whether traditional or non-traditional, must
continue to expand.
A detailed presentation of Farmer Mac's financial results for the years
ended December 31, 2002, 2001 and 2000 follows.
Net Interest Income. Net interest income totaled $35.0 million in 2002,
compared to $26.9 million in 2001, and the net interest yield was 93 basis
points in 2002 compared to 83 basis points in 2001. The effects on Farmer Mac's
net interest yield due to the Statement of Financial Accounting Standards No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("SFAS 140") for 2002 and 2001 were increases of
seven basis points and one basis point, respectively, due to Farmer Mac's
adoption of SFAS 140 on April 1, 2001. Under SFAS 140, loans purchased and
securitized after April 1, 2001, for which Farmer Mac retained all the
beneficial interest in the securitized loans, are classified as loans and the
interest income recognized on those loans includes amounts that would have been
classified as guarantee fees prior to April 1, 2001. Prior to April 1, 2001,
such securitizations were classified as Farmer Mac Guaranteed Securities under
Statement of Financial Accounting Standards No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities ("SFAS
125"). The effects of yield maintenance on Farmer Mac's net interest yield for
2002 and 2001 were increases of eight basis points and three basis points,
respectively. The increase in net interest income was due to a 16.6 percent
increase in the average balance of interest-earnings assets, driven by a 28.9
percent increase in average on-balance sheet program assets that resulted from
the retention of loans purchased during 2002. Also, yield maintenance payment
receipts were $3.2 million during 2002 compared to $1.1 million during 2001. For
further information, see "--Business Volume" and "--Balance Sheet
Review--Assets." During 2002, the average balance of non-program assets, which
consists of cash and cash equivalents and investments, increased 1.5 percent.
Net interest income totaled $26.9 million in 2001 and $17.7 million in
2000. The $9.2 million increase from 2000 to 2001 was due to a 14.4 percent
increase in the average balance of interest-earning assets, driven by a 25.4
percent increase in average on-balance sheet program assets. Net interest yield
for 2000 was 63 basis points.
The following table provides information regarding interest-earning assets
and funding for the years ended December 31, 2002, 2001 and 2000. The balance of
non-accruing loans is included in the average balance of interest earning loans
presented, though no related income is included in the income figures presented.
Therefore, as the balance of non-accruing loans increases or decreases, the net
interest yield will increase or decrease, accordingly. Net interest income and
the yield will also fluctuate due to the uncertainty of the timing and size of
yield maintenance payments.
2002 2001 2000
---------------------------------- ----------------------------------- ---------------------------------
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
----------- ---------- ----------- ------------ ----------- ---------- ---------- ---------- -----------
(dollars in thousands)
Interest-earning assets:
Cash and cash
equivalents $ 564,614 $ 10,237 1.81% $ 522,227 $ 21,464 4.11% $ 510,779 $32,675 6.40%
Investments 902,740 30,562 3.39% 922,856 43,870 4.75% 888,765 59,230 6.66%
Loans and Farmer Mac
Guaranteed Securities 2,291,887 129,241 5.64% 1,778,601 115,879 6.52% 1,418,708 103,515 7.30%
------------ ----------- ---------- ----------- ----------- ---------- ------------ ---------- ----------
Total interest-earning
assets $3,759,241 170,040 4.52% $3,223,684 181,213 5.62% $2,818,252 195,420 6.93%
------------ ----------- ------------
Funding:
Discount notes $2,533,762 67,020 2.65% $2,175,087 95,424 4.39% $1,945,276 125,952 6.47%
Medium-term notes 1,102,485 67,994 6.17% 926,878 58,850 6.35% 825,433 51,770 6.27%
------------ ----------- ---------- ------------ ----------- ----------- ---------- ---------- ----------
Total interest-bearing
liabilities 3,636,247 135,014 3.71% 3,101,965 154,274 4.97% 2,770,709 177,722 6.41%
Net non-interest-bearing
funding 122,994 - 0.00% 121,719 - 0.00% 47,543 - 0.00%
------------ ----------- ---------- ------------ ----------- ----------- ---------- ---------- ----------
Total funding $3,759,241 135,014 3.59% $ 3,223,684 154,274 4.79% $2,818,252 177,722 6.31%
------------ ----------- ---------- ------------ ----------- ----------- ---------- ---------- ----------
Net interest income/
yield $ 35,026 0.93% $ 26,939 0.83% $17,698 0.63%
---------- ---------- ----------- ---------- ----------------------
For 2002, the decreases in all of the rates presented above tracked the
general decline in interest rates relative to the prior year. The average rates
for cash and cash equivalents and discount notes reflect that decline in
short-term interest rates during 2002, while the average rates for investments
and loans and Farmer Mac Guaranteed Securities reflect the decline in interest
rates for investments of similar term to the rate reset or maturity date.
The following table sets forth information regarding the changes in the
components of Farmer Mac's net interest income for the periods indicated. For
each category, information is provided on changes attributable to changes in
volume (change in volume multiplied by old rate) and changes in rate (change in
rate multiplied by old volume). Combined rate/volume variances, the third
element of the calculation, are allocated based on their relative size. The
decreases due to rate reflect the short-term or adjustable-rate nature of the
assets or liabilities and the general decreases in market rates described above.
2002 vs. 2001 2001 vs. 2000
------------------------------------- ------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------- ------------------------------------
Rate Volume Total Rate Volume Total
------------ ----------- ------------ ------------ ---------- -----------
(in thousands)
Income from interest-earning assets:
Cash and cash equivalents $ (11,325) $ 97 $ (11,228) $ (11,960) $ 749 $ (11,211)
Investments (12,371) (937) (13,308) (17,737) 2,377 (15,360)
Loans & Farmer Mac guaranteed securities (6,382) 19,744 13,362 (8,945) 21,309 12,364
------------ ----------- ------------ ------------ ---------- -----------
Total (30,078) 18,904 (11,174) (38,642) 24,435 (14,207)
Expense from interest-bearing liabilities (31,452) 12,191 (19,261) (47,565) 24,117 (23,448)
------------ ----------- ------------ ------------ ---------- -----------
Change in net interest income $ 1,374 $ 6,713 $ 8,087 $ 8,923 $ 318 $ 9,241
------------ ----------- ------------ ------------ ---------- -----------
Gains and Losses on Financial Derivatives and Trading Assets. Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133") requires the change in the fair values of
certain financial derivatives to be reflected in a company's net income or
accumulated other comprehensive income. SFAS 133 became effective as of January
1, 2001. The cumulative effect of the change in accounting principles recognized
during 2001 was a charge of $0.7 million, net of taxes. During 2002 and 2001,
the net losses on financial derivatives that do not qualify for hedge accounting
under SFAS 133 and trading assets recorded in Farmer Mac's consolidated
statements of operations were $4.4 million and $0.2 million, respectively. On a
net after-tax basis, those losses, combined with the cumulative effect of the
change in accounting principles and benefits received from the elimination of
the amortization of certain premium payments that resulted from SFAS 133, the
effects of SFAS 133 reduced net income available to common stockholders by $2.5
million and $0.8 million for 2002 and 2001, respectively.
Other Income. Other income, which is comprised of guarantee and commitment
fee income and miscellaneous income, totaled $20.6 million for 2002 compared to
$16.4 million for 2001 and $12.1 million for 2000. Guarantee and commitment fee
income, which compensate Farmer Mac for assuming the credit risk on loans
underlying Farmer Mac Guaranteed Securities and LTSPCs, was $19.3 million for
2002, compared to $15.8 million for 2001 and $11.7 million for 2000. The
relative increase in guarantee and commitment fee income reflects an increase in
the average balance of outstanding guarantees and LTSPCs. For 2002, the effect
of SFAS 140 reclassified $2.7 million of guarantee fee income as interest
income, although management considers that amount to have been earned in
consideration for the assumption of credit risk. That portion of the difference
or "spread" between the cost of Farmer Mac's debt funding for loans and the
yield on post-1996 Act Farmer Mac I Guaranteed Securities held on its books
compensates for credit and interest rate risk. If a post-1996 Act Farmer Mac I
Guaranteed Security is sold to a third party, Farmer Mac continues to receive
the guarantee fee component of that spread, which continues to compensate Farmer
Mac for its assumption of credit risk. The portion of the spread that
compensates for interest rate risk would not typically continue to be received
by Farmer Mac, except to the extent attributable to any retained interest-only
strip, if the asset were sold.
Miscellaneous income was $1.3 million for 2002, compared to $0.6 million
for 2001 and $0.4 million for 2000. The increase in miscellaneous income was
primarily a result of the receipt of late fee income and processing fees on
Farmer Mac II refinance transactions.
For more information regarding the increases in outstanding loans held and
loans underlying Farmer Mac Guaranteed Securities and LTSPCs, see "--Business
Volume."
Operating Expenses. During 2002, operating expenses totaled $18.7 million,
compared to $16.6 million for 2001 and $13.3 million for 2000. Operating
expenses equaled 38 percent of total revenues in 2002, compared to 39 percent in
2001 and 45 percent in 2000. The dollar increase in operating expenses in 2002
primarily reflects higher legal, consulting and regulatory fees that resulted
from certain inaccurate and misleading publicity Farmer Mac received during
2002. While the effects of that publicity have dissipated somewhat, ongoing
events associated with that publicity could cause Farmer Mac to incur higher
than expected legal and consulting fees in 2003. During third quarter 2002,
Farmer Mac incurred unexpected regulatory costs of approximately $0.3 million
above FCA's assessment for the year ended September 30, 2002. FCA has advised
Farmer Mac that its regulatory assessment for the year ended September 30, 2003
will be an estimated $1.4 million, an increase from the estimated $0.7 million
for the year ended September 30, 2002.
Farmer Mac's provision for losses on loans underlying Farmer Mac I
Guaranteed Securities and LTSPCs, which is classified as a component of
operating expenses, was $6.9 million for 2002, $6.1 million for 2001 and $4.4
million in 2000. The increases in the provisions were due to increases in
outstanding Farmer Mac I Guaranteed Securities and LTSPCs for which Farmer Mac
assumes 100 percent of the credit risk. As of December 31, 2002, Farmer Mac's
allowance for losses for loans underlying Farmer Mac I Guaranteed Securities and
LTSPCs was $16.8 million, compared to $14.5 million as of December 31, 2001.
Farmer Mac also provides for losses on the loans on its balance sheet through
provisions that are charged against net interest income on the statement of
operations and presented as a reduction to the reported loan balances on Farmer
Mac's balance sheet. For further discussion and presentation regarding Farmer
Mac's provisions for losses and allowances for losses in the aggregate, see
"--Risk Management--Credit Risk - Loans"
Income Tax Expense. Income tax expense totaled $9.3 million in 2002,
compared to $8.4 million in 2001 and $5.7 million in 2000. Farmer Mac's
effective tax rate for 2002 was approximately 29.9 percent, reflecting the
effects of certain tax-advantaged investments, compared to approximately 33.1
percent for 2001 and 35.5 percent for 2000. Farmer Mac expects its effective tax
rate in 2003 to approximate 31 percent. For more information about income taxes,
see Note 10 to the consolidated financial statements.
Extraordinary Gain. During first quarter 2002, Farmer Mac recognized a net
after-tax extraordinary gain of $1.6 million resulting from the repurchase of
$43.8 million of outstanding Farmer Mac debt. During second quarter 2002, Farmer
Mac recognized a net after-tax extraordinary gain of $0.6 million resulting from
the repurchase of $18.9 million of outstanding Farmer Mac debt. During fourth
quarter 2002, Farmer Mac recognized a net after-tax extraordinary loss of $1.3
million resulting from the repurchase of $41.0 million of outstanding Farmer Mac
debt. All of these repurchases were from outstanding Farmer Mac debt that had a
maturity date of October 14, 2011 and an interest rate of 5.4 percent. These
debt securities were replaced with new fixed-rate funding to the same maturity
dates at more attractive interest rates, which preserves Farmer Mac's
asset-liability match and reduces future interest expense. The combined net
after-tax extraordinary gain resulting from the repurchase of outstanding Farmer
Mac debt in 2002 was $0.9 million.
Business Volume and Purchase Prices. During 2002, the volume of loans
purchased or placed under Farmer Mac Guaranteed Securities under LTSPCs totaled
$2.1 billion, a 38 percent increase over 2001 volume. This increase largely
resulted from the purchase of a $489.5 million loan portfolio in second quarter
2002 and increases in LTSPCs from $1.0 billion in 2001 to $1.2 billion in 2002.
See "Business--Farmer Mac Programs--Farmer Mac I--Off-Balance Sheet Guarantees
and Commitments" and Note 12 to the consolidated financial statements for a
description of LTSPCs. The following table sets forth information regarding the
volume of loans purchased or placed under Farmer Mac Guaranteed Securities or
LTSPCs for the periods indicated:
Farmer Mac Loan Purchases, Guarantees and LTSPCs
- --------------------------------------------------------------------------------
For the Year Ended December 31,
--------------------------------------------
2002 2001 2000
-------------- -------------- ------------
(in thousands)
Farmer Mac I:
Loans and Guaranteed Securities $ 747,881 $ 272,127 $ 442,246
LTSPCs 1,155,479 1,032,967 373,202
Farmer Mac II 173,011 198,171 193,505
-------------- -------------- -----------
Total $2,076,371 $1,503,265 $1,008,953
The purchase price of newly originated and seasoned eligible loans and
portfolios purchased through the cash window, none of which are delinquent at
the time of purchase, is the fair value based on current market interest rates
and Farmer Mac's target net yield, which includes an amount to compensate Farmer
Mac for credit risk that is similar to the guarantee or commitment fee it
receives for accepting credit risk on loans underlying post-1996 Act Farmer Mac
I Guaranteed Securities and LTSPCs. The purchase price for loans purchased from
all related parties is determined in the same manner as for loans acquired from
any other third party. See Note 3 to the consolidated financial statements for a
description of related party transactions.
As part of fulfilling its guarantee obligations for Farmer Mac I Guaranteed
Securities and commitments to purchase eligible loans underlying LTSPCs, Farmer
Mac purchases defaulted loans, all of which are at least 90 days delinquent at
the time of purchase, out of those securities and pools. The purchase price for
defaulted loans purchased out of Farmer Mac I Guaranteed Securities is the
current outstanding principal balance of the loan plus accrued and unpaid
interest. The purchase price for defaulted loans purchased under an LTSPC is the
current outstanding principal balance of the loan, with accrued and unpaid
interest on the defaulted loans payable out of any future loan payments or
liquidation proceeds as received. The purchase price of a defaulted loan is not
an indicator of the expected loss on that loan; many other factors affect
expected loss, if any, on loans so purchased. See "--Risk Management--Credit
Risk - Loans."
The following table presents Farmer Mac's purchases of newly originated and
current seasoned loans and purchases of defaulted loans underlying Farmer Mac I
Guaranteed Securities and LTSPCs.
For the Year Ended
December 31,
------------------------------
2002 2001
-------------- --------------
(in thousands)
Farmer Mac I newly originated
and current seasoned loan purchases $ 747,881 $ 272,127
Defaulted loans purchased underlying
off-balance sheet Farmer Mac I
Guaranteed Securities 17,386 6,005
Defaulted loans underlying
on-balance sheet Farmer Mac I
Guaranteed Securities transferred
to loans 25,675 526
Defaulted loans purchased underlying
underlying LTSPCs 3,386 1,751
The increase in newly originated and current seasoned loan purchases was
attributable to an increase in program volume. The increases in defaulted loans
purchased and in defaulted loans transferred to loans reflect:
o the general increase in 90-day delinquencies;
o Farmer Mac's practice of purchasing 90-day delinquent loans out of
Farmer Mac I Guaranteed Securities; and
o recordation in the consolidated financial statements of other loans
over which it has regained effective control during the period.
With respect to the last circumstance cited, when particular criteria are met,
such as the default of the borrower, Farmer Mac becomes entitled to exercise its
option to purchase the defaulted loans underlying Farmer Mac Guaranteed
Securities (these options are commonly referred to as "removal-of-account"
provisions). Farmer Mac records these loans in the consolidated financial
statements during the period in which Farmer Mac has the option to repurchase
the loans and therefore regains effective control over the transferred loans.
The weighted-average age of the Farmer Mac I newly originated and current
seasoned loans purchased during 2002 and 2001 was 3 years and 6 months,
respectively. Of the combined total of Farmer Mac I newly originated and
seasoned loans that were purchased (excluding purchases of defaulted loans)
during 2002 and 2001, 76 percent and 71 percent, respectively, had principal
amortization periods longer than the maturity date, resulting in balloon
payments at maturity, with a weighted-average remaining term to maturity of 11.1
years and 14.3 years, respectively. The weighted-average age of delinquent loans
purchased out of securitized pools and LTSPCs during 2002 and 2001 was 4.3 years
and 4.6 years, respectively.
The outstanding principal balance of loans held and loans underlying Farmer
Mac Guaranteed Securities and LTSPCs increased 32 percent to $5.5 billion as of
December 31, 2002 from $4.2 billion as of December 31, 2001. The following table
sets forth information regarding those outstanding balances as of the dates
indicated:
Outstanding Balance of Farmer Mac Loans and Loans Underlying
Farmer Mac Guaranteed Securities and LTSPCs
- ------------------------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
(in thousands)
Farmer Mac I:
Post-1996 Act:
Loans and Guaranteed Securities $ 2,168,994 $ 1,658,716 $ 1,646,193
LTSPCs 2,681,240 1,884,260 862,804
Pre-1996 Act 31,960 48,979 83,513
Farmer Mac II 645,790 595,156 517,703
--------------- --------------- ---------------
Total $ 5,527,984 $ 4,187,111 $ 3,110,213
--------------- --------------- ---------------
The following table sets forth information regarding the Farmer Mac
Guaranteed Securities issued during the periods indicated:
Farmer Mac Guaranteed Securities Issuances
- -----------------------------------------------------------------------------------------------------
For the Year Ended December 31,
----------------------------------------------
2002 2001 2000
--------------- -------------- --------------
(in thousands)
Retained $ - $ 33,932 $ 360,037
Sold 47,682 77,422 159,910
Swap transactions - 5,574 -
--------------- -------------- --------------
Total Farmer Mac Guaranteed Securities Issuances $ 47,682 $ 116,928 $ 519,947
--------------- -------------- --------------
Based on market conditions, Farmer Mac either retains Farmer Mac Guaranteed
Securities or sells them to capital markets investors. During 2002 and 2001,
Farmer Mac sold Farmer Mac I Guaranteed Securities to third parties totaling
$47.7 million and $77.4 million, respectively, at no gain or loss. LTSPCs
typically involve seasoned loans, while cash purchase transactions usually
represent acquisitions of newly originated loans. The increased activity in
LTSPCs is a result of growing recognition of the capital planning and corporate
finance advantages that the structure offers by institutions that could so
benefit. Management expects that LTSPCs will continue to constitute a
significant portion of Farmer Mac's new Farmer Mac I program activity during
2003.
Outstanding commitments to purchase loans (other than under LTSPCs) and the
total balance of loans submitted for approval or approved but not yet purchased
are indicators of individual loan purchase volume through the cash window in the
immediately succeeding reporting period. Many purchase commitments entered into
by Farmer Mac are mandatory delivery commitments. If a seller obtains a
mandatory commitment and is unable to deliver the loans required, Farmer Mac
requires the seller to pay a fee to modify, extend or cancel the commitment. As
of December 31, 2002, outstanding commitments to purchase Farmer Mac I and II
loans totaled $26.2 million, compared to $21.1 million as of December 31, 2001.
Of the total Farmer Mac I and II commitments outstanding as of December 31, 2002
and 2001, $21.7 million and $16.4 million, respectively, were mandatory
commitments. Loans submitted for approval or approved but not yet committed to
purchase totaled $53.4 million as of December 31, 2002, compared to $106.1
million as of December 31, 2001. Not all of such loans are purchased, as some
are denied for credit reasons or withdrawn by the seller.
Balance Sheet Review
Assets. As of December 31, 2002, total assets were $4.2 billion compared to
$3.4 billion as of December 31, 2001. The increase in total assets was primarily
due to growth in program assets (Farmer Mac Guaranteed Securities and loans),
which increased $683.6 million during 2002 to a total of $2.6 billion.
Non-program assets increased to $1.6 billion as of December 31, 2002, from $1.4
billion as of December 31, 2001. The following table presents Farmer Mac's
on-balance sheet program assets based on their repricing frequency.
Principal Balance of Loans Held and Loans Underlying
On-Balance Sheet Farmer Mac Guaranteed Securities
- -------------------------------------------------------------------------
As of December 31,
------------------------------------
2002 2001
----------------- ----------------
(in thousands)
Fixed Rate $ 1,003,434 $ 764,115
5-to-10 Year ARMS & Resets 981,548 790,948
1-Month-to-3-Year ARMS 494,713 302,169
----------------- ----------------
Total $ 2,479,695 $ 1,857,232
----------------- ----------------
Liabilities. Total liabilities increased from $3.3 billion as of December
31, 2001 to $4.0 billion as of December 31, 2002. The increase in liabilities
was primarily due to growth in notes payable, which corresponded to the growth
in on-balance sheet program assets. The remaining increase in total liabilities
was due to increases in accrued interest payable, the reserve for losses on
Farmer Mac I Guaranteed Securities and LTSPCs and an increase in the liability
for financial derivatives. For more information about Farmer Mac's reserve for
losses, see "--Risk Management--Credit Risk - Loans." For more information about
Farmer Mac's funding and interest rate risk practices and how financial
derivatives are used, see "--Risk Management--Interest Rate Risk."
Capital. As of December 31, 2002, stockholders' equity totaled $183.6
million, compared to $134.4 million as of December 31, 2001. The increase was
primarily due to the issuance of $35.0 million of preferred stock and net income
available to common stockholders earned during 2002 of $21.3 million, offset by
an $8.8 million reduction in accumulated other comprehensive loss that was due
to a net decrease in the market values of financial derivatives classified as
cash flow hedges and partially offset by an increase in net unrealized gains on
investment securities and Farmer Mac Guaranteed Securities classified as
available for sale. Accumulated other comprehensive income is not a component of
Farmer Mac's core capital or regulatory capital.
Return on average common equity was 15.0 percent for 2002, compared to 12.2
percent for 2001. The effects of SFAS 133 and Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, reduced the average return on common equity by 2.2 percent for 2002
and by 2.8 percent for 2001.
As of December 31, 2002, Farmer Mac's core capital totaled $184.0 million,
compared to $126.0 million as of December 31, 2001. As of December 31, 2002,
Farmer Mac's core capital exceeded its statutory minimum capital requirement of
$137.1 million by $46.9 million. FCA issued its final risk-based capital
regulation for Farmer Mac on April 12, 2001 and the Corporation was required to
meet the risk-based capital standards beginning on May 23, 2002. As of December
31, 2002 the risk-based capital stress test generated a regulatory capital
requirement of $73.4 million. Farmer Mac's regulatory capital of $204.0 million
exceeded that amount by approximately $130.6 million. The Corporation is
required to hold capital at the higher of the statutory minimum capital
requirement or the amount required by the risk-based capital stress test. For
further information, see "--Liquidity and Capital Resources--Capital
Requirements."
Off-Balance Sheet Farmer Mac Guaranteed Securities and LTSPCs. As of
December 31, 2002, outstanding off-balance sheet Farmer Mac Guaranteed
Securities and LTSPCs totaled $3.0 billion, compared to $2.3 billion as of
December 31, 2001. The following table presents the balance of outstanding
LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities as of December 31,
2002 and 2001:
Outstanding Balance of LTSPCs and
Off-Balance Sheet Farmer Mac Guaranteed Securities
- ---------------------------------------------------------------------------------
As of December 31,
----------------------------------
2002 2001
----------------- ---------------
(in thousands)
Farmer Mac I:
Post-1996 Act obligations:
Farmer Mac I Guaranteed Securities $ 299,940 $ 366,749
LTSPCs 2,681,240 1,884,260
----------------- --------------
Total Post-1996 Act obligations 2,981,180 2,251,009
Pre-1996 Act Farmer Mac I
Guaranteed Securities - 461
----------------- --------------
Total Farmer Mac I 2,981,180 2,251,470
Farmer Mac II Guaranteed Securities 67,109 78,409
----------------- --------------
Total Farmer Mac I and II $3,048,289 $2,329,879
----------------- --------------
For more information about off-balance sheet Farmer Mac Guaranteed
Securities, see "--Risk Management--Credit Risk - Loans" and Note 12 to the
consolidated financial statements.
Risk Management
Interest Rate Risk. Farmer Mac is subject to interest rate risk on all
assets held for investment because of possible timing differences in the cash
flows of the assets and related liabilities. This risk is primarily related to
loans held and Farmer Mac Guaranteed Securities because of the ability of
borrowers to prepay their mortgages before the scheduled maturities, thereby
increasing the risk of asset and liability cash flow mismatches. Cash flow
mismatches in a changing interest rate environment can reduce the earnings of
the Corporation if assets repay sooner than expected and the resulting cash
flows must be reinvested in lower-yielding investments when Farmer Mac's funding
costs cannot be correspondingly reduced, or if assets repay more slowly than
expected and the associated debt must be replaced by higher-cost debt.
Yield maintenance provisions and other prepayment penalties contained in
many agricultural mortgage loans reduce, but do not eliminate, this risk. Those
provisions require borrowers to make an additional payment when they prepay
their loans, so that, when reinvested with the prepaid principal, yield
maintenance payments generate substantially the same cash flows that would have
been generated had the loan not prepaid. This creates a disincentive to
prepayment and compensates the Corporation for its interest rate risks to a
large degree. As of December 31, 2002, 57 percent of the outstanding balance of
all loans held and loans underlying on-balance sheet Farmer Mac I Guaranteed
Securities (including 91 percent of all loans with fixed interest rates) were
covered by yield maintenance provisions and other prepayment penalties. As of
December 31, 2002, 50 percent of the total outstanding balance of retained
Farmer Mac I loans and Guaranteed Securities had yield maintenance provisions
and 7 percent had another form of prepayment protection. Of the Farmer Mac I new
and current loans purchased in 2002, 54 percent had yield maintenance or another
form of prepayment protection (including 88 percent of all loans with fixed
interest rates). None of the USDA-guaranteed portions underlying Farmer Mac II
Guaranteed Securities had yield maintenance provisions.
The goal of interest rate risk management at Farmer Mac is to create a
portfolio that generates stable earnings and value across a variety of interest
rate environments. Farmer Mac's primary strategy for managing interest rate risk
is to fund asset purchases with liabilities that have similar durations so that
they will perform similarly as interest rates change. To achieve this match,
Farmer Mac issues discount notes and both callable and non-callable medium-term
notes across a spectrum of maturities and purchases financial derivatives to
alter the duration of its liabilities and so its interest rate sensitivities. By
using a blend of liabilities that includes callable debt, the interest rate
sensitivities of the liabilities tend to increase or decrease as interest rates
change in a manner similar to changes in the interest rate sensitivities of the
assets.
Farmer Mac's $723.8 million of cash and cash equivalents as of December 31,
2002 matures within three months and are match-funded with discount notes having
similar maturities. Investment securities of $830.4 million as of December 31,
2002 consist of $555.5 million (68 percent) of floating rate securities that all
have rates that adjust within one year. See Note 4 to the consolidated financial
statements for more information on investment securities. These floating rate
investments are funded using a series of discount note issuances. Each
successive discount note issuance matures on or about the corresponding
repricing date of the related investment.
Farmer Mac is also subject to interest rate risk on loans, including loans
that Farmer Mac has committed to acquire but has not yet purchased. When Farmer
Mac commits to purchase a loan, it is exposed to interest rate risk between the
time it commits to purchase the loan and the time it either:
o sells Farmer Mac Guaranteed Securities backed by the loan; or
o issues debt to retain the loan in its portfolio (although issuing debt
to fund the loan as an investment does not fully eliminate interest
rate risk due to the possible timing differences in the cash flows of
the assets and related liabilities, as discussed above).
Farmer Mac manages the interest rate risk related to such loans, and any related
Farmer Mac Guaranteed Securities or debt issuance, through the use of forward
sale contracts on the debt and mortgage-backed securities of other
government-sponsored enterprises and futures contracts involving U.S. Treasury
securities. Farmer Mac uses government-sponsored enterprise forward sale
contracts to reduce its interest rate exposure to changes in both Treasury rates
and spreads on Farmer Mac debt and Farmer Mac I Guaranteed Securities.
Since interest rate sensitivity may change with the passage of time and as
interest rates change, Farmer Mac assesses this exposure on a regular basis and
rebalances its portfolio of assets and liabilities as necessary through:
o the purchase of mortgage assets in the ordinary course of business;
o the refunding of existing liabilities; or
o the use of derivatives to alter the characteristics of existing assets
or liabilities.
The most strenuous measure of Farmer Mac's interest rate risk is the
sensitivity of its Market Value of Equity ("MVE") to parallel yield curve
shocks. MVE represents the present value of all future cash flows from on- and
off-balance sheet assets, liabilities and financial derivatives, discounted at
current interest rates and spreads. The following schedule summarizes the
results of Farmer Mac's MVE sensitivity analysis as of December 31, 2002 and
December 31, 2001 to an immediate and instantaneous parallel shift in the yield
curve.
Percentage Change in MVE from
Base Case
----------------------------------
Interest Rate December 31, December 31,
Scenario 2002 2001
--------------- ---------------- ----------------
+ 300 bp 15.6% -1.3%
+ 200 bp 11.0% -0.1%
+ 100 bp 5.9% 0.6%
- 100 bp -7.1% -2.4%
- 200 bp N/A* -6.4%
- 300 bp N/A* -16.2%
* As of December 31, 2002, a -200 bp parallel
shift of the U. S. Treasury yield curve produced
negative interest rates for maturities of 2 years
and shorter.
While Farmer Mac's interest rate sensitivity increased during 2002, it
remained relatively stable and at relatively low levels despite the volatile
interest rate environment. During 2002, interest rates fell to historic lows and
interest-rate volatility increased significantly. As interest rates declined
dramatically and prepayments increased, the duration of Farmer Mac's assets that
do not have prepayment protection shortened somewhat more than that of its
liabilities, causing a widening of Farmer Mac's effective duration gap, another
standard measure of interest rate risk. Farmer Mac's effective duration gap was
minus 3.6 months as of December 31, 2002, compared to minus 1.0 month as of
December 31, 2001. This environment also caused MVE and net interest income
("NII") to show positive sensitivity to increasing interest rates and negative
sensitivity to continued decreases in interest rates.
NII sensitivity, a shorter-term measure of interest rate risk, demonstrated
a similar change in its exposures to interest rate movements. As of December 31,
2002, a uniform or "parallel" increase of 100 basis points would increase NII by
6.8 percent, while a parallel decrease of 100 basis points would decrease NII by
6.7 percent. Farmer Mac also measures the sensitivity of both MVE and NII to a
variety of non-parallel interest rate shocks, including flattening and
steepening yield curve scenarios. Both MVE and NII continue to be less sensitive
to non-parallel shocks than to the parallel shocks. The sensitivity of Farmer
Mac's MVE and NII to both parallel and non-parallel interest rate shocks, and
its duration gap, indicate the effectiveness of the Corporation's approach to
managing its interest rate risk exposures.
The economic effects of financial derivatives, including interest rate
swaps, are included in the MVE, NII and duration gap analyses. Farmer Mac
generally enters into various interest rate swaps to reduce interest rate risk
as follows:
o "floating-to-fixed interest rate swaps" in which it pays fixed rates
of interest to, and receives floating rates of interest from,
counterparties; these adjust the characteristics of short-term debt to
match more closely the cash flow and duration characteristics of
longer-term reset and fixed-rate mortgages and other assets and
provide an overall lower effective cost of borrowing than would
otherwise be available in the conventional debt market;
o "fixed-to-floating interest rate swaps" in which it receives fixed
rates of interest from, and pays floating rates of interest to,
counterparties; these adjust the characteristics of long-term debt to
match more closely the cash flow and duration characteristics of
short-term assets; and
o "basis swaps" in which it pays variable rates of interest based on one
index to, and receives variable rates of interest based on another
index from, counterparties; these alter interest rate indices of
liabilities to match those of assets, and vice versa.
As of December 31, 2002, Farmer Mac had $1.2 billion combined notional amount of
interest rate swaps, of which $733.1 million were floating-to-fixed interest
rate swaps, $350.8 million were basis swaps and $85.0 million were
fixed-to-floating interest rate swaps, with terms ranging from one to fifteen
years.
Farmer Mac uses financial derivatives as an end-user for hedging purposes,
not for trading or speculative purposes. When financial derivatives meet the
specific hedge criteria under SFAS 133, they are accounted for as either fair
value hedges or cash flow hedges. Financial derivatives that do not satisfy
those hedge criteria are not accounted for as hedges and changes in the fair
value of those financial derivatives are reported as a gain or loss on financial
derivatives and trading assets in the statement of operations. All of Farmer
Mac's derivatives transactions are conducted under standard collateralized
agreements that limit Farmer Mac's potential credit exposure to any
counterparty. As of December 31, 2002, Farmer Mac had no uncollateralized net
exposure to any counterparty.
Credit Risk - Loans. Farmer Mac's primary exposure to credit risk is the
risk of loss resulting from the inability of borrowers to repay their mortgages.
Farmer Mac is exposed to credit risk on:
o loans it holds;
o loans underlying Farmer Mac Guaranteed Securities; and
o loans underlying LTSPCs.
Loans held or loans underlying Farmer Mac Guaranteed Securities or LTSPCs can be
divided into four groups:
o loans held for investment;
o loans underlying pre-1996 Act Farmer Mac I Guaranteed Securities;
o loans underlying post-1996 Act Farmer Mac I Guaranteed Securities or
LTSPCs; and
o USDA-guaranteed portions underlying Farmer Mac II Guaranteed
Securities.
For loans underlying pre-1996 Act Farmer Mac I Guaranteed Securities, ten
percent first-loss subordinated interests mitigate Farmer Mac's credit risk
exposure. Before Farmer Mac incurs a credit loss, full recourse must first be
taken against the subordinated interest. The 1996 Act eliminated the
subordinated interest requirement. As a result, Farmer Mac generally assumes 100
percent of the credit risk on loans held for investment and loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs. Farmer Mac's credit
exposure on USDA-guaranteed portions is covered by the full faith and credit of
the United States. Farmer Mac believes it has little or no credit risk exposure
to loans underlying pre-1996 Act Farmer Mac I Guaranteed Securities because of
the subordinated interests, or to USDA-guaranteed portions because of the USDA
guarantee. The outstanding principal balance of loans held and loans underlying
Farmer Mac Guaranteed Securities or LTSPCs is summarized in the table below.
As of December 31,
------------------------------------
2002 2001
------------------- ---------------
(in thousands)
Farmer Mac I:
Post-1996 Act $ 4,850,234 $ 3,542,976
Pre-1996 Act 31,960 48,979
Farmer Mac II:
USDA-guaranteed portions 645,790 595,156
---------------- ---------------
$ 5,527,984 $ 4,187,111
---------------- ---------------
For several years, Farmer Mac has conducted guarantee fee adequacy
analyses, using stress-test models developed internally and with the assistance
of outside experts. These analyses have taken into account the diverse and
dissimilar characteristics of the various asset categories for which Farmer Mac
manages its risk exposures, and have evolved as the mix and character of assets
under management has shifted with growth in the business and the addition of new
asset categories. Based on current information, Farmer Mac believes that its
guarantee fee is adequate compensation for the credit risk that it assumes.
Farmer Mac has established underwriting and appraisal standards for all
post-1996 Act loans and loans underlying Farmer Mac Guaranteed Securities and
LTSPCs. Those standards are designed 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 participants in its programs. The
standards were developed on the basis of industry norms for agricultural
mortgage loans and are designed to assess the creditworthiness of the borrower,
as well as the value of the mortgaged property relative to the amount of the
mortgage loan. Farmer Mac requires sellers to make representations and
warranties regarding the conformity of eligible mortgage loans to these
standards and other requirements it may impose from time to time. Detailed
information regarding Farmer Mac's underwriting and appraisal standards and
seller eligibility requirements are presented in "Business--Farmer Mac
I--Underwriting and Appraisal Standards" and "Business--Farmer Mac I--Sellers."
Farmer Mac maintains an allowance for losses to cover estimated probable
losses on loans held for investment and loans underlying post-1996 Act Farmer
Mac I Guaranteed Securities and LTSPCs in accordance with Statement of Financial
Accounting Standard No. 5, Accounting for Contingencies, ("SFAS 5") and
Statement of Financial Accounting Standard No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS 114"). The methodology for determining the allowance
for losses is the same for loans held for investment and loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs because Farmer Mac
believes the ultimate credit risk is the same, i.e., the underlying agricultural
mortgage loans all meet the same credit underwriting and appraisal standards.
For accepting the credit risk on loans underlying post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs, Farmer Mac receives guarantee fees and
commitment fees, respectively. For loans held, Farmer Mac receives interest
income that includes a component that correlates to its guarantee fee, which
Farmer Mac views as compensation for accepting credit risk.
No allowance for losses has been made for loans underlying Farmer Mac I
Guaranteed Securities issued prior to the 1996 Act or Farmer Mac II Guaranteed
Securities. Farmer Mac I Guaranteed Securities issued prior to the 1996 Act are
supported by unguaranteed first-loss subordinated interests, which are expected
to exceed the estimated credit losses on those loans. USDA-guaranteed portions
collateralizing Farmer Mac II Guaranteed Securities are obligations backed by
the full faith and credit of the United States. To date, Farmer Mac has
experienced no credit losses on any pre-1996 Act Farmer Mac I Guaranteed
Securities or on any Farmer Mac II Guaranteed Securities and does not expect to
incur any such losses in the future.
The allowance for losses is presented in three components on the
consolidated balance sheet:
o an "Allowance for loan losses" on loans held for investment;
o a valuation allowance on real estate owned, which is included in the
balance sheet under "Real estate owned (net of valuation allowance)";
and
o an allowance for losses on loans underlying post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs, which is included in the balance
sheet under "Reserve for losses."
The provision for losses is presented in two components on the consolidated
statement of operations:
o a "Provision for loan losses," which represents losses on Farmer Mac's
loans held for investment; and
o a "Provision for losses," which represents losses on loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs and real
estate owned.
During the year ended December 31, 2002, Farmer Mac reclassified certain
components of its allowance for losses and its provision for losses to further
clarify its presentation. Reclassifications of the allowance for losses and
provision for losses for prior periods were made to conform to the current
period presentation. These reclassifications are for presentation purposes only
and have no impact on Farmer Mac's risk exposure, results from operations or
financial position. See Note 2(j), Note 2(q) and Note 8 to the consolidated
financial statements for additional information.
Farmer Mac's allowance for losses is estimated using a systematic process
that begins with management's evaluation of the results of its proprietary loan
pool simulation and guarantee fee model (the "Model"); those results may be
modified by the application of management judgment that takes into account
factors including:
o economic conditions;
o geographic and agricultural commodity concentrations of Farmer Mac's
portfolio;
o the credit profile of Farmer Mac's portfolio;
o delinquency trends of Farmer Mac's portfolio; and
o historical charge-off and recovery activity of Farmer Mac's portfolio.
The Model offers historical loss experience on agricultural mortgage loans
similar to those on which Farmer Mac has assumed credit risk, but over a longer
term than Farmer Mac's own experience to date. Farmer Mac's systematic
methodology for determining its allowance for losses is expected to migrate over
time, away from the Model and toward the increased use of Farmer Mac's own
historical portfolio loss experience, as that experience continues to develop.
During this migration, Farmer Mac will continue to use the results from the
Model, augmented by the application of management's judgment, to develop its
loan loss allowance.
Management believes that its use of this methodology produces a reliable
estimate of total probable losses, as of the balance sheet date, for all loans
included in Farmer Mac's portfolio, including loans held for investment and
loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs.
In addition, Farmer Mac specifically analyzes its portfolio of
non-performing assets (loans 90 days or more past due, in foreclosure,
restructured, in bankruptcy - including loans performing under either their
original loan terms or a court-approved bankruptcy plan, and REO) on a
loan-by-loan basis. This analysis measures impairment based on the fair value of
the underlying collateral for each individual loan relative to the total amount
due, including principal, interest and advances under SFAS 114. In the event
that the updated appraisal or management's estimate of discounted collateral
value does not support the total amount due, Farmer Mac specifically determines
an allowance for the loan for the difference between the recorded investment and
its fair value, less estimated costs to liquidate the collateral.
Management believes that the general allowance, which is the difference
between the total allowance for losses (generated through use of the Model) and
the specific allowances, adequately covers any losses inherent in the portfolio
of performing loans under SFAS 5.
Farmer Mac considers that the methodology described above produces a
reliable estimate of the total probable losses inherent in the Farmer Mac
portfolio. The Model:
o runs various configurations of loan types, terms, economic conditions,
and borrower eligibility criteria to generate a distribution of loss
exposures over time for all loans in the portfolio;
o uses historical agricultural real estate loan origination and
servicing data that reflect varied economic conditions and stress
levels in the agricultural sector;
o contains features that allow variations for changes in loan portfolio
characteristics to make the data set more representative of Farmer
Mac's portfolio and credit underwriting standards; and
o considers the effects of the ageing of the loan portfolio along the
expected loss curves associated with individual cohort origination
years, including the segments that are entering into or coming out of
their peak default years.
Farmer Mac analyzes various iterations of the Model data to evaluate its
overall allowance for loss and back tests the results to validate the Model.
Such tests use prior period data to project losses expected in a current period,
and compare those projections to actual losses incurred during the current
period.
The allowance for losses is increased through periodic provisions for
losses charged to expense and reduced by charge-offs for actual losses, net of
recoveries that are recognized if liquidation proceeds exceed previous
estimates. Charge-offs represent losses on the outstanding principal balance,
any interest payments previously accrued or advanced and expected costs of
liquidation.
The following table summarizes the changes in the components of the
allowance for losses for each year in the three-year period ended December 31,
2002:
---------------------------------------------------------
Allowance REO Total
for Loan Valuation Reserve Allowance
Losses Allowance for Losses for Losses
-------------- -------------- ------------- -------------
(in thousands)
Balances as of January 1, 2000 $ 120 $ - $ 6,464 $ 6,584
Provision for losses 300 - 4,439 4,739
Net charge-offs - - - -
-------------- -------------- ------------- -------------
Balances as of December 31, 2000 $ 420 $ - $ 10,903 $ 11,323
-------------- -------------- ------------- -------------
Provision for losses 600 - 6,125 6,725
Net allocation of
allowance (5) (61) 66 -
Net charge-offs 337 61 (2,562) (2,164)
-------------- -------------- ------------- -------------
Balances as of December 31, 2001 $ 1,352 $ - $ 14,532 $ 15,884
-------------- -------------- ------------- -------------
Provision for losses 1,340 - 6,883 8,223
Net allocation of
allowance 3,221 1,284 (4,505) -
Net charge-offs (3,251) (692) (153) (4,096)
-------------- -------------- ------------- -------------
Balances as of December 31, 2002 $ 2,662 $ 592 $ 16,757 $ 20,011
-------------- -------------- ------------- -------------
When certain criteria are met, such as the default of the borrower, Farmer Mac
has the option to purchase the defaulted loans underlying Farmer Mac Guaranteed
Securities and is obligated to purchase those underlying an LTSPC. These
acquisitions are recorded in the consolidated financial statements at their fair
value. Fair value is determined by appraisal or management's estimate of
discounted collateral value. In September 2002, Farmer Mac adopted EITF issue
02-9, Accounting for Changes That Result in a Transferor Regaining Control of
Financial Assets Sold ("the consensus" or "EITF 02-9"). The consensus requires
that Farmer Mac record, at acquisition, the difference between each loan's
acquisition cost and its fair value, if any, as a charge to the reserve for
losses. Prior to the adoption of the consensus, any specific allowance that had
been established for the off-balance sheet obligation would have been
transferred from the reserve for losses to the allowance for loan losses
(referred to as "net allocation of the allowance" in the table below). Upon the
receipt of each loan's updated appraisal or determination of management's
estimate of discounted collateral value, the difference between the acquisition
cost of the loan and its fair value, if any, was recorded as a charge to the
allowance for loan losses.
Farmer Mac's total provision for losses was $8.2 million for 2002, compared
to $6.7 million for 2001. During 2002, Farmer Mac charged off $4.6 million in
losses against the allowance for losses and recovered $0.5 million from
previously charged off losses, for net charge-offs of $4.1 million. The net
charge-offs for 2002 included $1.3 million related to previously accrued or
advanced interest on loans or Farmer Mac I Guaranteed Securities, compared to
$0.5 million for 2001.
As of December 31, 2002, Farmer Mac's allowance for losses totaled $20.0
million, or 42 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 $15.9 million (45 basis points) as of December 31, 2001. The
year-to-year decline in this ratio is a result of a large increase in the
outstanding portfolio during 2002 compared to the provisions for probable losses
directly related to those loans.
As of December 31, 2002, loans held and loans underlying post-1996 Act
Farmer Mac I Guaranteed Securities and LTSPCs that were 90 days or more past
due, in foreclosure, restructured after delinquency, in bankruptcy (including
loans performing under either their original loan terms or a court-approved
bankruptcy plan) and real estate owned ("post-1996 Act non-performing assets")
totaled $75.3 million and represented 1.56 percent of the principal balance of
all loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs, compared to $58.3 million (1.70 percent) as of December
31, 2001. Loans that have been restructured after delinquency were insignificant
and are included within the reported 90-day delinquency and non-performing asset
disclosures. As of December 31, 2002, Farmer Mac's 90-day delinquencies totaled
$58.2 million and represented 1.21 percent of the principal balance of all loans
held and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs, compared to $54.5 million (1.59 percent) as of December 31, 2001. From
quarter to quarter, Farmer Mac anticipates the 90-day delinquencies will
fluctuate, both in dollars and as a percentage of the outstanding portfolio,
with higher levels likely at the end of the first and third quarters of each
year corresponding to the semi-annual (January 1st and July 1st) payment
characteristics of most Farmer Mac I loans.
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:
December 31, 2002 $ 4,821,634 $ 75,308 1.56% $ 17,094 $ 58,214 1.21%
September 30, 2002 4,506,330 91,286 2.03% 11,460 79,826 1.77%
June 30, 2002 4,489,735 65,196 1.45% 14,931 50,265 1.12%
March 31, 2002 3,754,171 87,097 2.32% 7,903 79,194 2.11%
December 31, 2001 3,428,176 58,279 1.70% 3,743 54,536 1.59%
September 30, 2001 3,318,796 71,686 2.16% 5,183 66,503 2.00%
June 30, 2001 3,089,460 53,139 1.72% 4,274 48,865 1.58%
March 31, 2001 2,562,374 67,134 2.62% 2,154 64,980 2.54%
The dollar level of 90-day delinquencies and period-over-period charge-offs
correlates to the increasing proportion of Farmer Mac's portfolio of loans,
guarantees and commitments entering their peak delinquency and default years
(approximately years three through five after origination). As of December 31,
2002, approximately $1.8 billion (38.3 percent) of Farmer Mac's outstanding
loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities
and LTSPCs were in their peak delinquency and default years compared to $1.2
billion (35.7 percent) of such loans as of December 31, 2001. The Model takes
the portfolio age distribution and maturation into consideration. Accordingly,
those trends did not cause management to alter the Model's projection for the
provisions for losses.
As of December 31, 2002, Farmer Mac's loan-by-loan analysis of its $75.3
million of non-performing assets and their updated appraisals or management's
estimates of discounted values indicated that $12.1 million had insufficient
collateral to cover the loan balance, accrued interest and expenses. Farmer Mac
has specifically allocated $2.0 million of allowances to those
under-collateralized loans. Farmer Mac's loan-by-loan analyses indicated that
the remaining $63.2 million of non-performing assets were adequately
collateralized, based on updated appraisals or management's estimates of
discounted collateral values, and that the allocation of specific allowances to
those loans was not necessary. As of December 31, 2002, after the allocation of
specific allowances to under-collateralized loans, Farmer Mac had additional
non-specific or general allowances of $18.0 million, bringing the total
allowance for losses to $20.0 million. The following table summarizes the Farmer
Mac's non-performing assets and allowance for losses:
Farmer Mac I Post-1996 Act Non-performing Assets and Allowance for Losses
- --------------------------------------------------------------------------------------------------------------
As of December 31, 2002 As of December 31, 2001
------------------------------------ -----------------------------------
(in thousands)
Specific Specific
Non-performing Allowance Non-performing Allowance
Assets for Losses Assets for Losses
Loans 90 days or more past due $ 17,600 $ 238 $ 24,701 $ 482
Loans in foreclosure 16,856 519 18,616 1,940
Loans in bankruptcy * 35,229 687 12,505 1,028
Real estate owned 5,623 592 2,457 -
------------------- --------------- ------------------- --------------
Total $ 75,308 $ 2,036 $ 58,279 $ 3,450
------------------- --------------- ------------------- --------------
Allowance Allowance
for Losses for Losses
--------------- --------------
Specific allowance for losses $ 2,036 $ 3,450
General allowance for losses 17,975 12,434
--------------- --------------
Total allowance for losses $ 20,011 $ 15,884
--------------- --------------
* Includes loans that are performing under either their original loan terms or a court-approved
bankruptcy plan.
Based on Farmer Mac's loan-by-loan analyses, loan collection experience and
continuing provisions for the allowance for losses, Farmer Mac believes that
ongoing losses will be covered adequately by the allowance for losses.
Original loan-to-value ratios are one of many factors Farmer Mac considers
in evaluating loss severity. Other factors include, but are not limited to,
other underwriting standards, commodity and farming forecasts and regional
economic and agricultural conditions. Loans in the Farmer Mac I program are all
first mortgage agricultural real estate loans. Accordingly, Farmer Mac's
exposure on a loan is limited to the difference between the principal balance of
a loan and the value of the property. Measurement of that excess or shortfall is
the best predictor and determinant of loss compared to other measures that
evaluate the efficiency of a particular farm operator.
Loan-to-value ratios depend upon the economic value of a property with due
regard for its income-producing potential in the hands of a competent operator.
As required by Farmer Mac's collateral valuation standards, an appraisal of
agricultural real estate must include analysis of the income producing
capability of the property and address the income estimate in the market
analysis. Debt service ratios depend upon farm operator efficiency and leverage,
which can vary widely within a geographic region, commodity type, or an
operator's business and farming skills.
As of December 31, 2002, the weighted-average original loan-to-value ratio
for all post-1996 Act loans and loans underlying Farmer Mac Guaranteed
Securities and LTSPCs was 49 percent, and the weighted-average original
loan-to-value ratio for all post-1996 Act non-performing assets was 59 percent.
The following table summarizes the post-1996 Act non-performing assets by
original loan-to-value ratio (calculated by dividing the loan principal balance
at the time of guarantee, purchase or commitment by the appraised value at the
date of loan origination or, when available, updated appraised value at the time
of guarantee, purchase or commitment):
Distribution of Post-1996 Act Non-performing
Assets as of December 31, 2002
- -----------------------------------------------
(dollars in thousands)
Post-1996 Act
Non-performing
Original LTV Ratio Assets Percentage
- --------------------- ------------- ------------
0.00% to 40.00% $ 3,265 4%
40.01% to 50.00% 14,289 19%
50.01% to 60.00% 29,726 39%
60.01% to 70.00% 25,792 34%
70.01% to 80.00% 1,684 2%
80.01% + 552 2%
------------ -----------
Total $ 75,308 100%
------------ -----------
The following table presents outstanding loans held and loans underlying
Farmer Mac I Guaranteed Securities and LTSPCs, post-1996 Act non-performing
assets and specific allowances for losses as of December 31, 2002 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
Loans, Loans Post-1996 Act Non- Specific
Guarantees and Guarantees and Non-performing Performing Allowance
LTSCPs LTSCPs Assets (1) Asset Rate for Losses
------------------- ----------------- ------------------ ------------ -------------
(dollars in thousands)
By year of origination:
Before 1994 14% $ 696,326 $ 5,546 0.80% $ -
1994 4% 171,407 - 0.00% -
1995 3% 155,668 3,098 1.99% 6
1996 7% 355,422 13,002 3.66% 286
1997 8% 386,658 16,619 4.30% 19
1998 15% 706,984 14,391 2.04% 967
1999 16% 745,006 12,529 1.68% 655
2000 9% 437,433 6,322 1.45% 101
2001 13% 626,738 3,597 0.57% 2
2002 11% 539,992 204 0.04% -
------------------- ----------------- ------------------ ------------ -------------
Total 100% $ 4,821,634 $ 75,308 1.56% $ 2,036
------------------- ----------------- ------------------ ------------ -------------
By geographic region (2):
Northwest 24% $ 1,167,331 $ 43,492 3.73% $ 1,462
Southwest 47% 2,273,846 24,910 1.10% 491
Mid-North 11% 518,439 552 0.11% 2
Mid-South 5% 233,997 1,397 0.60% 35
Northeast 6% 298,340 1,283 0.43% 6
Southeast 7% 329,681 3,674 1.11% 40
------------------- ----------------- ------------------ ------------ -------------
Total 100% $ 4,821,634 $ 75,308 1.56% $ 2,036
------------------- ----------------- ------------------ ------------ -------------
By commodity:
Crops 43% $ 2,085,963 $ 27,563 1.32% $ 190
Permanent plantings 28% 1,341,165 34,100 2.54% 1,739
Livestock 20% 987,533 11,013 1.12% 1
Part-time farm 8% 367,823 2,632 0.72% 106
Other 1% 39,150 - 0.00% -
------------------- ----------------- ------------------ ------------ -------------
Total 100% $ 4,821,634 $ 75,308 1.56% $ 2,036
------------------- ----------------- ------------------ ------------ -------------
<FN>
(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).
</FN>
The following table presents Farmer Mac's cumulative charge-offs and
current specific allowances relative to the cumulative original purchased,
guaranteed or LTSPC principal balances for all loans purchased and loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs. This
information is presented by cohort year (origination date of the loan),
geographic region and commodity. The purpose of this information is to present
information regarding losses and collateral deficiencies relative to original
guarantees and commitments.
Farmer Mac I Post-1996 Act Charge-offs and Specific Allowance for Losses
Relative to all Cumulative Original Loans, Guarantees and LTSPCs
- ------------------------------------------------------------------------------------------------------------------
Cumulative Combined
Cumulative Original Loans, Current Charge-off
Net Guarantees Charge-off Specific and Specific
Charge-offs and LTSPCs Rate Allowances Allowance Rate
-------------- ------------------ ------------- ------------ ----------------
(dollars in thousands)
By year of origination:
Before 1994 $ - $ 1,755,985 0.00% $ - 0.00%
1994 - 317,183 0.00% - 0.00%
1995 200 289,198 0.07% 6 0.07%
1996 808 559,664 0.14% 286 0.20%
1997 2,608 613,048 0.43% 19 0.43%
1998 2,203 954,125 0.23% 967 0.33%
1999 487 960,963 0.05% 655 0.12%
2000 250 561,533 0.04% 101 0.06%
2001 - 715,794 0.00% 2 0.00%
2002 - 535,841 0.00% - 0.00%
-------------- ------------------ ------------- ------------ ----------------
Total $ 6,556 $ 7,263,334 0.09% $ 2,036 0.12%
-------------- ------------------ ------------
By geographic region (1):
Northwest $ 3,108 $ 1,894,400 0.16% $ 1,462 0.24%
Southwest 3,448 3,170,997 0.11% 491 0.12%
Mid-North - 760,942 0.00% 2 0.00%
Mid-South - 326,403 0.00% 35 0.01%
Northeast - 481,798 0.00% 6 0.00%
Southeast - 628,794 0.00% 40 0.01%
-------------- ------------------ ------------- ------------ ----------------
Total $ 6,556 $ 7,263,334 0.09% $ 2,036 0.12%
-------------- ------------------ ------------
By commodity:
Crops $ 1,296 $ 3,109,356 0.04% $ 190 0.05%
Permanent plantings 4,613 2,041,034 0.23% 1,739 0.31%
Livestock 647 1,648,032 0.04% 1 0.04%
Part-time farm - 368,117 0.00% 106 0.03%
Other - 96,795 0.00% - 0.00%
-------------- ------------------ ------------- ------------ ----------------
Total $ 6,556 $ 7,263,334 0.09% $ 2,036 0.12%
-------------- ------------------ ------------
<FN>
(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).
</FN>
An analysis of Farmer Mac's historical losses and identified specific
collateral deficiencies within the portfolio (by origination year) indicates
that Farmer Mac has experienced peak loss years as loans have aged between
approximately their third and fifth years subsequent to origination, regardless
of the year the loans were added to the Farmer Mac's portfolio. As a consequence
of the combination of principal amortization and collateral value appreciation,
there are few loans in the portfolio originated prior to 1996 with known
collateral deficiencies. While Farmer Mac expects that there will be loans that
have aged past their fifth year that will become delinquent and possibly
default, Farmer Mac does not anticipate significant losses on such loans.
Analysis of the portfolio by its geographic distribution indicates that
losses and collateral deficiencies have been and are expected to remain most
prevalent in the loans concentrated in the areas that do not receive significant
government support. This analysis is consistent with corresponding commodity
analysis, which indicates that Farmer Mac has experienced higher loss and
collateral deficiency rates in its loans classified as permanent plantings. Most
of the loans classified as permanent plantings do not receive significant
government support and are therefore more susceptible to adverse
commodity-specific economic trends. Further, as adverse economic conditions
persist for a particular commodity that requires a long-term improvement on the
land, such as permanent plantings, the prospective sale value of the land is
likely to decrease and the related loans may become under-collateralized. Farmer
Mac anticipates that one or more particular commodity groups will be under
economic pressure at any one time and actively manages its portfolio to mitigate
concentration risks while preserving Farmer Mac's ability to meet the financing
needs of all commodity groups.
Farmer Mac's methodologies for pricing its guarantee and commitment fees,
managing credit risks and providing adequate allowances for losses consider all
of the foregoing factors and information.
Credit Risk - Institutional. Farmer Mac is also exposed to credit risk
arising from its business relationships with other institutions including:
o issuers of AgVantage bonds and other investments held by Farmer Mac;
o sellers and servicers; and
o interest rate contract counterparties.
AgVantage bonds are general obligations of the AgVantage Issuers and are secured
by collateral in an amount ranging from 120 percent to 150 percent of the bond
amount. In addition to requiring collateral, Farmer Mac mitigates credit risk
related to AgVantage bonds by evaluating and monitoring the financial condition
of the issuers of the AgVantage bonds. Outstanding AgVantage bonds totaled $28.6
million as of December 31, 2002, and $24.5 million as of December 31, 2001.
Farmer Mac manages institutional credit risk related to sellers and
servicers by requiring those institutions to meet Farmer Mac's standards for
creditworthiness. Farmer Mac monitors the financial condition of those
institutions by evaluating financial statements and bank credit rating agency
reports and confirms that they maintain adequate fidelity bonds and errors and
omissions insurance. For more information on Farmer Mac's approval of sellers,
see "Business--General--Sellers." Credit risk related to interest rate contracts
is discussed in "--Risk Management--Interest Rate Risk" and Note 6 to the
consolidated financial statements.
Credit Risk - Other Investments. The credit risk inherent in other
investments held by Farmer Mac is mitigated by Farmer Mac's policies of
investing in highly-rated instruments and establishing concentration limits,
which reduce exposure to any one counterparty. Farmer Mac's policies limit the
Corporation's total credit exposure, including uncollateralized credit exposure
resulting from financial derivatives, to a single entity by limiting the dollar
amount of investments with each individual entity to the greater of 25 percent
of Farmer Mac's regulatory core capital or $25 million. That limitation excludes
exposure to agencies of the U.S. government, government-sponsored enterprises
and money market funds. Farmer Mac policy also requires each individual entity
to be rated in one of the three highest rating categories of at least one
nationally recognized statistical rating organization for investments with terms
greater than 270 days and in one of the two highest rating categories for
investments with terms of 270 days or less.
As of December 31, 2002, Farmer Mac had investments in commercial paper,
corporate debt securities, asset-backed securities and preferred stock issued by
forty-three entities totaling $830.4 million. Farmer Mac's investments in
eighteen of these entities each exceeded 10 percent of Farmer Mac's core capital
(the cumulative balance of investments in such entities totaled $560.3 million),
and investments in two of these entities each exceeded 15 percent of core
capital. In addition, as of December 31, 2002, Farmer Mac held $231.3 million of
securities issued by government-sponsored enterprises or agencies of the U.S.
government and $463.1 million in five money market investment accounts. The
maximum amount held in any one money market fund investment fund at any time
during 2002 was approximately $272.0 million. As of December 31, 2002, 56
percent of the investment portfolio, excluding government-sponsored enterprise
and agency investments, consisted of short-term highly liquid investments.
Liquidity and Capital Resources
Farmer Mac has sufficient liquidity and capital resources to support its
operations for the next twelve months.
Debt Issuance. Section 8.6(e) of Farmer Mac's statutory charter (12 U.S.C.
ss. 2279aa-6(e)) authorizes Farmer Mac to issue debt obligations to purchase
eligible mortgage loans and Farmer Mac Guaranteed Securities and to maintain
reasonable amounts for business operations, including adequate liquidity. Farmer
Mac funds its program purchases primarily by issuing debt obligations of various
maturities in the public capital markets. Farmer Mac's debt obligations consist
of discount notes and medium-term notes issued to obtain funds principally to
cover the costs of purchasing and holding loans and securities (including Farmer
Mac Guaranteed Securities). Farmer Mac also issues discount notes and
medium-term notes to obtain funds for investments, transaction costs and
guarantee payments. The Corporation's discount notes and medium-term notes are
obligations of Farmer Mac only, are not rated by any rating agency and the
interest and principal thereon are not guaranteed by and do not constitute debts
or obligations of the Farm Credit Administration or the United States or any
agency or instrumentality of the United States other than Farmer Mac. Farmer Mac
is an institution of the Farm Credit System, but is not liable for any debt or
obligation of any other institution of the Farm Credit System. Likewise, neither
the Farm Credit System nor any other individual institution of the Farm Credit
System is liable for any debt or obligation of Farmer Mac. Federal law does not
exempt income on a Farmer Mac discount note or medium-term note from federal,
state or local taxation.
Effective June 6, 2002, Farmer Mac's board of directors has authorized the
issuance of up to $5.0 billion of discount notes and medium-term notes (of which
$3.9 billion was outstanding as of December 31, 2002), subject to periodic
review of the adequacy of that level relative to Farmer Mac's borrowing
requirements. Farmer Mac invests the proceeds of such issuances in loans, Farmer
Mac Guaranteed Securities and non-program investment assets in accordance with
guidelines established by its board of directors.
Liquidity. The funding and liquidity needs of Farmer Mac's business
programs are driven by the purchase and retention of loans and Farmer Mac
Guaranteed Securities, the maturities of Farmer Mac's discount notes and
medium-term notes and payment of principal and interest on Farmer Mac Guaranteed
Securities. Farmer Mac's primary sources of funds to meet these needs are:
o principal and interest payments and ongoing guarantee and
commitment fees received on loans, Farmer Mac Guaranteed
Securities and LTSPCs; and
o the issuance of new discount notes and medium-term notes.
Farmer Mac projects its expected cash flows from loans and securities,
other earnings and the sale of assets and matches those with its obligations to
retire debt and pay other liabilities as they come due. Farmer Mac issues
discount notes and medium-term notes to meet the needs associated with its
business operations, including liquidity, and also to increase its presence in
the capital markets in order to enhance the liquidity and pricing efficiency of
its discount notes and medium-term notes and Farmer Mac Guaranteed Securities
transactions and so improve the mortgage rates available to farmers, ranchers
and rural homeowners. Though Farmer Mac's mortgage purchases do not currently
necessitate daily debt issuance, the Corporation continued its strategy of using
its non-program investment portfolio (referred to as Farmer Mac's liquidity
portfolio) to facilitate increasing its ongoing presence in the capital markets
during 2002. To meet investor demand for daily presence in the capital markets,
Farmer Mac issues discount notes in maturities ranging from one day to
approximately 90 days and invests the proceeds not needed for program asset
purchases in highly-rated securities. Investments are predominantly short-term
money market securities with maturities closely matched to the discount note
maturities and floating-rate securities with reset terms of less than one year
and closely matched to the maturity of the discount notes. The positive spread
earned from these investments enhances the net interest income Farmer Mac earns,
thereby improving the net yields at which Farmer Mac can purchase mortgages from
lenders who may pass that benefit to farmers, ranchers and rural homeowners
through the Farmer Mac programs. Subject to dollar limitations, the
Corporation's board of directors has authorized non-program investments in:
o U.S. Treasury obligations;
o agency and instrumentality obligations;
o repurchase agreements;
o commercial paper;
o guaranteed investment contracts;
o certificates of deposit;
o federal funds and bankers acceptances;
o certain securities and debt obligations of corporate and
municipal issuers;
o asset-backed securities;
o corporate money market funds; and
o preferred stock of government-sponsored enterprises.
As of December 31, 2002, Farmer Mac was in compliance with the dollar
limitations and investment authorizations set forth in its investment
guidelines.
The following table presents Farmer Mac's five largest investments as of
December 31, 2002:
Security
Credit Recorded Percent of
Investment Issuer Rating Investment Core Capital
- ------------------------------- ----------------------------- --------------- --------------- --------------
(dollars in thousands)
Dreyfus Cash Management Dreyfus Corp. N/A* $ 137,874 74.9%
and Institutional Shares
Citi Institutional Liquid Citigroup Inc. N/A* 103,172 56.0%
Reserve Class A
Federated Prime Value Federated Group Inc. N/A* 100,297 54.5%
Obligations Fund
Merrill Lynch Premier Merrill Lynch & Co., Inc. N/A* 95,723 52.0%
Institutional Fund
Preferred Stock CoBank not rated ** 93,183 50.6%
* These money market funds are not rated, but invest in short-term, high quality money market securities and
conform to Rule 2a-7 of the Investment Company Act of 1940.
** CoBank is an institution of the Farm Credit System, a government-sponsored enterprise.
As a result of Farmer Mac's regular issuance of discount notes and
medium-term notes and its status as a federally chartered instrumentality of the
United States, Farmer Mac has been able to access the capital markets at
favorable rates. Throughout the recent period of inaccurate and misleading
publicity about the Corporation, Farmer Mac has maintained regular daily access
to the discount note market at rates comparable to the issuance and trading
levels of other government-sponsored enterprise discount notes. Farmer Mac's
continued ability to access the discount note market at such favorable rates
could be affected by continued inaccurate and misleading publicity about Farmer
Mac or unusual trading in its securities. Farmer Mac believes such factors
caused spread levels in secondary market trading of its outstanding medium-term
notes to widen during second quarter 2002. Although those spreads appeared to
improve in the second half of 2002 and Farmer Mac returned to issuing
medium-term notes on a limited basis at favorable issuance spreads during the
second half of 2002, the foregoing factors could affect future medium-term note
issuance spreads adversely and cause Farmer Mac to continue to emphasize
floating-to-fixed interest rate swaps, combined with discount note issuances, as
a source of fixed-rate funding. While the swap market provides favorable fixed
rates, swap transactions expose Farmer Mac to the risk of future widening of its
own issuance spreads versus corresponding LIBOR rates. If the spreads on the
Farmer Mac discount notes were to increase relative to LIBOR, Farmer Mac would
be exposed to a commensurate reduction on its net interest yield on the notional
amount of its floating-to-fixed interest rate swaps and other LIBOR-based
floating rate assets. Farmer Mac compensates for this risk by pricing the
required net yield on program asset purchases to reflect the higher cost of
medium-term notes issuance without regard to the savings achieved in the
interest rate swap market.
Farmer Mac maintains an investment portfolio of cash and cash equivalents
(including commercial paper and other short-term money market instruments) and
investment securities consisting mostly of floating rate securities that reprice
within one year, which can be drawn upon for liquidity needs. As of December 31,
2002, Farmer Mac's cash and cash equivalents and investment securities totaled
$723.8 million and $830.4 million, respectively, a combined 37 percent of total
assets. For 2002, exclusive of daily overnight discount note issuances that were
invested overnight, the average discount note issuance term and re-funding
frequency was approximately 76.3 days.
The principal sources of funding for the payment of Farmer Mac's
obligations under its guarantees and LTSPCs are the fees for its guarantees and
commitments, net interest income and the proceeds of debt issuance. Farmer Mac
satisfies its guarantee and purchase commitment obligations by purchasing
defaulted loans out of LTSPCs and from the related trusts for Farmer Mac
Guaranteed Securities. Farmer Mac typically recovers a significant portion of
the value of defaulted loans purchased either through borrower payments, loan
payoffs, payments by third parties or foreclosure and sale. Farmer Mac's
liquidity position and ready access to the debt markets also provide additional
flexibility to meet liquidity needs that result from the uncertainty regarding
the timing and amount of required purchases of loans underlying either Farmer
Mac Guaranteed Securities or LTSPCs, should significantly more loans be required
to be purchased than in prior periods.
Capital Requirements. The Act, as amended by the 1996 Act, establishes
three capital standards for Farmer Mac--minimum, critical and risk-based. The
minimum capital requirement is expressed as a percentage of on-balance sheet
assets and off-balance sheet obligations, with the critical capital requirement
equal to one-half of the minimum capital amount. Higher minimum and critical
capital requirements were phased in over a transition period, which ended on
January 1, 1999, when the highest level of minimum capital became applicable.
The Act does not specify the required level of risk-based capital. It directs
FCA to establish a risk-based capital test for Farmer Mac, using specified
stress-test parameters. For a discussion of risk-based capital, see "Government
Regulation of Farmer Mac--Regulation--Capital Standards--Risk-based capital."
Certain enforcement powers are given to FCA depending upon Farmer Mac's
compliance with the capital standards. See "Government Regulation of Farmer
Mac--Regulation--Capital Standards--Enforcement levels." As of December 31, 2002
and 2001, Farmer Mac was classified as within "level I" (the highest compliance
level). The following table sets forth Farmer Mac's minimum capital requirement
as of December 31, 2002 and 2001 based on the fully phased-in requirements.
December 31, 2002 December 31, 2001
----------------------------------------- ----------------------------------------
Capital Capital
Amount Ratio Required Amount Ratio Required
-------------- ------------ ------------- --------------- ----------- ------------
(dollars in thousands)
On-balance sheet assets as defined for
determining statutory minimum capital $4,126,719 2.75% $113,485 $3,380,157 2.75% $92,954
Outstanding balance of Farmer Mac
Guaranteed Securities held by others
and LTSPCs 3,048,289 0.75% 22,862 2,329,879 0.75% 17,474
Derivative and hedging obligations 93,997 0.75% 705 20,762 0.75% 156
------------- ------------
Minimum capital level 137,052 110,584
Actual core capital 183,978 126,042
------------- ------------
Capital surplus $ 46,926 $15,458
------------- ------------
Based on the current minimum capital requirements established in the 1996
Act, Farmer Mac's current capital surplus of $46.9 million would support
additional guarantee growth in amounts ranging from $1.7 billion of on-balance
sheet guarantees to more than $6.2 billion of off-balance sheet guarantees.
Furthermore, should Farmer Mac deem it appropriate, on-balance sheet non-program
assets (cash and cash equivalents and investment securities) of $1.6 billion
could be replaced with on- and off-balance sheet program guarantees, resulting
in the ability to carry additional guarantees ranging from $1.6 billion of
on-balance sheet guarantees to over $5.7 billion of off-balance sheet
guarantees. Ultimately, Farmer Mac could sell on-balance sheet program assets of
$2.6 billion in order to support further increases of on- and off-balance sheet
program guarantees, resulting in the ability to carry an additional cumulative
$15.2 billion of off-balance sheet guarantees. Any of these transactions would,
of course, be evaluated to optimize Farmer Mac's return on equity and capital
flexibility. Accordingly, in the opinion of management, Farmer Mac has
sufficient capital and liquidity for the next twelve months.
Contractual Commitments, Contingent Liabilities and Off-Balance Sheet
Arrangements. The following table presents Farmer Mac's significant fixed and
determinable contractual obligations by payment date as of December 31, 2002.
The payment amounts represent those amounts contractually due to the recipient
and do not include any unamortized premiums or discounts or other similar
carrying value adjustments.
One Year One to Three to Over Five
or Less Three Years Five Years Years Total
-------------- ---------------- ------------ ------------ --------------
(in thousands)
Discount notes $ 2,781,577 $ - $ - $ - $ 2,781,577
Medium-term notes 179,479 502,016 274,752 463,607 1,419,854
Minimum lease payments 531 1,103 1,159 2,498 5,291
For more information regarding discount notes and medium-term notes, see Note 7
to the consolidated financial statements. For more information regarding minimum
lease payments, see Note 12 to the consolidated financial statements.
Farmer Mac enters into financial derivative contracts under which it either
receives cash from counterparties, or is required to pay cash to them, depending
on changes in interest rates. Financial derivatives are carried on the
consolidated balance sheet at fair value, representing the net present value of
expected future cash payments or receipts based on market interest rates as of
the balance sheet date. The fair values of the contracts change daily as market
interest rates change. Because the financial derivative liabilities recorded on
the consolidated balance sheet as of December 31, 2002 do not represent the
amounts that may ultimately be paid under the financial derivative contracts,
those liabilities are not included in the table of contractual obligations
presented above. Further information regarding financial derivatives is included
in Note 2(h) and Note 6 to the consolidated financial statements.
In conducting its loan purchase activities, Farmer Mac enters into
mandatory and optional delivery commitments to purchase agricultural mortgages
and corresponding optional commitments to deliver Farmer Mac Guaranteed
Securities. In conducting its LTSPC activities, Farmer Mac enters into
arrangements whereby it commits to buy agricultural mortgages at an undetermined
future date. The following table presents these significant commitments.
As of
December 31, 2002
---------------------
(in thousands)
Mandatory commitments to
purchase loans and
USDA-guaranteed portions $ 21,700
Optional commitments to
purchase loans 4,478
Optional commitments to
deliver Farmer Mac
Guaranteed Securities 4,478
LTSPCs 2,681,240
Further information regarding commitments to purchase and sell loans is included
in Note 12 to the consolidated financial statements.
Farmer Mac also may have liabilities that arise from its Farmer Mac
Guaranteed Securities. Farmer Mac Guaranteed Securities are issued through
trusts and, when sold to third-party investors, accordingly, are not included in
the consolidated balance sheets. In performing its obligations related to LTSPCs
and Farmer Mac Guaranteed Securities, Farmer Mac would have the right to enforce
the underlying agricultural mortgage loans, and in the event of the default
under the terms of those loans, would have access to the underlying collateral.
The following table presents the balance of outstanding LTSPCs and
off-balance sheet Farmer Mac Guaranteed Securities as of December 31, 2002 and
2001:
Outstanding Balance of LTSPCs and
Off-Balance Sheet Farmer Mac Guaranteed Securities
- -------------------------------------------------------------------------
As of December 31,
----------------------------------
2002 2001
----------------- ---------------
(in thousands)
Farmer Mac I:
Post-1996 Act obligations:
Farmer Mac I Guaranteed Securities $ 299,940 $ 366,749
LTSPCs 2,681,240 1,884,260
----------------- ---------------
Total Post-1996 Act obligations 2,981,180 2,251,009
Pre-1996 Act Farmer Mac I
Guaranteed Securities - 461
----------------- ---------------
Total Farmer Mac I 2,981,180 2,251,470
Farmer Mac II Guaranteed Securities 67,109 78,409
----------------- ---------------
Total Farmer Mac I and II $ 3,048,289 $ 2,329,879
----------------- ---------------
See Note 2(c), Note 2(e) and Note 5 to the consolidated financial
statements for more information on Farmer Mac Guaranteed Securities and Note
2(o) and Note 12 to the consolidated financial statements for more information
on LTSPCs.
Other Matters
New Accounting Standards. In April 2002, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections which is effective January 1, 2003 and requires
gains and losses from the extinguishment or repurchase of debt to be classified
as extraordinary items only if they meet the criteria for such classification in
Accounting Principles Board Opinion No. 30, Reporting the Results of Operations,
Reporting the Effects of Disposal of a Segment of a Business and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. Until January 1,
2003, gains and losses from the extinguishment or repurchase of debt must be
classified as extraordinary items. Subsequent to January 1, 2003, any gain or
loss resulting from the extinguishment or repurchase of debt classified as an
extraordinary item in a prior period that does not meet the criteria for such
classification under Accounting Principles Board Opinion No. 30 must be
reclassified.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No.148, Accounting for Stock-Based Compensation-Transition and
Disclosure ("SFAS 148"), which provides alternative transition methods for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation and amends the disclosure requirements of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
to require prominent disclosures in both annual and quarterly financial
statements of the method of accounting for stock-based employee compensation and
the effect of the method used on reported results. Farmer Mac has not changed
the way it accounts for stock-based employee compensation; however, it has
adopted the disclosure provisions of SFAS 148.
In December 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45") which requires a company to
disclose many of the guarantees or indemnification agreements it issues, some of
which are required to be recorded as a liability in the company's consolidated
balance sheet at the time it enters into the guarantee. FIN 45 requires
disclosures beginning in interim and year-end financial statements ending after
December 15, 2002. Farmer Mac has adopted the disclosure provisions. The
liability recognition provisions apply to guarantees issued or modified
beginning January 1, 2003. Farmer Mac is currently evaluating the impact of the
adoption of the liability recognition provision of FIN 45.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities - an interpretation of ARB No. 51 ("FIN 46") that
addresses the consolidation of variable interest entities ("VIEs"). Generally, a
VIE is a corporation, partnership, trust or any other legal structure used for
business purposes that either (1) does not have equity investors with voting
rights or (2) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. A VIE often holds financial
assets and may be passive or it may engage in such activities as research and
development or other activities on behalf of another company. FIN 46 requires
that a VIE be consolidated by a company if that company is subject to a majority
of the VIE's risk of loss or entitled to receive a majority of the VIE's
residual returns or both. A company that consolidates a VIE is referred to as
the primary beneficiary of that entity.
The consolidation requirements of FIN 46 apply immediately to VIEs created
after January 31, 2003. The consolidation requirements apply to older entities
in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply in all financial statements issued
after January 31, 2003 regardless of when the VIE was established. Farmer Mac
does not believe the adoption of FIN 46 will have a material impact on its
consolidated financial position or results of operations.
In September of 2002, the EITF reached a consensus on a portion of EITF
02-9. The consensus applies to loan transfers that were initially treated as
sales and are recorded as a "re-purchase" when the transferor has regained
effective control over the loan. The consensus indicates that under no
circumstances should an allowance for losses be initially recorded when such
loans have been recorded as a "re-purchase" on the transferor's financial
statements. Farmer Mac has adopted the consensus, which applies to transactions
recorded after September 12, 2002.
GAO Analysis. On June 26, 2002, the Senate Committee on Agriculture,
Nutrition, and Forestry requested that the U.S. General Accounting Office
("GAO") conduct an independent analysis of a number of issues relating to Farmer
Mac. The Committee made this request of the GAO in response to misleading
reports and speculation about Farmer Mac produced by certain hedge funds acting
as "short sellers," who stood to gain if the price of Farmer Mac securities was
depressed, and in concurrent articles by a reporter for a major newspaper.
Farmer Mac made it clear that those reports and articles were inaccurate and
misleading and welcomed the independent analysis by the GAO as an opportunity to
confirm that Farmer Mac continues to fulfill its Congressionally-established
mission in a financially safe and sound manner.
The GAO report was requested by the Committee specifically to address
Farmer Mac's financial stability; corporate governance; compensation policies;
investment practices; the non-voting status of Farmer Mac's Class C common
stock; and the fulfillment of Farmer Mac's Congressionally-established mission.
Farmer Mac is confident that the GAO's analysis will confirm its integrity
and financial stability, as presented in its public financial disclosures.
Farmer Mac expects the GAO report will show that it is appropriately and
effectively fulfilling its mission to increase the availability of borrower
credit at stable rates, enhance lender liquidity and lending capacity and
provide capital markets funding in the agricultural sector of the U.S. economy
for the benefit of U.S. farmers, ranchers and rural homeowners, lenders
participating in Farmer Mac programs and the investing public.
Farmer Mac looks forward to the GAO report as an opportunity to remove the
confusion that has been cast over it, so that it may continue its Congressional
mission for agricultural borrowers and the lenders who serve them.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Farmer Mac is exposed to market risk from changes in interest rates. Farmer
Mac manages this market risk by entering into various financial transactions,
including financial derivatives, and by monitoring its exposure to changes in
interest rates. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Risk Management--Interest Rate Risk" for more
information about Farmer Mac's exposure to interest rate risk and strategies to
manage such risk. For information regarding Farmer Mac's use of and accounting
policies for financial derivatives, see Note 2(h) and Note 6 to the consolidated
financial statements.
Item 8. Financial Statements
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of
Federal Agricultural Mortgage Corporation:
We have audited the accompanying consolidated balance sheet of the Federal
Agricultural Mortgage Corporation and subsidiary ("Farmer Mac") as of December
31, 2002, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of Farmer Mac's management. Our responsibility
is to express an opinion on the 2002 financial statements based on our audit.
The financial statements as of December 31, 2001 and for each of the years in
the two-year period then ended, before the reclassifications discussed in Note 2
to the financial statements, were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion dated January 23,
2002, which included an explanatory paragraph regarding Farmer Mac's change in
its method of accounting for financial derivatives on January 1, 2001, on those
financial statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements present fairly, in
all material respects, the financial position of the Federal Agricultural
Mortgage Corporation and subsidiary as of December 31, 2002, and the results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
As discussed above, the financial statements of the Federal Agricultural
Mortgage Corporation and subsidiary as of December 31, 2001, and for the two
years in the period then ended, were audited by other auditors who have ceased
operations. As described in Note 2, certain reclassifications of the 2001 and
2000 financial statements were made to conform to the 2002 presentation. We
audited the reclassifications described in Note 2 that were made to conform the
2001 and 2000 financial statements to the current period presentation. Our audit
procedures with respect to the 2001 and 2000 reclassifications as described in
Note 2 included (1) comparing the amounts shown as the allowance for loan losses
and the reserve for losses in Farmer Mac's consolidated balance sheet and the
amounts shown as the provision for loan losses and the provision for losses in
Farmer Mac's statement of operations to Farmer Mac's underlying accounting
analysis obtained from management, (2) on a test basis, comparing the amounts
comprising the allowance for loan losses, the reserve for losses, the provision
for loan losses and the provision for losses obtained from management to
supporting documentation, and (3) testing the mathematical accuracy of the
underlying analyses. In our opinion, such reclassifications are appropriate and
have been properly applied. However, we were not engaged to audit, review, or
apply any procedures to the 2001 and 2000 financial statements of Farmer Mac
other than with respect to such reclassifications and, accordingly, we do not
express an opinion or any other form of assurance on the 2001 and 2000 financial
statements taken as a whole.
Deloitte & Touche LLP
McLean, Virginia
January 23, 2003
The report of Arthur Andersen LLP below is a copy of their previously issued
report contained in Farmer Mac's Annual Report on Form 10-K for the year ended
December 31, 2001. Arthur Andersen LLP has ceased operations and has not
reissued its report in connection with this Form 10-K.
* * * * *
The Board of Directors and Stockholders of
Federal Agricultural Mortgage Corporation:
We have audited the accompanying consolidated balance sheets of the Federal
Agricultural Mortgage Corporation ("Farmer Mac") and subsidiaries as of December
31, 2001 and 2000, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of Farmer Mac's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Farmer Mac and subsidiaries as
of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2001, Farmer Mac changed its method of accounting for financial
derivatives.
Arthur Andersen LLP
Vienna, VA
January 23, 2002
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------------
2002 2001
----------------- -----------------
(in thousands)
Assets:
Cash and cash equivalents $ 723,800 $ 437,831
Investment securities 830,409 1,007,954
Farmer Mac Guaranteed Securities 1,608,507 1,690,376
Loans 966,123 199,355
Allowance for loan losses (2,662) (1,352)
----------------- -----------------
Loans, net 963,461 198,003
Real estate owned (net of valuation allowance 5,031 2,457
of $0.6 million and zero)
Financial derivatives 317 15
Interest receivable 65,276 56,253
Guarantee and commitment fees receivable 5,938 6,004
Deferred tax asset 9,666 1,866
Prepaid expenses and other assets 10,510 15,097
----------------- -----------------
Total Assets $ 4,222,915 $ 3,415,856
----------------- -----------------
Liabilities and Stockholders' Equity:
Liabilities:
Notes payable:
Due within one year $ 2,895,746 $ 2,233,267
Due after one year 985,318 968,463
----------------- -----------------
Total notes payable 3,881,064 3,201,730
Financial derivatives 94,314 20,762
Accrued interest payable 29,756 26,358
Accounts payable and accrued expenses 17,453 18,037
Reserve for losses 16,757 14,532
----------------- -----------------
Total Liabilities 4,039,344 3,281,419
----------------- -----------------
Commitments and Contingencies (Note 12)
Stockholders' Equity:
Preferred stock:
Series A, stated at redemption/liquidation value,
$50 per share, 700,000 shares authorized, issued
and outstanding as of December 31, 2002 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,
10,106,903 and 10,033,037 shares issued and outstanding
as of December 31, 2002 and 2001, respectively 10,107 10,033
Additional paid-in capital 82,527 80,960
Accumulated other comprehensive income/(loss) (407) 8,395
Retained earnings 54,813 33,518
----------------- -----------------
Total Stockholders' Equity 183,571 134,437
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 4,222,915 $ 3,415,856
----------------- -----------------
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For Year Ended December 31,
------------------------------------------------
2002 2001 2000
--------------- --------------- --------------
(in thousands, except per share amounts)
Interest income:
Investments and cash equivalents $ 40,799 $ 65,334 $ 91,905
Farmer Mac guaranteed securities 89,736 110,169 100,649
Loans 39,505 5,710 2,866
--------------- --------------- --------------
Total interest income 170,040 181,213 195,420
Interest expense 135,014 154,274 177,722
--------------- --------------- --------------
Net interest income 35,026 26,939 17,698
Provision for loan losses (1,340) (600) (300)
--------------- --------------- --------------
Net interest income after provision for loan losses 33,686 26,339 17,398
Losses on financial derivatives
and trading assets (4,359) (726) -
Other income:
Guarantee and commitment fees 19,277 15,807 11,677
Miscellaneous 1,332 560 399
--------------- --------------- --------------
Total other income 20,609 16,367 12,076
--------------- --------------- --------------
Total revenues 49,936 41,980 29,474
--------------- --------------- --------------
Expenses:
Compensation and employee benefits 5,142 5,601 4,521
Provision for losses 6,883 6,125 4,439
Regulatory fees 1,172 735 584
General and administrative 5,547 4,094 3,744
--------------- --------------- --------------
Total operating expenses 18,744 16,555 13,288
--------------- --------------- --------------
Income before income taxes 31,192 25,425 16,186
Income tax expense 9,330 8,419 5,749
--------------- --------------- --------------
Net income before cumulative effect
of change in accounting principles and
extraordinary gain 21,862 17,006 10,437
Cumulative effect of change
in accounting principles, net of taxes - (726) -
Extraordinary gain, net of taxes of $479 889 - -
--------------- --------------- --------------
Net income 22,751 16,280 10,437
Preferred stock dividends (1,456) - -
--------------- --------------- --------------
Net income available to common stockholders $ 21,295 $ 16,280 $ 10,437
--------------- --------------- --------------
Earnings per share:
Basic net earnings $ 1.83 $ 1.44 $ 0.94
Diluted net earnings $ 1.77 $ 1.38 $ 0.92
Earnings per share before cumulative
effect of change in accounting principles
and extraordinary gain:
Basic earnings per share $ 1.76 $ 1.50 $ 0.94
Diluted earnings per share $ 1.69 $ 1.45 $ 0.92
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Other
Additional Paid- Comprehensive Retained
Common Stock Preferred Stock in Capital Income/(Loss) Earnings Total
-------------- ----------------- ------------------ ------------------ ---------- ----------
(in thousands)
Balance, January 1, 2000 $ 10,902 $ - $ 71,097 $ (1,657) $ 6,801 $ 87,143
Net income 10,437 10,437
Change in unrealized gain/loss
on securities available-for-sale,
net of taxes of $18.2 million 33,155 33,155
---------
Comprehensive income 43,592
Issuance of class C
common stock 250 1,676 1,926
-------------- ----------------- ------------------ ------------------ ---------- ----------
Balance, December 31, 2000 $ 11,152 $ - $ 72,773 $ 31,498 $ 17,238 $132,661
-------------- ----------------- ------------------ ------------------ ---------- ----------
Net income 16,280 16,280
Change in unrealized gain/loss
on securities available-for-sale,
net of taxes of $4.2 million (7,601) (7,601)
Cumulative effect of change in
accounting principles,
net of taxes of $4.8 million (8,632) (8,632)
Change in unrealized gain/loss
on financial derivatives,
net of taxes of $3.7 million (6,870) (6,870)
---------
Comprehensive loss (6,823)
Issuance of class C
common stock 412 8,187 8,599
-------------- ----------------- ------------------ ------------------ ---------- ----------
Balance, December 31, 2001 $ 11,564 $ - $ 80,960 $ 8,395 $ 33,518 $134,437
-------------- ----------------- ------------------ ------------------ ---------- ----------
Net Income 22,751 22,751
Preferred stock dividends (1,456) (1,456)
Change in unrealized gain/loss
on securities available-for-sale,
net of taxes of $20.7 million 38,423 38,423
Change in unrealized gain/loss
on financial derivatives,
net of taxes of $25.4 million (47,225) (47,225)
----------
Comprehensive income 12,493
Issuance of class C
common stock 74 1,900 1,974
Issuance of preferred stock 35,000 (333) 34,667
-------------- ----------------- ------------------ ------------------ ---------- ----------
Balance, December 31, 2002 $ 11,638 $ 35,000 $ 82,527 $ (407) $ 54,813 $183,571
-------------- ----------------- ------------------ ------------------ ---------- ----------
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------------------------------------
2002 2001 2000
----------------- ---------------- -----------------
(in thousands)
Cash flows from operating activities:
Net income $ 22,751 $ 16,280 $ 10,437
Adjustments to reconcile net income to net cash provided by
operating activities:
Net amortization of investment premiums and discounts 743 (7,885) 1,269
Amortization of debt premiums, discounts and issuance costs 46,859 89,131 126,653
Proceeds from repayment of trading investment securities (34,029) (21,717) -
Mark-to-market on trading securities and derivatives 4,359 (202) -
Amortization of settled financial derivatives contracts 1,111 461 -
Extraordinary gain on debt repurchases 889 - -
Provision for losses 8,223 6,725 4,739
Deferred income tax benefit (2,959) (2,250) (1,853)
Increase in interest receivable (9,023) (572) (12,781)
Decrease (increase) in guarantee and
commitment fees receivable 66 (510) (1,136)
Decrease (increase) in prepaid expenses and other assets (6,065) 555 1,687
Increase in accrued interest payable 3,398 5,506 2,303
Increase in other liabilities 6,756 3,762 2,960
----------------- ---------------- -----------------
Net cash provided by operating activities 43,079 89,284 134,278
----------------- ---------------- -----------------
Cash flows from investing activities:
Purchases of available-for-sale investment securities (179,146) (592,747) (254,937)
Purchases of Farmer Mac II Guaranteed Securities and
AgVantage bonds (200,583) (273,061) (464,917)
Purchases of loans (794,328) (278,989) (446,251)
Proceeds from repayment of investment securities 399,938 455,744 264,403
Proceeds from repayment Farmer Mac Guaranteed Securities 242,748 268,351 435,602
Proceeds from repayment of loans 67,168 2,021 1,183
Proceeds from sale of loans and
Farmer Mac Guaranteed Securities 47,682 82,995 159,910
Settlement of financial derivatives (5,053) (5,230) -
Purchases of office equipment (161) (71) -
----------------- ---------------- -----------------
Net cash used in investing activities (421,735) (340,987) (305,007)
----------------- ---------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of discount notes 58,967,290 105,736,192 64,284,888
Proceeds from issuance of medium-term notes 303,017 295,186 215,027
Payments to redeem discount notes (58,433,613) (105,641,354) (64,072,223)
Payments to redeem medium-term notes (207,254) (246,960) (57,300)
Net proceeds from preferred stock issuance 34,667 - -
Proceeds from common stock issuance 1,974 8,599 1,926
Preferred stock dividends (1,456) - -
----------------- ---------------- -----------------
Net cash provided by financing activities 664,625 151,663 372,318
----------------- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents 285,969 (100,040) 201,589
Cash and cash equivalents at beginning of period 437,831 537,871 336,282
----------------- ---------------- -----------------
Cash and cash equivalents at end of period $ 723,800 $ 437,831 $ 537,871
----------------- ---------------- -----------------
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
1. ORGANIZATION
The Federal Agricultural Mortgage Corporation ("Farmer Mac" or the
"Corporation") was chartered by the U.S. Congress in the Agricultural Credit Act
of 1987 (12 U.S.C. ss.ss. 2279aa et seq.), which amended the Farm Credit Act of
1971 (collectively, as amended, the "Act"). Farmer Mac is a stockholder-owned
instrumentality of the United States that was created to establish a secondary
market for agricultural real estate and rural housing mortgage loans and to
increase the availability of long-term credit at stable interest rates to
American farmers, ranchers and rural homeowners. The Farmer Mac secondary market
for agricultural mortgage loans accomplishes that mission by providing liquidity
and lending capacity to agricultural mortgage lenders by:
o purchasing newly originated and pre-existing ("seasoned")
eligible mortgage loans directly from lenders through its "cash
window" and seasoned eligible mortgage loans from lenders and
other third parties in negotiated transactions;
o exchanging newly issued agricultural mortgage-backed securities
guaranteed by Farmer Mac ("Farmer Mac Guaranteed Securities") for
newly originated and seasoned eligible mortgage loans that back
those securities in "swap" transactions;
o issuing long-term standby purchase commitments ("LTSPCs") for
newly originated and seasoned eligible mortgage loans; and
o purchasing and guaranteeing mortgage-backed bonds secured by
eligible mortgage loans, which are referred to as AgVantage
bonds.
Farmer Mac conducts these activities through two programs--Farmer Mac I and
Farmer Mac II. Under the Farmer Mac I program, Farmer Mac
o purchases eligible mortgage loans;
o securitizes eligible mortgage loans purchased and guarantees the
timely payment of principal and interest on the agricultural
mortgage-backed securities backed by such loans; and
o commits to purchase eligible mortgage loans under LTSPCs for such
loans.
To be eligible for the Farmer Mac I program, loans must meet Farmer Mac's
underwriting, appraisal and documentation standards. Under the Farmer Mac II
program, Farmer Mac purchases the guaranteed portions of loans guaranteed by the
United States Department of Agriculture (the "USDA-guaranteed portions")
pursuant to the Consolidated Farm and Rural Development Act (7 U.S.C. ss.ss.
1921 et seq.) and guarantees securities backed by those USDA-guaranteed portions
purchased by Farmer Mac.
As of December 31, 2002, outstanding loans held by Farmer Mac and loans that
either back Farmer Mac Guaranteed Securities or are subject to LTSPCs totaled
$5.5 billion. Farmer Mac may retain Farmer Mac Guaranteed Securities in its
portfolio or sell them to third parties.
Farmer Mac's two principal sources of revenue are:
o fees received in connection with outstanding Farmer Mac
Guaranteed Securities and LTSPCs; and
o net interest income earned on its portfolio of Farmer Mac
Guaranteed Securities, mortgage loans, AgVantage bonds and
investments.
Farmer Mac funds its program purchases by issuing debt obligations of various
maturities. As of December 31, 2002, Farmer Mac had outstanding $2.9 billion of
discount notes and $1.0 billion of medium-term notes. During 2002, Farmer Mac
continued its strategy of issuing debt obligations and investing a portion of
the proceeds in non-program investments to increase its presence in the capital
markets and thereby improve the mortgage rates offered by lenders to farmers,
ranchers and rural homeowners.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Farmer Mac conform with generally
accepted accounting principles in the United States of America. The preparation
of consolidated financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities (including, but not limited to,
the allowance for loan losses, reserve for losses and the REO valuation
allowance) as of the date of the consolidated financial statements and the
reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates. The following are the significant
accounting policies that Farmer Mac follows in preparing and presenting its
consolidated financial statements:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Farmer Mac and its
wholly-owned subsidiary, Farmer Mac Securities Corporation, whose principal
activities are to facilitate the purchase and issuance of Farmer Mac Guaranteed
Securities and to act as a registrant under registration statements filed with
the Securities and Exchange Commission. All intercompany balances and
transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents
Farmer Mac considers highly liquid investment securities with remaining
maturities of three months or less at the time of purchase to be cash
equivalents. Changes in the balance of cash and cash equivalents are reported in
the consolidated statements of cash flows. The following table sets forth
information regarding certain cash and non-cash transactions for the years ended
December 31, 2002, 2001 and 2000.
2002 2001 2000
----------- ------------- -------------
(in thousands)
Cash paid during the year for:
Interest $ 63,750 $ 75,821 $ 50,493
Income taxes 12,600 8,200 6,825
Non-cash activity:
Real estate owned acquired through foreclosure 7,632 2,457 471
Loans acquired and securitized as Farmer Mac
Guaranteed Securities - 105,436 452,124
Loans acquired from on-balance sheet Farmer Mac
Guaranteed Securities 25,675 526 2,273
(c) Investments and Farmer Mac Guaranteed Securities
Farmer Mac classifies investments and Farmer Mac Guaranteed Securities that
Farmer Mac has the positive intent and ability to hold to maturity as
held-to-maturity. Such securities are carried at cost, adjusted for unamortized
premiums and unearned discounts. Securities for which Farmer Mac does not have
the positive intent to hold to maturity are classified as available-for-sale and
are carried at estimated fair value. Unrealized gains and losses on
available-for-sale securities are reported as accumulated other comprehensive
income/(loss) in stockholders' equity. Securities classified as trading
securities are reported at their fair value, with unrealized gains and losses
included in earnings. Gains and losses on the sale of available-for-sale and
trading securities are determined using the specific identification cost method.
Farmer Mac determines the fair value of Farmer Mac Guaranteed Securities based
on the present value of the associated expected future cash flows. In estimating
the present value of the expected future cash flows, management is required to
make estimates and assumptions. The key estimates and assumptions include future
discount rates and collateral repayment rates. Premiums, discounts and other
deferred costs are amortized to interest income over the estimated life of the
security using the effective interest method. Interest income on investments and
Farmer Mac Guaranteed Securities is recorded on an accrual basis unless the
collection of interest is considered doubtful.
Farmer Mac receives yield maintenance payments when certain loans or loans
underlying Farmer Mac Guaranteed Securities prepay. These payments mitigate
Farmer Mac's exposure to reinvestment risk and are calculated such that, when
reinvested with the prepaid principal, they should generate substantially the
same cash flows that would have been generated had the loans not prepaid. Yield
maintenance payments are recognized as interest income in the consolidated
statements of operations upon receipt.
(d) Loans
Loans for which Farmer Mac has the positive intent and ability to hold for the
foreseeable future are classified as held for investment and reported at
amortized cost. Loans that Farmer Mac does not intend to hold for the
foreseeable future are classified as held for sale and reported at the lower of
cost or market using the aggregate method. Of the loans held by Farmer Mac as of
December 31, 2002, $929.1 million were held for investment and $37.0 million
were held for sale. Of the loans held by Farmer Mac as of December 31, 2001,
$173.5 million were held for investment and $25.9 million were held for sale.
(e) Securitization of Loans
Asset securitization involves the transfer of financial assets to another entity
in exchange for cash and/or beneficial interests in the assets transferred.
Farmer Mac transfers agricultural mortgage loans into trusts that are used as
vehicles for the securitization of the transferred loans. The trusts issue
Farmer Mac Guaranteed Securities that are beneficial interests in the assets of
the trusts, to either Farmer Mac or third party investors. In most cases, Farmer
Mac retains all of the securities issued by the trusts. From time to time, the
securities issued by the trusts are sold to third party investors.
Farmer Mac guarantees the timely payment of principal and interest on the
securities issued by the trusts and receives guarantee fees as compensation for
its guarantee. Farmer Mac recognizes guarantee fees on an accrual basis over the
terms of the Farmer Mac Guaranteed Securities, which coincide with the terms of
the underlying loans. As such, no guarantee fees are unearned at the end of any
reporting period. If Farmer Mac purchases a delinquent loan underlying a Farmer
Mac Guaranteed Security, Farmer Mac stops accruing the guarantee fee upon the
loan purchase.
Prior to April 1, 2001, Farmer Mac accounted for the transfer of loans into
trusts in accordance with SFAS 125. Under that standard, each trust met the
requirements of a "qualifying special purpose entity." Therefore, the trusts
were not consolidated into Farmer Mac's consolidated financial statements. The
Farmer Mac Guaranteed Securities securitized prior to April 1, 2001 that Farmer
Mac retained, have been recorded in Farmer Mac's consolidated financial
statements as Farmer Mac Guaranteed Securities and are classified and accounted
for in accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, see Note 2(c).
Statement of Financial Accounting Standards No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS
140"), which became effective for transfers of financial assets after March 31,
2001, expanded the requirements for "qualifying special purposes entities." The
trust vehicles used in loan securitization transactions after March 31, 2001, in
which Farmer Mac retains all the Farmer Mac Guaranteed Securities issued by the
trust, do not meet the "qualifying special purpose entity" requirements of SFAS
140. Accordingly, Farmer Mac accounts for the Farmer Mac Guaranteed Securities
it retains in these transactions as loans in its consolidated balance sheets and
the guarantee fees earned on those assets are recorded as interest income in the
consolidated statements of operations.
Transfers of agricultural mortgage loans into trusts in which Farmer Mac
surrenders control over the financial assets and receives compensation other
than beneficial interests in the underlying loans are recorded as sales under
both SFAS 125 and SFAS 140. The carrying amount of the assets that are
transferred in these transactions is allocated between the assets sold and the
interests retained, if any, based on the relative fair values of each at the
date of the transfer. A gain or loss is included in income for the difference
between the allocated carrying amount of the asset sold and the net cash
proceeds received. In 2002, 2001 and 2000, Farmer Mac did not realize any gains
or losses upon the sale of loans accounted for as sales under SFAS 125 or SFAS
140.
When particular criteria are met, such as the default of the borrower, Farmer
Mac has the option to repurchase the defaulted loans underlying Farmer Mac
Guaranteed Securities (these options are commonly referred to as
"removal-of-account" provisions). Farmer Mac records these loans in the
consolidated financial statements during the period in which Farmer Mac has the
option to repurchase the loans and therefore regains effective control over the
transferred loans.
(f) Non-Performing Loans
Non-performing or "impaired" loans are loans for which it is probable that
Farmer Mac will be unable to collect all amounts due according to the
contractual terms of the loan agreement and include all loans 90 days or more
past due. When a loan is determined to be impaired, interest due on the loan is
not recognized as interest income until the payment is received from the
borrower. Interest previously accrued on such loans or interest advanced to
security holders is charged against the allowance for losses when deemed
uncollectible.
(g) Real Estate Owned
Real estate owned consists of real estate acquired through foreclosure and is
recorded at fair value less estimated selling costs at acquisition. Fair value
is determined by appraisal or other appropriate valuation method. Losses
estimated at the time of acquisition are charged to the allowance for loan
losses. Subsequent to the acquisition, management continues to perform periodic
valuations and establishes a valuation allowance for real estate owned through a
charge to income if the carrying value of a property exceeds its estimated fair
value less estimated selling costs.
(h) Financial Derivatives
Farmer Mac enters into financial derivative transactions principally to protect
against the risk from the effects of market price or interest rate movements on
the value of certain assets and future cash flows, not for trading or
speculative purposes. Farmer Mac is required to recognize certain contracts and
commitments as financial derivatives when the characteristics of those contracts
and commitments meet the definition of a financial derivative promulgated by
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by Statement of Financial
Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133 and
Statement of Accounting Standards No. 138, Accounting for Certain Derivatives
Instruments and Hedging Activities, and as interpreted by the Financial
Accounting Standards Board ("FASB") and the Derivative Implementation Group
(collectively, "SFAS 133").
Effective January 1, 2001, Farmer Mac adopted SFAS 133, which establishes
accounting and reporting standards for financial derivatives including certain
financial derivatives embedded in other contracts and for hedging activities.
The adoption of SFAS 133 resulted in a $0.7 million charge, net of tax, reported
as a cumulative effect of a change in accounting principles and an $8.6 million
decrease, net of tax, in stockholders' equity in Farmer Mac's consolidated
financial statements as of and for the year ended December 31, 2001.
All financial derivatives are required to be 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.
Fair value hedges are accounted for by recording the fair value of the financial
derivative and the change in fair value of the asset attributable to the risk
being hedged on the consolidated balance sheets with the net difference reported
as ineffectiveness in the consolidated statements of operations as a gain or
loss on financial derivatives. Financial derivatives are reported as either
freestanding assets or freestanding liabilities in the consolidated balance
sheets. The adjustment to the hedged asset is included in the reported amount of
the hedged item. Cash payments or receipts and related amounts accrued during
the reporting period on financial derivatives in fair value hedging
relationships are recorded as an adjustment to the interest income on the hedged
asset. If a financial derivative in a fair value hedging relationship is no
longer effective, is de-designated from its hedging relationship, or is
terminated, Farmer Mac discontinues fair value hedge accounting for the
financial derivative and the hedged item. Accordingly, the hedged item is no
longer adjusted for changes in its fair value attributable to the risk being
hedged. The accumulated adjustment of the carrying amount of the hedged asset is
recognized in earnings as an adjustment to interest income over the expected
remaining life of the asset using the effective interest rate method.
Cash flow hedges are accounted for by recording the fair value of the financial
derivative as either a freestanding asset or a freestanding liability on the
consolidated balance sheets, with the effective portion of the change in fair
value of the financial derivative recorded in accumulated other comprehensive
income/(loss) within stockholders' equity, net of tax. Amounts are reclassified
from accumulated other comprehensive income/(loss) to interest income or expense
in the consolidated statements of operations in the period the hedged forecasted
transaction affects earnings. Any ineffective portion of the change in fair
value of the financial derivative is reported as a gain or loss on financial
derivatives and trading assets in the consolidated statements of operations. If
it becomes probable that a hedged forecasted transaction will not occur, any
amounts included in accumulated other comprehensive income related to the
specific hedging relationship are reclassified from accumulated other
comprehensive income/(loss) to the consolidated statements of operations and
reported as gains or losses on financial derivatives and trading assets.
Gains and losses on financial derivatives not considered highly effective in
hedging the change in fair value or expected cash flows of the related hedged
item are recognized in the consolidated statement of operations as a gain or
loss on financial derivatives and trading assets, as these derivatives do not
qualify for hedge accounting under SFAS 133. If a financial derivative has not
been or will not continue to be highly effective as a hedge, hedge accounting is
discontinued prospectively and the financial derivative continues to be recorded
at fair value with changes in fair value reported as a gain or loss on financial
derivatives and trading assets in the consolidated statement of operations.
Prior to January 1, 2001, unrealized gains and losses on financial derivatives
used for hedging purposes were generally not required to be reported in the
consolidated balance sheet. In order to be eligible for hedge accounting
treatment, a high correlation had to be probable at the inception of the hedge
transaction and maintained throughout the hedge period. For interest rate swaps,
the net interest received or paid was treated as an adjustment to the interest
income or expense related to the hedged assets or obligations in the period in
which such amounts were due. Premiums and fees associated with interest rate
caps were amortized to interest income or expense on a straight-line basis over
the terms of the contracts. For financial derivatives that were not designated
or did not qualify for hedge accounting treatment, realized and unrealized gains
and losses were recognized in the statements of operations as a gain or loss on
financial derivatives and trading assets.
(i) Notes Payable
Notes payable are classified as due within one year or due after one year based
on their contractual maturities. Debt issuance costs are deferred and amortized
to interest income or expense using the effective interest method over the
estimated life of the related debt.
(j) Allowance for Losses
Farmer Mac maintains an allowance for losses to cover estimated probable losses
on loans held for investment, real estate owned and loans underlying post-1996
Act Farmer Mac I Guaranteed Securities and LTSPCs in accordance with Statement
of Financial Accounting Standard No. 5, Accounting for Contingencies, ("SFAS 5")
and Statement of Financial Accounting Standard No. 114, Accounting by Creditors
for Impairment of a Loan ("SFAS 114"), as amended. The methodology for
determining the allowance for losses is the same for loans held for investment
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs
because Farmer Mac believes the ultimate credit risk is the same, i.e., the
underlying agricultural mortgage loans all meet the same credit underwriting and
appraisal standards.
Farmer Mac's allowance for losses is estimated using a systematic process that
begins with management's evaluation of the results of its proprietary loan pool
simulation and guarantee fee model (the "Model"); those results may be modified
by the application of management judgment that takes into account factors
including:
o economic conditions;
o geographic and agricultural commodity concentrations of Farmer
Mac's portfolio;
o the credit profile of Farmer Mac's portfolio;
o delinquency trends of Farmer Mac's portfolio; and
o historical charge-off and recovery activity of Farmer Mac's
portfolio.
The Model offers historical loss experience on agricultural mortgage loans
similar to those on which Farmer Mac has assumed credit risk, but over a longer
term than Farmer Mac's own experience to date. Farmer Mac's systematic
methodology for determining its allowance for losses is expected to migrate over
time, away from the Model and toward the increased use of Farmer Mac's own
historical portfolio loss experience, as that experience continues to develop.
During this migration, Farmer Mac will continue to use the results from the
Model, augmented by the application of management's judgment, to develop its
loan loss allowance.
Management believes that its use of this methodology produces a reliable
estimate of total probable losses, as of the balance sheet date, for all loans
included in Farmer Mac's portfolio, including loans held for investment and
loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs.
In addition, Farmer Mac specifically analyzes its portfolio of non-performing
assets (loans 90 days or more past due, in foreclosure, restructured, in
bankruptcy - including loans performing under either their original loan terms
or a court-approved bankruptcy plan - and REO) on a loan-by-loan basis. This
analysis measures impairment based on the fair value of the underlying
collateral for each individual loan relative to the total amount due, including
principal, interest and advances under SFAS 114. In the event that the updated
appraisal or management's estimate of discounted collateral value does not
support the total amount due, Farmer Mac specifically determines an allowance
for the loan for the difference between the recorded investment and its fair
value, less estimated costs to liquidate the collateral.
Management believes that the general allowance, which is the difference between
the total allowance for losses (generated through use of the Model) and the
specific allowances, adequately covers any losses inherent in the portfolio of
performing loans under SFAS 5.
Farmer Mac considers that the methodology described above produces a reliable
estimate of the total probable losses inherent in the Farmer Mac portfolio. The
Model:
o runs various configurations of loan types, terms, economic
conditions, and borrower eligibility criteria to generate a
distribution of loss exposures over time for all loans in the
portfolio;
o uses historical agricultural real estate loan origination and
servicing data that reflect varied economic conditions and stress
levels in the agricultural sector;
o contains features that allow variations for changes in loan
portfolio characteristics to make the data set more
representative of Farmer Mac's portfolio and credit underwriting
standards; and
o considers the effects of the ageing of the loan portfolio along
the expected loss curves associated with individual cohort
origination years, including the segments that are entering into
or coming out of their peak default years.
Farmer Mac analyzes various iterations of the Model data to evaluate its overall
allowance for loss and back tests the results to validate the Model. Such tests
use prior period data to project losses expected in a current period, and
compare those projections to actual losses incurred during the current period.
The allowance for losses is increased through periodic provisions for losses
charged to expense and reduced by charge-offs for actual losses, net of
recoveries that are recognized if liquidation proceeds exceed previous
estimates. Charge-offs represent losses on the outstanding principal balance,
any interest payments previously accrued or advanced and expected costs of
liquidation. When certain criteria are met, such as the default of the borrower,
Farmer Mac has the option to purchase the defaulted loans underlying Farmer Mac
Guaranteed Securities and is obligated to purchase those underlying an LTSPC.
These acquisitions are recorded in the consolidated financial statements at
their fair value. Fair value is determined by appraisal or management's estimate
of discounted collateral value. In September 2002, Farmer Mac adopted EITF issue
02-9, Accounting for Changes That Result in a Transferor Regaining Control of
Financial Assets Sold ("the consensus" or "EITF 02-9"). The consensus requires
that Farmer Mac record at acquisition, the difference between each loan's
acquisition cost and its fair value, if any, as a charge to the reserve for
losses. Prior to the adoption of the consensus, any specific allowance that had
been established for the off-balance sheet obligation would have been
transferred from the reserve for losses to the allowance for loan losses. Upon
the receipt of each loan's updated appraisal or determination of management's
estimate of discounted collateral value, the difference between the acquisition
cost of the loan and its fair value, if any, was recorded as a charge to the
allowance for loan losses.
No allowance for losses has been made for loans underlying Farmer Mac I
Guaranteed Securities issued prior to the 1996 Act or Farmer Mac II Guaranteed
Securities. Farmer Mac I Guaranteed Securities issued prior to the 1996 Act are
supported by unguaranteed first loss subordinated interests, which are expected
to exceed the estimated credit losses on those loans. USDA-guaranteed portions
collateralizing Farmer Mac II Guaranteed Securities are obligations backed by
the full faith and credit of the United States. To date, Farmer Mac has
experienced no credit losses on any pre-1996 Act Farmer Mac I Guaranteed
Securities or on any Farmer Mac II Guaranteed Securities and does not expect to
incur any such losses in the future.
During the year ended December 31, 2002 Farmer Mac reclassified certain
components of its allowance for losses and its provision for losses to further
clarify its presentation. Reclassifications of the allowance for losses and
provision for losses for prior periods were made to conform to the current
period presentation. These reclassifications are for presentation purposes only
and have no impact on Farmer Mac's risk exposure, results from operations or
financial position. See Note 2(q) for additional information regarding these
reclassifications.
(k) Earnings Per Common Share
The following schedule reconciles basic and diluted earnings per share for the
years ended December 31, 2002, 2001 and 2000. Basic earnings per share is based
on the weighted-average common shares outstanding. Diluted earnings per share is
based on the weighted-average number of common shares outstanding adjusted to
include all potentially dilutive common stock options.
2002 2001 2000
-------------------------------- ------------------------------- --------------------------------
Dilutive Dilutive Dilutive
Basic stock Diluted Basic stock Diluted Basic stock Diluted
EPS options EPS EPS options EPS EPS options EPS
---------- ----------- --------- --------- ---------- ---------- --------- ----------- ----------
(in thousands, except per share amounts)
Net income available to $ 21,295 $ 21,295 $ 16,280 $ 16,280 $ 10,437 $ 10,437
common stockholders
Weighted-average 11,613 437 12,050 11,329 440 11,769 11,064 293 11,357
shares
Earnings per
common share $ 1.83 $ 1.77 $ 1.44 $ 1.38 $ 0.94 $ 0.92
Effects of:
Extraordinary gain $ 0.07 $ 0.07 - - - -
Cumulative effect of
change in accounting
principles - - $ (0.06) $ (0.06) - -
(l) Income Taxes
Deferred federal income tax assets and liabilities are established for temporary
differences between financial and taxable income and are measured using the
current enacted statutory tax rate. Income tax expense is equal to the income
taxes payable in the current year plus the net change in the deferred tax asset
or liability balance.
(m) Stock-Based Compensation
Farmer Mac accounts for its stock-based employee compensation plans, which are
described more fully in Note 9, using the intrinsic value method of accounting
for employee stock options pursuant to Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), as amended by
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure ("SFAS 148"). Accordingly, no
compensation expense was recognized in 2002, 2001 and 2000 for employee stock
option plans. Had Farmer Mac elected to use the fair value method of accounting
for employee stock options, net income available to common stockholders and
earnings per share for the years ended December 31, 2002, 2001 and 2000 would
have been reduced to the pro forma amounts indicated in the following table:
For the Years Ended December 31,
----------------------------------------
2002 2001 2000
------------ ------------- ------------
(in thousands, except per share amounts)
Net income available to common
stockholders, as reported $ 21,295 $ 16,280 $ 10,437
Add back: Restricted stock
compensation expense included in
reported net income, net of taxes 617 577 536
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method
for all awards, net of tax (2,990) (2,662) (2,403)
------------ ------------- -------------
Pro forma net income available to
common stockholders $ 18,922 $ 14,195 $ 8,570
------------ ------------- -------------
Earnings per share:
Basic - as reported $ 1.83 $ 1.44 $ 0.94
Basic - pro forma $ 1.63 $ 1.25 $ 0.77
Diluted - as reported $ 1.77 $ 1.38 $ 0.92
Diluted - pro forma $ 1.57 $ 1.21 $ 0.76
The underlying assumptions to these fair value calculations are presented in
Note 9.
(n) Comprehensive Income/(Loss)
Comprehensive income/(loss) represents all changes in stockholders' equity
except those resulting from investments by or distributions to stockholders, and
is comprised of net income available to common stockholders, unrealized gains
and losses on securities available-for-sale and the effective portion of the
unrealized gains and losses on financial derivatives in cash flow hedge
relationships, net of reclassification adjustments and related taxes. The
following table presents Farmer Mac's accumulated other comprehensive
income/(loss) as of December 31, 2002 and 2001.
As of December 31,
2002 2001 2000
------------- ------------ -------------
(in thousands)
Net unrealized gains on securities
available-for-sale, net of taxes $ 62,321 $ 23,898 $ 31,498
Net unrealized losses on financial derivatives in
cash flow hedge relationships, net of taxes (62,728) (15,503) -
------------- ------------ -------------
Accumulated other comprehensive income/(loss), net of tax $ (407) $ 8,395 $ 31,498
------------- ------------ -------------
(o) Long-Term Standby Purchase Commitments ("LTSPCs")
Farmer Mac accounts for its LTSPCs in accordance with the consensus reached in
EITF 85-20, Recognition of Fees for Guaranteeing a Loan. As is specified in this
consensus, Farmer Mac recognizes LTSPC commitment fees over the life of the
underlying loans. As such, no guarantee fees or commitment fees are unearned at
the end of any reporting period. If Farmer Mac purchases a defaulted loan
underlying an LTSPC, Farmer Mac stops accruing the commitment fee upon the loan
purchase. If the loan becomes current and is repurchased from Farmer Mac under
the terms of an LTSPC, Farmer Mac resumes accrual of the commitment fee. See
Note 2(j) for Farmer Mac's policy for estimating probable losses for LTSPCs.
(p) New Accounting Standards
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13 and Technical Corrections ("SFAS 145") which is effective January 1, 2003
and requires gains and losses from the extinguishment or repurchase of debt to
be classified as extraordinary items only if they meet the criteria for such
classification in Accounting Principles Board Opinion No. 30, Reporting the
Results of Operations, Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. Until January 1, 2003, gains and losses from the extinguishment or
repurchase of debt must be classified as extraordinary items. Subsequent to
January 1, 2003, any gain or loss resulting from the extinguishment or
repurchase of debt that was previously classified as an extraordinary item in a
prior period that does not meet the criteria for such classification under
Accounting Principles Board Opinion No. 30 must be reclassified. Farmer Mac will
adopt the provisions of SFAS 145 on January 1, 2003 and will at that time
reclassify the net gain on the extinguishment of debt recognized for the year
ended December 31, 2002.
In December 2002, the FASB issued SFAS 148, which provides alternative
transition methods for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS 123, to require prominent disclosures in both annual and
quarterly financial statements of the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
Farmer Mac has not changed the way it accounts for stock-based employee
compensation; however, it has adopted the disclosure provisions of SFAS 148.
In December 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("FIN 45"), which requires a company to disclose many of
the guarantees or indemnification agreements it issues, some of which are
required to be recorded as a liability in a company's consolidated balance sheet
at the time it enters into the guarantee. FIN 45 requires disclosures beginning
in interim and year-end financial statements ending after December 15, 2002.
Farmer Mac has adopted the disclosure provisions. The liability recognition
provisions apply to guarantees issued or modified beginning January 1, 2003.
Farmer Mac is in the process of evaluating the impact of the liability
recognition provisions of FIN 45.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities - an interpretation of ARB No. 51, ("FIN 46") which
addresses the consolidation of variable interest entities ("VIEs"). Generally, a
VIE is a corporation, partnership, trust or any other legal structure used for
business purposes that either (1) does not have equity investors with voting
rights or (2) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. A VIE often holds financial
assets and may be passive or it may engage in such activities as research and
development or other activities on behalf of another company. FIN 46 requires
that a VIE be consolidated by a company if that company is subject to a majority
of the VIE's risk of loss or entitled to receive a majority of the VIE's
residual returns or both. A company that consolidates a VIE is referred to as
the primary beneficiary of that entity.
The consolidation requirements of FIN 46 apply immediately to VIEs created after
January 31, 2003. The consolidation requirements apply to VIEs created on or
before January 31, 2003 in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003 regardless of when the VIE
was established. Farmer Mac does not believe the adoption of FIN 46 will have a
material impact on its consolidated financial position or its results of
operations.
In September of 2002, the EITF reached a consensus on a portion of EITF 02-9.
The consensus applies to loan transfers that were initially treated as sales and
are recorded as a "re-purchase" when the transferor has regained effective
control over the loan. The consensus indicates that under no circumstances
should an allowance for losses be initially recorded when such loans have been
recorded as a "re-purchase" on the transferor's financial statements. Farmer Mac
has adopted the consensus, which applies to transactions that are recorded after
September 12, 2002.
(q) Reclassifications
Certain reclassifications of prior year information were made to conform to the
2002 presentation. As a result of the continued increase in loans held for
investment and to further clarify the various components of Farmer Mac's
allowance for losses (previously referred to as reserve for losses), Farmer Mac
reclassified certain components of its allowance for losses and provisions for
losses to conform to the current presentation.
Farmer Mac reclassified its presentation of the allowance for losses and the
provisions for losses as of and for the each of the years ended December 31,
2001 and 2000 to conform to the current year presentation. The following table
summarizes the reclassifications on the 2001 consolidated financial statements
to conform to the current presentation.
Prior Current
Presentation Reclassifications Presentation
-------------- ------------------- --------------
(in thousands)
Balance sheet reclassifications:
Allowance for loan losses $ - $ 1,352 $ 1,352
Reserve for losses 15,884 (1,352) 14,532
-------------- ------------------- --------------
Total $ 15,884 $ - $ 15,884
-------------- ------------------- --------------
Statement of operations reclassifications:
Provision for loan losses $ - $ 600 $ 600
Provision for losses 6,725 (600) 6,125
-------------- ------------------- --------------
Total $ 6,725 $ - $ 6,725
-------------- ------------------- --------------
The following table summarizes the reclassifications for the statement of
operations for the year ended December 31, 2000 to conform to the current
presentation.
Prior Current
Presentation Reclassifications Presentation
-------------- ------------------- --------------
(in thousands)
Provision for loan losses $ - $ 300 $ 300
Provision for losses 4,739 (300) 4,439
-------------- ------------------- --------------
Total $ 4,739 $ - $ 4,739
-------------- ------------------- --------------
3. RELATED PARTY TRANSACTIONS
As provided by Farmer Mac's statutory charter, only banks, insurance companies
and other financial institutions or similar entities may hold Farmer Mac's Class
A voting common stock and only institutions of the Farm Credit System may hold
Farmer Mac's Class B voting common stock. Farmer Mac's statutory charter also
provides that Class A stockholders elect five members of Farmer Mac's 15-member
board of directors and that Class B stockholders elect five members of the board
of directors. Additionally, in order to participate in the Farmer Mac I program,
a financial institution must own a requisite amount of Farmer Mac Class A or
Class B voting common stock, based on the size and type of institution. As a
result of these requirements, Farmer Mac conducts business with related parties
in the normal course of Farmer Mac's business.
During 2002, Farmer Mac purchased eligible loans from 63 entities, placed loans
under LTSPCs with 16 entities and conducted Farmer Mac II transactions with 143
entities operating throughout the United States. During the year, the top 10
institutions generated 90 percent of the Farmer Mac I loan volume.
For all of the transactions discussed below, Farmer Mac has a related party
relationship with each entity resulting from a member of Farmer Mac's board of
directors being affiliated with the entity in some capacity. These transactions
were conducted in the ordinary course of business, with terms and conditions
comparable to those applicable to any other third party.
The following is a summary of the related party activity for the year ended
December 31, 2002:
o The following transactions occurred between Zions First National Bank or
its affiliates ("Zions"), which is Farmer Mac's largest holder of Class A
voting common stock and a major holder of Class C non-voting common stock,
and Farmer Mac during 2002:
o Farmer Mac purchased 183 loans having an aggregate principal amount of
approximately $77.2 million from Zions under the Farmer Mac I program,
representing approximately 4.1 percent of that program's volume for
the year;
o Farmer Mac purchased 16 guaranteed portions of USDA-guaranteed loans
having an aggregate principal amount of approximately $3.6 million
from Zions under the Farmer Mac II program, representing approximately
2.1 percent of that program's volume for the year;
o Farmer Mac sold approximately $47.7 million of Farmer Mac Guaranteed
Securities to Zions at no gain or loss;
o Farmer Mac and Zions entered into interest rate swap transactions
having an aggregate notional principal amount of approximately $41.6
million (the aggregate outstanding notional principal amount all
interest rate swap transactions between Farmer Mac and Zions was
$326.8 million as of December 31, 2002);
o Farmer Mac received approximately $1.0 million in guarantee fees on
Farmer Mac Guaranteed Securities whose underlying loans were swapped
or sold to Farmer Mac by Zions;
o Farmer Mac paid Zions approximately $51,000 in underwriting and loan
file review fees;
o Zions received approximately $1.2 million in servicing fees for acting
as a central servicer in the Farmer Mac I program;
o Zions received approximately $43,000 in fees for acting as agent with
respect to approximately $28.3 million of Farmer Mac medium-term
notes; and
o Zions received approximately $89,000 in commissions for acting as
dealer with respect to approximately $738.7 million of Farmer Mac
discount notes;
o The following transactions occurred between AgFirst Farm Credit Bank
("AgFirst"), which is a major holder of Class B voting common stock, and
Farmer Mac during 2002:
o Farmer Mac extended LTSPCs on 1,810 loans having an aggregate
principal balance of approximately $314.1 million to AgFirst (the
aggregate outstanding principal balance of the 2,840 total loans
underlying LTSPCs with AgFirst was $431.3 million as of December 31,
2002);
o Farmer Mac guaranteed approximately $161.0 million of Farmer Mac
Guaranteed Securities backed by rural housing loans under which Farmer
Mac is second-loss guarantor for the last 10 percent of the
securities;
o Farmer Mac received approximately $0.2 million in guarantee fees and
approximately $1.3 million in commitment fees attributable to
transactions with AgFirst; and
o AgFirst received approximately $122,000 in servicing fees for acting
as a central servicer in the Farmer Mac I program;
o Farmer Mac extended LTSPCs on 389 loans having an aggregate principal
balance of approximately $388.6 million to Farm Credit West, ACA or its
affiliates (the aggregate outstanding principal balance of the 777 loans
underlying LTSPCs with Farm Credit West, ACA or its affiliates was $712.4
million as of December 31, 2002), and Farmer Mac received commitment fees
of approximately $2.8 million;
o Farmer Mac purchased 28 guaranteed portions of USDA-guaranteed loans having
an aggregate principal amount of approximately $4.6 million from Bath State
Bank under the Farmer Mac II program, and Farmer Mac received approximately
$50,000 in guarantee fees on Farmer Mac II Guaranteed Securities whose
underlying USDA-guaranteed portions were sold to Farmer Mac by Bath State
Bank;
o Farmer Mac extended LTSPCs on 56 loans having an aggregate principal
balance of approximately $4.5 million to AgStar FCS, ACA (the aggregate
outstanding principal balance of the 1,540 loans underlying LTSPCs with
AgStar FCS, ACA was $103.3 million as of December 31, 2002), and Farmer Mac
received commitment fees of approximately $0.5 million; and
o GreenPoint Financial Corp. or its affiliates received approximately $25,000
in servicing fees for acting as a central servicer in the Farmer Mac I
program.
As of December 31, 2002, Farmer Mac had net interest payable to Zions or its
affiliates of approximately $7.3 million. As of December 31, 2002, Farmer Mac
had the following commitment fees receivable from related parties:
As of
December 31,
2002
---------------
(in thousands)
Farm Credit West, ACA or its affiliates $ 291
AgStar FCS, ACA 38
AgFirst Farm Credit Bank 307
4. INVESTMENT SECURITIES
The amortized cost and estimated fair values of investments as of December 31,
2002 and 2001 were as follows. Fair value was estimated based on quoted market
prices.
2002 2001
---------------------------------------------------- ----------------------------------------------------
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 $ 890 $ - $ 11,494 $ 10,602 $ - $ (263) $ 10,339
------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------
Total held-to-maturity 10,604 890 - 11,494 10,602 - (263) 10,339
Available-for-sale:
Floating rate
asset-backed securities 12,543 - (345) 12,198 17,970 9 - 17,979
Floating rate corporate
debt securities 344,330 - (1,464) 342,866 404,333 - (589) 403,744
Fixed rate corporate
debt securities 34,000 552 - 34,552 34,000 1,560 - 35,560
Fixed rate preferred
stock 186,799 11,511 - 198,310 166,581 637 - 167,218
Floating rate mortgage-
backed securities 207,394 - (86) 207,308 337,622 - (945) 336,677
------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------
Total available-for-sale 785,066 12,063 (1,895) 795,234 960,506 2,206 (1,534) 961,178
Trading:
Adjustable rate mortgage-
backed securities 23,944 627 - 24,571 35,575 599 - 36,174
------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------
Total trading 23,944 627 - 24,571 35,575 599 - 36,174
Total $ 819,614 $ 13,580 $ (1,895) $ 831,299 $ 1,006,683 $ 2,805 $ (1,797) $1,007,691
------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------
The amortized cost, fair value and yield of investments by remaining contractual
maturity as of December 31, 2002 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.
Farmer Mac owns one held-to-maturity investment that matures after ten years
with an amortized cost of $10.6 million, a fair value of $11.5 million, and a
yield of 6.15 percent.
Available-for-Sale Trading Total
-------------------------------- ---------------------------------- --------------------------------
Amortized Amortized Amortized
Cost Fair Value Yield Cost Fair Value Yield Cost Fair Value Yield
----------- ------------ ------- ------------ ------------ ------- ----------- ------------ -------
(dollars in thousands)
Due within one year $209,900 $210,270 2.83% $ - $ - $ - $ 209,900 $ 210,270 2.83%
Due after one year
through five years 178,467 176,841 1.99% - - - 178,467 176,841 1.99%
Due after five years
through ten years 188,491 200,008 8.05% - - - 188,491 200,008 8.05%
Due after ten years 208,208 208,115 1.94% 23,944 24,571 5.38% 232,152 232,686 2.30%
----------- ------------ ------- ------------ ------------ ------- ----------- ------------ -------
Total $785,066 $795,234 3.66% $ 23,944 $ 24,571 5.38% $ 809,010 $ 819,805 3.71%
----------- ------------ ------- ------------ ------------ ------- ----------- ------------ -------
5. FARMER MAC GUARANTEED SECURITIES
As of December 31, 2002 and 2001, Farmer Mac Guaranteed Securities included the
following:
As of December 31,
-------------------------------------------------------------------------------------------------
2002 2001
------------------------------------------------- -----------------------------------------------
Premiums, Premiums,
Discounts and Discounts and
Other Other
Principal Deferred Amortized Principal Deferred Amortized
Balance Costs Cost Balance Costs Cost
----------------- --------------- --------------- --------------- --------------- ---------------
(in thousands)
Farmer Mac I $ 946,014 $ (2,375) $ 943,639 $ 1,138,915 $ (2,906) $ 1,136,009
Farmer Mac II 578,681 73 578,754 516,746 59 516,805
----------------- --------------- --------------- --------------- --------------- ---------------
Total $ 1,524,695 $ (2,302) $ 1,522,393 $ 1,655,661 $ (2,847) $ 1,652,814
----------------- --------------- --------------- --------------- --------------- ---------------
Farmer Mac estimates the fair value of its Farmer Mac Guaranteed Securities by
discounting the projected cash flows at projected interest rates. Because the
cash flows may be interest rate path dependent, the values and projected
discount rates are derived using a Monte Carlo simulation model. The following
table sets forth the amortized costs, unrealized gains and losses and estimated
fair values of the Farmer Mac Guaranteed Securities as of December 31, 2002 and
2001.
As of December 31,
-------------------------------------------------------------------------------------
2002 2001
---------------------------------------- -----------------------------------------
Held-to- Available-for- Held-to- Available-for-
Maturity Sale Total Maturity Sale Total
----------- ----------------- ----------- ------------ ---------------- -----------
(in thousands)
Amortized cost $ 639,273 $ 883,120 $1,522,393 $ 589,775 $ 1,063,039 $1,652,814
Unrealized gains 24,376 86,114 110,490 34,321 37,562 71,883
Unrealized losses - - - - - -
----------- ----------------- ----------- ------------ ---------------- -----------
Fair value $ 663,649 $ 969,234 $1,632,883 $ 624,096 $ 1,100,601 $1,724,697
----------- ----------------- ----------- ------------ ---------------- -----------
Of the total Farmer Mac Guaranteed Securities held by Farmer Mac as of December
31, 2002, $1.3 billion are fixed-rate or reprice after one year.
The amortized cost, fair value and yield of Farmer Mac Guaranteed Securities by
remaining contractual maturity, although the actual maturities may differ due to
prepayments of the underlying mortgage loans, as of December 31, 2002 are set
forth below.
Held-to-Maturity Available-for-Sale Total
--------------------------------- -------------------------------- --------------------------------
Amortized Amortized Amortized
Cost Fair Value Yield Cost Fair Value Yield Cost Fair Value Yield
----------- ------------ -------- ----------- ------------ ------- ----------- ------------ -------
(dollars in thousands)
Due within one year $ 35,345 $ 36,793 3.45% $ 43,705 $ 46,488 6.98% $ 79,050 $ 83,281 5.47%
Due after one year
through five years 53,496 56,767 5.45% 90,128 96,850 6.12% 143,624 153,617 5.95%
Due after five years
through ten years 87,124 90,434 4.59% 199,342 225,971 5.64% 286,466 316,405 5.39%
Due after ten years 463,308 479,655 4.78% 549,945 599,925 5.56% 1,013,253 1,079,580 5.26%
----------- ------------ -------- ----------- ------------ ------- ----------- ------------ -------
Total $ 639,273 $ 663,649 4.74% $ 883,120 $ 969,234 5.70% $1,522,393 $1,632,883 5.36%
----------- ------------ -------- ----------- ------------ ------- ----------- ------------ -------
The table below presents a sensitivity analysis for Farmer Mac's retained Farmer
Mac Guaranteed Securities as of December 31, 2002.
December 31, 2002
----------------------
(dollars in thousands)
Fair value of beneficial interests retained
in Farmer Mac Guaranteed Securities $ 1,632,883
Weighted-average remaining life 4.7 years
Weighted-average prepayment speed (annual rate) 10.6%
Effect on fair value of a 10% adverse change $(2,295)
Effect on fair value of a 20% adverse change $(4,369)
Weighted-average discount rate 5.3%
Effect on fair value of a 10% adverse change $(22,332)
Effect on fair value of a 20% adverse change $(44,083)
These sensitivities are hypothetical and should be viewed as such. As the
figures indicate, changes in fair value based on a 10 percent variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumptions to the change in fair value may not be linear. Also, in
this table the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption. In fact, changes in one factor may result in changes in another (for
example, increases in market interest rates may result in lower prepayments),
which might amplify or counteract the sensitivities.
Farmer Mac securitizes two types of assets: agricultural mortgage loans and
USDA-guaranteed portions. Farmer Mac manages the credit risk of its securitized
agricultural mortgage loans, both on- and off-balance sheet, together with its
on-balance sheet agricultural mortgage loans and the agricultural mortgage loans
underlying its off-balance sheet LTSPCs. See Note 8 for more information
regarding this credit risk. Due to the differing interest rate and funding risk
characteristics of on- and off-balance sheet asset classes, Farmer Mac manages
its on-balance sheet agricultural mortgage loans held and securitized
differently from its off-balance sheet securitized agricultural mortgage loans
and off-balance sheet agricultural mortgage loans underlying LTSPCs.
Farmer Mac separately manages its securitized USDA-guaranteed portions and
manages those held on its balance sheet differently from those that are
off-balance sheet - also due to their differing interest rate and funding risk
characteristics.
As part of fulfilling its guarantee obligations for Farmer Mac I Guaranteed
Securities and commitments to purchase eligible loans underlying LTSPCs, Farmer
Mac purchases defaulted loans, all of which are at least 90 days delinquent at
the time of purchase, out of those securities and pools, and records the
purchased loans as such on its balance sheet.
The table below presents the outstanding principal balances, 90-day
delinquencies and net credit losses as of and for the periods indicated for each
managed asset class, both on- and off-balance sheet.
Total Principal 90-Day
Amount Delinquencies (1) Net Credit Losses
---------------------- ------------------ --------------------------------
As of December 31, For the Year Ended December 31,
----------------------------------------- --------------------------------
2002 2001 2002 2001 2002 2001 2000
------------ ----------- -------- -------- ----------- --------- ----------
(in thousands)
On-balance sheet assets:
Farmer Mac I:
Loans $ 949,378 $ 199,113 $ 54,679 $ 53,051 $ 3,728 $ 1,325 $ -
Guaranteed Securities 946,014 1,138,915 - - 368 (211) -
Farmer Mac II:
Guaranteed Securities 578,681 516,747 - - - - -
------------ ----------- -------- --------- ----------- --------- ---------
Total $ 2,474,073 $1,854,775 $ 54,679 $ 53,051 $ 4,096 $ 1,114 $ -
------------ ----------- -------- --------- ----------- --------- ---------
Off-balance sheet assets:
Farmer Mac I:
LTSPCs $ 2,681,240 $1,884,260 $ 3,535 $ 1,485 $ - $ - $ -
Guaranteed Securities 299,940 367,210 - - - 1,050 -
Farmer Mac II:
Guaranteed Securities 67,109 78,409 - - - - -
------------ ----------- -------- ---------- ----------- --------- ---------
Total $ 3,048,289 $2,329,879 $ 3,535 $ 1,485 $ - $ 1,050 $ -
------------ ----------- -------- ---------- ----------- --------- ---------
Total $ 5,522,362 $4,184,654 $ 58,214 $ 54,536 $ 4,096 $ 2,164 $ -
------------ ----------- -------- ---------- ----------- --------- ---------
(1) Includes loans and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities that are 90 days or more past due, in foreclosure, restructured
after delinquency, and in bankruptcy excluding loans performing under
either their original loan terms or a court-approved bankruptcy plan.
6. FINANCIAL DERIVATIVES
Farmer Mac enters into interest rate swap contracts to adjust the
characteristics of Farmer Mac's debt to match more closely the characteristics
of the Corporation's assets and to derive an overall lower effective fixed-rate
cost of borrowing than would otherwise be available to Farmer Mac in the
conventional debt market. Farmer Mac is also required to recognize certain
contracts and commitments as derivatives when the characteristics of those
contracts and commitments meet the definition of a derivative as promulgated by
SFAS 133. Farmer Mac enters into financial derivatives as an end-user, not for
trading or speculative purposes. As with any financial instrument, financial
derivatives have inherent risks: market risk and credit risk.
Market Risk:
Market risk is the risk of an adverse effect resulting from changes in interest
rates or spreads on the value of a financial instrument. Farmer Mac manages
market risk associated with financial derivatives by establishing and monitoring
limits as to the degree of risk that may be undertaken. This risk is
periodically measured as part of Farmer Mac's overall risk monitoring processes,
which include market value of equity measurements, net interest income modeling
and other measures.
Credit Risk:
Credit risk is the risk that a counterparty will fail to perform according to
the terms a financial contract in which Farmer Mac has an unrealized gain.
Credit losses could occur in the event of non-performance by counterparties to
the financial derivative contracts. Farmer Mac mitigates this counterparty
credit risk by dealing with counterparties with high credit ratings (no less
than BBB+ as of December 31, 2002), establishing and maintaining collateral
requirements and entering into netting agreements. Netting agreements provide
for netting all amounts receivable and payable under all transactions covered by
the netting agreement between Farmer Mac and a single counterparty. Farmer Mac's
exposure to credit risk related to its financial derivatives is represented by
those counterparties for which Farmer Mac has a net receivable, including the
effect of any netting arrangements. As of December 31, 2002 and 2001, Farmer
Mac's credit exposure, excluding netting arrangements was $0.4 million and $0.3
million, respectively; however, including netting arrangements, Farmer Mac had
no net receivables. Conversely, financial derivatives in a net payable position
required Farmer Mac to pledge securities as collateral of approximately $37.0
million as of December 31, 2002. Farmer Mac was not required to pledge any
securities as of December 31, 2001.
Interest Rate Risk:
Farmer Mac uses financial derivatives to provide a cost- and capital-efficient
way to manage its interest rate risk exposure by modifying the repricing or
maturity characteristics of certain assets and liabilities and by locking in the
rates for certain forecasted issuances of liabilities. The primary financial
derivatives Farmer Mac uses include interest rate swaps and forward sale
contracts. Farmer Mac uses interest-rate swaps to assume fixed rate interest
payments in exchange for variable rate interest payments and vice versa.
Depending on the hedging relationship, the effects of these agreements are (a)
the conversion of variable rate liabilities to longer-term fixed rate
liabilities, (b) the conversion of long-term fixed rate assets to shorter-term
variable rate assets, or (c) the reduction of the variability of future changes
in interest rates on forecasted issuances of liabilities. The net payments of
these agreements are charged to either interest expense or interest income,
depending on whether the agreement is designated to hedge an existing or
forecasted liability or asset.
Fair Value Hedges:
Interest Rate Swaps:
Farmer Mac uses interest rate swaps primarily to offset the change in value of
certain fixed rate investments and liabilities caused by movements in the
benchmark interest rate (LIBOR). In calculating the effective portion of the
fair value hedges under SFAS 133, the change in fair value of the financial
derivative is recognized currently in earnings, as is the change in the value of
the hedged items attributable to the risk being hedged. Accordingly, the net
difference or hedge ineffectiveness, if any, is recognized currently in the
consolidated statement of operations as a gain or loss on financial derivatives
and trading assets. Fair value hedge ineffectiveness for each of the years ended
December 31, 2002 and 2001 was not significant.
Forward Sale Agreements:
Loans held for sale expose Farmer Mac to interest rate risk. Farmer Mac manages
this risk for certain loans held for sale by selling forward
government-sponsored enterprise debt and mortgage backed securities. The changes
in fair values of the hedged loans and the related financial derivatives are
recorded in the consolidated statements of operations as a gain or loss on
financial derivatives and trading assets. The net change in the fair values of
loans held for sale and the related financial derivatives for each of the years
ended December 31, 2002 and 2001 was not significant.
The following table summarizes information related to Farmer Mac's financial
derivatives in fair value hedge relationships as of December 31, 2002:
Weighted-
Weighted- Weighted- Weighted- Average
Fair Value Average Average Average Remaining
Notional -------------------------- Pay Receive Forward Life
Amount Asset (Liability) Rate Rate Price (in Years)
------------- ------------- ------------- ------------ ------------ ----------- ------------
(dollars in thousands)
Medium-term notes:
Pay variable interest rate swaps $ 85,000 317 - 2.72% 4.76% - 7.08
Loans:
Agency forwards 20,958 - (81) - - 1.06 0.04
------------- ------------- ------------- ------------ ------------
Total fair value hedges $ 105,958 $ 317 $ (81) 2.72% 4.76%
------------- ------------- ------------- ------------ ------------
SFAS 133 also required a $1.1 million increase in the line item "loans" on the
consolidated balance sheet as of December 31, 2002, due to the recognition of
the change in the fair value of a hedged item.
Cash Flow Hedges:
Interest Rate Swaps:
Farmer Mac uses interest rate swaps to hedge the variability of future cash
flows associated with existing variable rate liabilities and forecasted
issuances of liabilities. With respect to the variable rate liabilities
(discount notes) on the December 31, 2002 balance sheet, Farmer Mac uses
interest rate swaps to hedge the risk of changes in the benchmark rate (LIBOR),
which affects the amount of future payments to be made on discount notes. With
respect to the hedging of the forecasted issuance of discount notes, Farmer Mac
utilizes interest rate swaps with a longer maturity than the underlying
liabilities. The use of interest rate swap contracts with longer maturities than
the underlying liabilities allows Farmer Mac to hedge both the risk of changes
in the benchmark rate (LIBOR) on existing liabilities and the replacement of
such liabilities upon maturity. These cash flow hedge relationships are treated
as effective hedges as long as the future issuances of liabilities remain
probable and the hedges continue to meet the requirements of SFAS 133. Farmer
Mac expects to hedge the forecasted issuance of liabilities over a period that
ranges from a minimum of 1 year to a maximum of 15 years.
Farmer Mac measures the ineffectiveness of cash flow hedges in accordance with
SFAS 133 and reports this amount, if any, as a gain or loss on financial
derivatives and trading assets in the consolidated statement of operations. The
ineffectiveness for each of the years ended December 31, 2002 and 2001 was not
significant.
Basis Swaps:
Farmer Mac uses basis swaps to create comparable asset-liability positions.
Specifically, Farmer Mac uses basis swaps to hedge combined asset-liability
positions in which an asset and a liability with variable cash flows have
different interest rate bases. Basis swaps are used to convert the interest rate
index of the asset to the same index as the variable rate liability or vice
versa. These swaps are treated as effective hedge relationships if the index of
one leg of the swap is the same as the index of the identified asset and the
index of the other leg of the swap is the same as the index of the identified
liability. Farmer Mac measures ineffectiveness for basis swaps in accordance
with SFAS 133 and reports this amount as a gain or loss on financial derivatives
and trading assets in the consolidated statement of operations. The
ineffectiveness for each of the years ended December 31, 2002 and 2001 was not
significant.
A significant proportion of Farmer Mac's outstanding basis swaps are with a
related party. See Note 3 for additional information on these related party
transactions.
Forward Sale Agreements and Future Contracts:
Farmer Mac uses forward sale contracts involving government-sponsored enterprise
debt instruments and mortgage backed securities and futures contracts involving
U.S. Treasury securities to reduce the variability of future changes in interest
rates on forecasted issuances of liabilities. Farmer Mac measures
ineffectiveness in accordance with the provisions of SFAS 133. The
ineffectiveness for each of the years ended December 31, 2002 and 2001 was not
significant. The effective portion of the change in fair value of these
contracts is recorded in accumulated other comprehensive income/(loss), net of
tax. The amounts recorded in accumulated other comprehensive income/(loss) will
be recognized in the statements of operations as the hedged transactions affect
earnings.
The following table summarizes information related to financial derivatives in
cash flow hedging relationships, as of December 31, 2002:
Weighted-
Weighted- Weighted- Weighted- Average
Fair Value Average Average Average Remaining
Notional -------------------------- Pay Receive Forward Life
Amount Asset (Liability) Rate Rate Price (in Years)
--------------- ------------ ------------ ------------ ----------- ---------- ------------
(dollars in thousands)
Discount notes or medium-term notes:
Pay fixed interest rate swaps $ 642,798 $ - $(76,316) 5.92% 1.68% - 8.81
Agency forwards 41,218 - (463) - - 1.03 0.06
Loans or Farmer Mac Guaranteed
Securities and discount notes:
Basis swaps 326,846 - (11,703) 5.64% 2.10% - 12.42
--------------- ------------ ------------ ------------ -----------
Total cash flow hedges $ 1,010,862 $ - $(88,482) 5.83% 1.82%
--------------- ------------ ------------ ------------ -----------
As of December 31, 2002, Farmer Mac had approximately $62.7 million of net
after-tax unrealized losses on cash flow hedges included in accumulated other
comprehensive income/(loss). These amounts will be reclassified into earnings in
the same period or periods during which the hedged forecasted transactions
(either the payment of interest or issuance of discount notes) affect earnings
or immediately when it becomes probable that the original hedged forecasted
transaction will not occur within two months of the originally specified date.
During the next 12 months, Farmer Mac expects to reclassify approximately $7.0
million of the net after-tax unrealized losses included in accumulated other
comprehensive income/(loss) as of December 31, 2002.
Other Financial Derivatives:
Farmer Mac employs certain hedging strategies that do not meet the hedge
accounting criteria in SFAS 133. These financial derivatives are recorded on the
balance sheet at fair value as freestanding assets or liabilities and the
related changes in fair value are recognized in the consolidated statements of
operations as gains or losses on financial derivatives and trading assets.
The following table summarizes information related to Farmer Mac's other
financial derivatives as of December 31, 2002:
Weighted-
Weighted- Weighted- Weighted- Average
Fair Value Average Average Average Remaining
Notional -------------------------- Pay Receive Strike Life
Amount Asset (Liability) Rate Rate Price (in Years)
--------------- ------------ ------------ ------------ ----------- ---------- -----------
(dollars in thousands)
Pay fixed interest rate swaps $ 90,259 $ - $ (4,968) 5.35% 1.63% - 4.23
Basis swaps 23,944 - (783) 5.38% 1.70% - 4.30
Purchased caps 345,000 - - - - 8.50% 1.23
-------------- ------------ ------------ ------------ ------------
Total other financial derivatives $ 459,203 $ - $ (5,751) 5.35% 1.64%
-------------- ------------ ------------ ------------ ------------
For the years ended December 31, 2002 and 2001, Farmer Mac reported $4.4 million
and $0.8 million, respectively, of losses on financial derivatives that do not
qualify for hedge accounting and trading assets in the consolidated statements
of operations.
7. NOTES PAYABLE
Farmer Mac's borrowings consist of discount notes and medium-term notes, both of
which are unsecured general obligations of the Corporation. Discount notes
generally have maturities of one year or less, whereas medium-term notes have
maturities of one to 15 years.
The following table sets forth information related to Farmer Mac's borrowings
for 2002 and 2001:
2002 2001
---------------------------------------------------------- ---------------------------------------------------
Outstanding as of Average Outstanding Maximum Outstanding as of Average Outstanding Maximum
December 31, 2002 During Year Outstanding at December 31, 2001 During Year Outstanding at
------------------- --------------------- Any ------------------- ------------------- Any
Amount Rate Amount Rate Month End Amount Rate Amount Rate Month End
--------- --------- ---------- ---------- ---------------- --------- --------- ---------- --------- ------------
(dollars in thousands)
Due within one
year:
Discount notes $2,777,206 2.71% $2,533,762 2.65% $2,815,784 $2,197,427 2.80% $2,175,087 4.39% $2,240,965
Current portion
of medium-
term notes 118,540 4.61% 35,840 6.07%
----------- --------- ----------- --------
2,895,746 2.79% 2,233,267 2.85%
Due after one
year:
Medium-term
notes due in:
2003 - - 83,326 5.70%
2004 153,753 4.57% 121,309 5.40%
2005 245,664 5.61% 148,469 6.62%
2006 157,227 5.70% 119,138 5.82%
2007 59,014 5.36% 12,700 7.41%
2008 68,872 5.56% 70,514 5.67%
Thereafter 300,788 6.57% 413,007 6.28%
------------ -------- ----------- --------
985,318 5.74% 968,463 6.09%
------------ -------- ----------- --------
Total $3,881,064 3.54% $3,201,730 3.83%
------------ -------- ----------- --------
Certain of Farmer Mac's medium-term notes are callable. Callable notes give
Farmer Mac the option to redeem the notes at par value on a specified call date
or at any time on or after a specified call date. The following table summarizes
the maturities, amounts and costs for callable notes by call period as of
December 31, 2002.
Callable Debt as of
December 31, 2002
-----------------------------------------
Maturity Amount Rate
------------ -------------- ------------
(dollars in thousands)
Callable in:
2003 2003-2006 $ 83,700 3.95%
2004 2011 3,400 5.80%
-------------- ------------
$ 87,100 4.02%
-------------- ------------
The following schedule summarizes the earliest repricing date of total
borrowings outstanding as of December 31, 2002, including callable and
non-callable medium-term notes, assuming callable notes are redeemed at the
initial call date.
Earliest Repricing Date of
Borrowings Outstanding
-----------------------------
Weighted-
Average
Amount Rate
--------------- ------------
(dollars in thousands)
Debt repricing in:
2003 $ 2,944,446 2.36%
2004 157,153 4.59%
2005 234,664 5.70%
2006 119,527 5.64%
2007 59,014 5.36%
2008 68,872 5.56%
Thereafter 297,388 6.58%
--------------- ------------
Total $ 3,881,064 3.18%
--------------- ------------
During 2002 and 2001, Farmer Mac called $49.3 million and $57.7 million of
callable medium-term notes, respectively.
Authority to Borrow from the Treasury of the United States
Farmer Mac's statutory charter authorizes Farmer Mac to borrow, in extreme
circumstances, up to $1.5 billion from the Secretary of the Treasury, if
necessary, to fulfill its obligations under any guarantee. The debt would bear
interest at a rate determined by the Secretary of the Treasury based on the then
current cost of funds to the United States. The charter requires the debt to be
repaid within a reasonable time. To date, Farmer Mac has not utilized this
borrowing authority.
Extraordinary Gains and Losses
During first quarter 2002, Farmer Mac recognized a net after-tax extraordinary
gain of $1.6 million resulting from the repurchase of $43.8 million of
outstanding Farmer Mac debt. During second quarter 2002, Farmer Mac recognized a
net after-tax extraordinary gain of $0.6 million resulting from the repurchase
of $18.9 million of outstanding Farmer Mac debt. During fourth quarter 2002,
Farmer Mac recognized a net after-tax extraordinary loss of $1.3 million
resulting from the repurchase of $41.0 million of outstanding Farmer Mac debt.
All of these repurchases were from outstanding Farmer Mac debt that had a
maturity date of October 14, 2011 and an interest rate of 5.4 percent. These
debt securities were replaced with new fixed-rate funding to the same maturity
dates at more attractive interest rates, which preserves Farmer Mac's
asset-liability match and reduces future interest expense. The combined net
after-tax extraordinary gain resulting from the repurchase of outstanding Farmer
Mac debt in 2002 was $0.9 million.
8. ALLOWANCE FOR LOSSES AND CONCENTRATIONS OF CREDIT RISK
Allowance for Losses
Farmer Mac maintains an allowance for losses to cover probable estimated
principal and interest losses on all loans held (allowance for loan losses),
loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs
(reserve for losses) and real estate owned (REO valuation allowance). No
allowance for losses has been provided for Farmer Mac I Guaranteed Securities
issued prior to the 1996 Act or for Farmer Mac II Securities. See Note 2(e),
Note 2(j), Note 5 and Note 12 for more information about Farmer Mac Guaranteed
Securities.
The allowance for losses is increased through periodic provisions for losses
charged to expense and reduced by charge-offs for actual losses, net of
recoveries that are recognized if liquidation proceeds exceed previous
estimates. Charge-offs represent losses on the outstanding principal balance,
any interest payments previously accrued or advanced and expected costs of
liquidation.
The following is a summary of the changes in the allowance for losses for each
year in the three-year period ended December 31, 2002:
---------------------------------------------------------
Allowance REO Total
for Loan Valuation Reserve Allowance
Losses Allowance for Losses for Losses
-------------- -------------- ------------- -------------
(in thousands)
Balances as of January 1, 2000 $ 120 $ - $ 6,464 $ 6,584
Provision for losses 300 - 4,439 4,739
Net charge-offs - - - -
-------------- -------------- ------------- -------------
Balances as of December 31, 2000 $ 420 $ - $ 10,903 $ 11,323
-------------- -------------- ------------- -------------
Provision for losses 600 - 6,125 6,725
Net allocation of
allowance (5) (61) 66 -
Net charge-offs 337 61 (2,562) (2,164)
-------------- -------------- ------------- -------------
Balances as of December 31, 2001 $ 1,352 $ - $ 14,532 $ 15,884
-------------- -------------- ------------- -------------
Provision for losses 1,340 - 6,883 8,223
Net allocation of
allowance 3,221 1,284 (4,505) -
Net charge-offs (3,251) (692) (153) (4,096)
-------------- -------------- ------------- -------------
Balances as of December 31, 2002 $ 2,662 $ 592 $ 16,757 $ 20,011
-------------- -------------- ------------- -------------
All loans that Farmer Mac purchases, issues guarantees with respect to, or
commits to purchase under an LTSPC in the Farmer Mac I program are underwritten
for conformance to Farmer Mac's underwriting and appraisal standards and Farmer
Mac believes the credit risk is the same. Accordingly, management establishes
general allowances for loans held and loans underlying LTSPCs and Farmer Mac
Guaranteed Securities collectively.
The following table presents Farmer Mac's reserve for losses for all post-1996
Act Farmer Mac I Guaranteed Securities and LTSPCs on a pro rata basis as of
December 31, 2002 and 2001.
Reserve for Losses on LTSPCs and
Post-1996 Act Farmer Mac I Guaranteed Securities
- -----------------------------------------------------------------------------------------------------
December 31, December 31,
2002 2001
----------------- ----------------
(in thousands)
On-balance sheet Farmer Mac I Guaranteed Securities $ 4,036 $ 6,030
Off-balance sheet Farmer Mac I Guaranteed Securities 1,280 1,890
LTSPCs 11,441 6,612
----------------- ----------------
Total reserve for losses $ 16,757 $ 14,532
----------------- ----------------
When certain criteria are met, such as the default of the borrower, Farmer Mac
has the option to purchase the defaulted loans underlying Farmer Mac Guaranteed
Securities and is obligated to purchase those underlying an LTSPC. These
acquisitions are recorded in the consolidated financial statements at their fair
value. Fair value is determined by appraisal or other appropriate valuation
method. In September 2002, Farmer Mac adopted EITF 02-9, which requires that
Farmer Mac record at acquisition the difference between each loan's acquisition
cost and its fair value, if any, as a charge to the reserve for losses. Prior to
the adoption of EITF 02-9, any specific allowance that had been established for
the off-balance sheet obligation would be transferred from the reserve for
losses to the allowance for loan losses (referred to as "net allocation of the
allowance" in the table above). Upon the receipt of each loan's updated
appraisal or estimation of value, the difference between the acquisition cost of
the loan and its fair value, if any, was recorded as a charge to the allowance
for loan losses.
A portion of the allowance for losses is specifically allocated to impaired
loans when the fair value of the collateral, less the estimated selling cost, is
less than the cost basis in the loan. The balance of impaired loans, both on-
and off-balance sheet, and the related allowance specifically allocated to those
impaired loans as of December 31, 2002 and 2001 are summarized in the following
table:
2002 2001
-------------------------------------- ---------------------------------------
Balance Allowance Net Balance Balance Allowance Net Balance
------------ ------------ ------------ ------------ ----------- -------------
(in thousands)
Impaired loans with:
Specific allowance for losses $ 12,137 $ (2,036) $ 10,101 $ 11,174 $ (3,450) $ 7,724
No specific allowance for losses 63,171 - 63,171 47,105 - 47,105
------------ ------------ ------------ ----------- ----------- ------------
Total $ 75,308 $ (2,036) $ 73,272 $ 58,279 $ (3,450) $ 54,829
------------ ------------ ------------ ----------- ----------- ------------
In accordance with the terms of all applicable trust agreements, Farmer Mac
acquires all loans that collateralize Farmer Mac Guarantee Securities that
become and remain 90 days or more past due on the next subsequent loan payment
date. During 2002, Farmer Mac purchased 79 defaulted loans having a principal
balance of $46.4 million from pools underlying Farmer Mac Guaranteed Securities
and LTSPCs. During 2001, Farmer Mac made 12 such purchases for a total of $8.3
million. The following table presents Farmer Mac's purchases of defaulted loans
underlying Farmer Mac I Guaranteed Securities and LTSPCs.
For the Year Ended
December 31,
---------------------
2002 2001
---------- ----------
(in thousands)
Defaulted loans purchased underlying
off-balance sheet Farmer Mac I
Guaranteed Securities $17,386 $6,005
Defaulted loans underlying
on-balance sheet Farmer Mac I
Guaranteed Securities transferred
to loans
25,675 526
Defaulted loans purchased underlying
underlying LTSPCs
3,386 1,751
---------- ----------
Total $46,447 $8,282
---------- ----------
Farmer Mac recognized interest income on impaired loans of approximately $0.6
million and $1.7 million during the years ended December 31, 2002 and 2001,
respectively. During 2002, Farmer Mac's average investment in impaired loans and
loans underlying on-balance sheet Farmer Mac Guaranteed Securities was $71.0
million.
Concentrations of Credit Risk
The following table sets forth the geographic and commodity diversification, as
well as the range of loan-to-value ratios, for all loans held and loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs as of
December 31, 2002 and 2001:
As of December 31,
---------------------------------
2002 2001
--------------- --------------
(in thousands)
By geographic region (1):
Northwest $ 1,167,331 $ 1,100,423
Southwest 2,273,846 1,489,882
Mid-North 518,439 423,044
Mid-South 233,997 136,623
Northeast 298,340 196,267
Southeast 329,681 163,009
--------------- ---------------
Total $ 4,821,634 $ 3,509,248
--------------- ---------------
By commodity:
Crops $ 2,085,963 $ 1,568,976
Livestock 987,533 672,364
Permanent plantings 1,341,165 1,061,209
Part-time farms 367,823 160,146
Other 39,150 46,553
--------------- ---------------
Total $ 4,821,634 $ 3,509,248
--------------- ---------------
By loan-to-value:
0.00% to 40.00% $ 1,246,891 $ 899,226
40.01% to 50.00% 1,046,915 753,382
50.01% to 60.00% 1,339,891 898,810
60.01% to 70.00% 1,066,419 859,084
70.01% to 80.00% 106,493 84,476
80.01% to 90.00% 15,025 14,270
--------------- ---------------
Total $ 4,821,634 $ 3,509,248
--------------- ---------------
(1) Geographic regions: Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South (KS,
OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA, RI, TN,
VA, VT, WV); Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY); Southeast (AL,
AR, FL, GA, LA, MS, SC); Southwest (AZ, CA, CO, HI, NM, NV, UT).
Loan-to-value ratios are based on collateral values at origination of the loan
and are calculated by dividing the loan principal balance at the time of
guarantee, purchase or commitment by the appraised value at the date of loan
origination or, when available, an updated appraised value at the time of
guarantee, purchase or commitment. Current loan-to-value ratios may be higher or
lower than the original loan-to-value ratios.
9. STOCKHOLDERS' EQUITY
Common Stock
Farmer Mac has three classes of common stock outstanding:
o Class A voting common stock, which may be held only by banks,
insurance companies and other financial institutions or similar
entities that are not institutions of the Farm Credit System. By
statute, no holder of Class A voting common stock may directly or
indirectly be a beneficial owner of more than 33 percent of the
outstanding shares of Class A voting common stock;
o Class B voting common stock, which may be held only by institutions of
the Farm Credit System. There are no restrictions on the maximum
holdings of Class B voting common stock; and
o Class C non-voting common stock, which has no ownership restrictions.
Dividends have not been paid to any common stockholders nor does Farmer Mac
expect to pay dividends in the foreseeable future. Farmer Mac's ability to
declare and pay a dividend could be restricted if it failed to comply with
regulatory capital requirements.
Preferred Stock
On May 6, 2002 the Corporation issued 700,000 shares of 6.40 percent Cumulative
Preferred Stock, Series A, which has a redemption price and liquidation
preference of $50.00 per share, plus accrued and unpaid dividends. The preferred
stock does not have a maturity date. Beginning on June 30, 2012, Farmer Mac has
the option to redeem the preferred stock at any time, in whole or in part, at
the redemption price of $50.00 per share, plus accrued and unpaid dividends
through and including the redemption date. Farmer Mac pays cumulative dividends
on the preferred stock quarterly in arrears, when and if declared by the board
of directors. The costs of issuing the preferred stock were charged to
additional paid-in capital.
Stock Option Plan
In 1992 and 1996, Farmer Mac adopted stock option plans for officers to acquire
shares of Class C non-voting common stock. Under the 1992 plan, stock options
granted were exercisable immediately, and, if not exercised, will expire 10
years from the date of grant. The exercise price of options under the 1992 plan,
which were granted in 1992 and 1993, is $2.19 per share. The maximum number of
options that could be issued under the 1992 plan was 345,000, 315,000 of which
were issued, net of cancellations. Under the 1996 plan, stock options awarded
under the plan vested annually in thirds, with the last installment having
vested in June 1998. If not exercised, any options granted under the 1996 plan
will expire 10 years from the date of grant. The exercise price of options
granted under the 1996 plan, which were issued in 1996, is $2.63. The maximum
number of options that could be issued under the 1996 plan was 338,490, all of
which were issued.
In 1997, Farmer Mac adopted a new stock option plan for directors, officers and
other employees, the terms of which are generally the same as for the 1996 plan,
except that options issued to directors since June 1, 1998, if not exercised,
will expire five years from the date of grant. Of the 3,750,000 shares
authorized to be issued under the 1997 plan, 1,686,292 have been issued, net of
cancellations. Options granted under the 1997 plan during 2002 have exercise
prices ranging from $26.25 to $45.06 per share. For all stock options granted
under all three of Farmer Mac's plans, the exercise price was equal to the
closing price of the Class C common stock on or immediately preceding the grant
date.
The following table summarizes stock option activity for 2002 and 2001:
2002 2001
------------------------------ --------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------------- --------------- ------------- -----------
Outstanding, beginning of year 1,416,426 $ 17.61 1,546,896 $ 13.39
Granted 270,421 28.97 278,411 31.17
Exercised (39,736) 15.64 (382,588) 10.60
Canceled (10,000) 31.24 (26,293) 17.77
------------- --------------- ------------- -----------
Outstanding, end of year 1,637,111 $ 19.45 1,416,426 $ 17.61
------------- --------------- ------------- -----------
Options exercisable at year end 1,368,884 1,079,052
------------- -------------
The cancellations of stock options during 2002 and 2001 were due to unvested
options terminating in accordance with the provisions of the applicable stock
option plans upon directors' or employees' departures from Farmer Mac.
The following table summarizes information regarding options outstanding as of
December 31, 2002:
Options
Options Outstanding Exercisable
------------------------------ --------------
Weighted-
Average
Remaining
Exercise Number of Contractual Number of
Price Shares Life Shares
------------- -------------- --------------- --------------
$ 2.19 90,000 0.5 years 90,000
2.63 165,087 3.5 years 165,087
11.83 63,312 4.5 years 63,312
12.67 1,200 5.7 years 1,200
12.92 4,050 4.6 years 4,050
15.13 340,881 6.5 years 340,881
16.38 25,813 7.7 years 25,813
18.13 5,000 7.8 years 5,000
18.25 3,300 4.9 years 3,300
19.38 20,213 6.7 years 20,213
20.00 140,886 3.7 years 140,886
21.19 3,000 7.9 years 3,000
22.08 237,495 5.0 years 237,495
22.94 1,500 6.6 years 1,500
26.20 2,000 8.2 years 1,000
26.25 15,000 9.7 years 5,000
26.92 500 8.3 years 250
27.75 3,000 8.1 years 1,500
29.10 247,255 8.1 years 82,419
29.56 1,000 9.7 years -
31.02 4,627 8.5 years 3,100
31.20 8,750 8.7 years 5,833
31.24 250,042 7.0 years 166,695
31.50 1,500 8.4 years 750
34.90 1,000 8.7 years 500
34.91 200 8.7 years 100
45.06 500 9.3 years -
-------------- ------------
1,637,111 1,368,884
-------------- -------------
The weighted-average fair values of options granted in 2002, 2001 and 2000 were
$13.50, $11.61 and $6.13, respectively, which under the fair value-based method
of accounting for stock-based compensation cost would have reduced net income
available to common stockholders by $2.4 million, $2.1 million and $1.9 million
for 2002, 2001 and 2000, respectively. The fair values were estimated using the
Black-Scholes option pricing model based on the following assumptions:
2002 2001 2000
----------- ---------- -----------
Risk-free interest rate 5.2% 5.4% 6.3%
Expected years until exercise 5 years 5 years 5 years
Expected stock volatility 40.0% 47.1% 42.7%
Dividend yield 0.0% 0.0% 0.0%
Restricted Stock
In addition to stock options, the Corporation, by authorization of the board of
directors, may issue restricted stock to employees. Restricted stock entitles
participants to all the rights of a stockholder, except that some of the shares
awarded are subject to forfeiture if the participant is not employed by Farmer
Mac at the end of the restriction period and other shares are not subject to
forfeiture but may not be disposed of by the participant during the restriction
period. The vesting or restriction period is usually one to two years. The value
of restricted stock granted to employees is amortized over the vesting period.
During 2002, 2001 and 2000, 32,338, 28,602 and 53,974 shares of restricted
stock, respectively, were granted, resulting in compensation expense of $0.9
million, $0.9 million and $0.8 million being recognized during the respective
years.
10. INCOME TAXES
The components of the provision for federal income taxes for the years ended
December 31, 2002, 2001 and 2000 were as follows:
2002 2001 2000
------------- ------------- -------------
(in thousands)
Current $ 12,289 $ 10,669 $ 7,602
Deferred (2,959) (2,250) (1,853)
------------- ------------- -------------
$ 9,330 $ 8,419 $ 5,749
------------- ------------- -------------
A reconciliation of tax at the statutory federal tax rate to the income tax
provision for the years ended December 31, 2002, 2001 and 2000 is as follows:
2002 2001 2000
----------- ----------- -----------
(in thousands)
Tax expense at statutory rate $ 10,917 $ 8,899 $ 5,665
Effect of non-taxable
dividend income (1,596) (386) -
Other 9 (94) 84
----------- ----------- -----------
Income tax expense $ 9,330 $ 8,419 $ 5,749
----------- ----------- -----------
Statutory tax rate 35.0% 35.0% 35.0%
Effective tax rate 29.9% 33.1% 35.5%
The components of the deferred tax assets and liabilities as of December 31,
2002 and 2001 were as follows:
2002 2001
------------ -----------
(in thousands)
Deferred tax assets:
Reserve for losses on guaranteed securities $ 7,004 $ 5,639
Unrealized loss on financial derivatives
designated as cash flow hedges 33,777 8,532
Other 2,442 848
------------ -----------
Total deferred tax assets 43,223 15,019
Deferred tax liability:
Unrealized gain on available-for-sale securities 33,557 13,153
------------ -----------
Total deferred tax liability 33,557 13,153
------------ -----------
Net deferred tax asset $ 9,666 $ 1,866
------------ -----------
A valuation allowance is required to reduce the net deferred tax asset to an
amount that is more likely than not to be realized. No valuation allowance was
considered necessary as of December 31, 2002 and 2001.
11. EMPLOYEE BENEFITS
On December 28, 1989, Farmer Mac adopted a defined contribution retirement plan
for all of its employees. Through 2001, Farmer Mac contributed 13.2 percent of
the lesser of an individual's gross salary or $170,000, plus 5.7 percent of the
difference between (1) the lesser of the gross salary or $170,000 and (2) the
Social Security Taxable Wage Base. The Economic Growth and Tax Relief
Reconciliation Act of 2001 increased the $170,000 to $200,000, adjusted for
inflation, beginning in 2002. Employees in service prior to December 7, 2000 are
fully vested in contributions made to the plan after they have been employed by
Farmer Mac for two years. Employees beginning service on and after December 7,
2000 are fully vested after they have been employed for three years. Expense for
this plan for the years ended December 31, 2002, 2001 and 2000 was $384,000,
$376,000 and $327,000, respectively.
12. OFF-BALANCE SHEET GUARANTEES AND LTSPCs, COMMITMENTS AND CONTINGENCIES
Farmer Mac offers approved agricultural and rural residential mortgage lenders
two Farmer Mac I off-balance sheet alternatives to increase their liquidity or
lending capacity while retaining the cash flow benefits of their loans. To be
eligible for these Farmer Mac I secondary market transactions, a loan must meet
Farmer Mac's credit underwriting, appraisal and documentation standards.
Accordingly, Farmer Mac believes the credit risk it assumes in each of these
transaction alternatives is the same.
Off-Balance Sheet Farmer Mac Guaranteed Securities
Periodically Farmer Mac transfers agricultural mortgage loans into trusts that
are used as vehicles for the securitization of the transferred assets and the
beneficial interests in the loans are sold to third party investors. The table
below summarizes certain cash flows received from and paid to these trusts.
Year ended December 31,
-------------------------------
2002 2001 2000
--------- ---------- ----------
(in thousands)
Proceeds from new securitizations $47,682 $ 82,995 $ 159,910
Guarantee fees received 775 579 250
Purchase of assets from the trusts 17,386 6,005 2,273
Servicing advances 1,235 819 64
Repayments of servicing advances 1,134 52 -
Farmer Mac is liable under its guarantee to ensure that the securities make
timely payments to investors of principal and interest based on the underlying
loans, regardless of whether the trust has actually received such scheduled loan
payments. As consideration for Farmer Mac's assumption of the credit risk on
these mortgage pass-through certificates, Farmer Mac receives an annual
guarantee fee, recognized as earned on an accrual basis over the life of the
loan that is based upon the outstanding balance of the Farmer Mac Guaranteed
Security.
Farmer Mac is required to perform under its obligation when the underlying loans
for the off-balance sheet Farmer Mac Guaranteed Securities do not make their
scheduled installment payments. When a loan underlying a Farmer Mac I Guaranteed
Security becomes 90 days or more past due, Farmer Mac has the option to
repurchase the loan from the trust and generally does repurchase such loans
thereby reducing the principal balance of the outstanding Farmer Mac Guaranteed
Securities.
The following table presents the maximum principal amount of potential
undiscounted future payments that Farmer Mac could be required to make under
off-balance sheet Farmer Mac Guaranteed Securities as of December 31, 2002 and
2001, not including offsets provided by any recourse provisions, recoveries from
third parties or collateral for the underlying loans.
Outstanding Balance of
Off-Balance Sheet Farmer Mac Guaranteed Securities
- ---------------------------------------------------------------------------
December 31, December 31,
2002 2001
----------------- ---------------
(in thousands)
Farmer Mac I Guaranteed Securities:
Post-1996 Act $ 299,940 $ 366,749
Pre-1996 Act - 461
----------------- ---------------
Total Farmer Mac I 299,940 367,210
Farmer Mac II Guaranteed Securities 67,109 78,409
----------------- ---------------
Total Farmer Mac I and II $ 367,049 $ 445,619
----------------- ---------------
If Farmer Mac exercises its option to purchase a loan that is collateral for a
Farmer Mac I Guaranteed Security, Farmer Mac would have the right to enforce the
terms of the loan, and in the event of a default, would have access to the
underlying collateral. Farmer Mac typically recovers a significant portion of
the value of defaulted loans purchased either through borrower payments, loan
payoffs, payments by third parties or foreclosure and sale.
Farmer Mac has recourse to the USDA for any amounts advanced for the timely
payment of principal and interest on Farmer Mac II Guaranteed Securities. That
recourse is the USDA guarantee, a full faith and credit obligation of the United
States that becomes enforceable if a lender fails to repurchase the
USDA-guaranteed portion from its owner within 30 days after written demand from
the owner when (a) the borrower under the guaranteed loan is in default not less
than 60 days in the payment of any principal or interest due on the
USDA-guaranteed portion, or (b) the lender has failed to remit to the owner the
payment made by the borrower on the USDA-guaranteed portion or any related loan
subsidy within 30 days after the lender's receipt thereof.
As of December 31, 2002, the weighted-average remaining maturity of all loans
underlying off-balance sheet Farmer Mac Guaranteed Securities was 12.4 years.
The portion of the reserve for losses that was attributable to off-balance sheet
Farmer Mac Guaranteed Securities was $1.3 million and $1.9 million as of
December 31, 2002 and 2001, respectively. For additional detail on Farmer Mac's
methodology for determining the reserve for losses, see Note 2(j) and Note 8.
Long-Term Standby Purchase Commitments
An LTSPC is a commitment by Farmer Mac to purchase eligible loans on an
undetermined future date. In consideration for Farmer Mac's assumption of the
credit risk on loans underlying an LTSPC, Farmer Mac receives an annual
commitment fee on the outstanding balance of those loans. The fee is recognized
as earned on an accrual basis over the life of the loan.
An LTSPC permits a seller to nominate from its portfolio a segregated pool of
loans, which are retained in the seller's portfolio. Upon nomination, Farmer Mac
reviews the loan portfolio to confirm that it is in compliance with Farmer Mac's
underwriting standards. Upon Farmer Mac's acceptance of the conforming loans,
the seller effectively transfers the credit risk on those loans to Farmer Mac,
thereby reducing its credit and concentration exposures and, consequently, its
regulatory capital requirements and its loss reserve requirements. Credit risk
is transferred via Farmer Mac's commitment to purchase some or all of the
segregated loans from the counterparty based upon Farmer Mac's original credit
review and acceptance of the credit risk on the loans.
The specific events or circumstances that would require Farmer Mac to perform
under its LTSPCs include the 1) determination by the holder of the LTSPC to sell
some or all of the loans under the LTSPC to Farmer Mac or 2) the failure of the
borrower under any loan to make installment payments under that loan for a
period of 120 days.
The LTSPC commits Farmer Mac to purchase these loans:
o At par plus accrued interest, if the loans become four months
delinquent;
o At a mark-to-market price, if the loans are not delinquent and are
standard Farmer Mac cash window loan products;
o At a mark-to-market negotiated price for all (but not some) loans in
the pool, if they are not four months delinquent; or
o In exchange for Farmer Mac Guaranteed Securities.
As of December 31, 2002 and 2001, 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 $2.7 billion and
$1.9 billion respectively.
If requested to purchase the underlying loans, Farmer Mac would have the right
to enforce the terms of the loans, and in the event of loan default, would have
access to the underlying collateral. To date Farmer Mac has not incurred any
charge-offs on LTSPCs. However, Farmer Mac believes that credit risk that is
assumed in the LTSPC transactions is the same as the credit risk that is assumed
for its other products. Farmer Mac believes that it will generally recover a
significant portion of the value of the defaulted loans purchased either through
borrower payments, loan payoffs, payments by third parties or foreclosure and
sale.
As of December 31, 2002, the weighted-average remaining maturity of all loans
underlying LTSPCs was 15.4 years. The portion of the reserve for losses that was
attributable to LTSPCs was $11.4 million and $6.6 million as of December 31,
2002 and 2001, respectively. For additional detail on Farmer Mac's methodology
for determining the reserve for losses, see Note 2(j) and Note 8.
Commitments
Farmer Mac enters into mandatory and optional delivery commitments to purchase
loans. Most loan purchase commitments entered into by Farmer Mac are mandatory
commitments, in which Farmer Mac charges a fee to extend or cancel the
commitment. All optional loan purchase commitments are sold forward under
optional commitments to deliver Farmer Mac Guaranteed Securities that may be
cancelled by Farmer Mac without penalty. As of December 31, 2002, commitments to
purchase Farmer Mac I and II loans totaled $26.2 million, of which $4.5 million
were optional commitments. Outstanding loan purchase commitments as of December
31, 2001, totaled $21.1 million, of which $4.7 million were optional
commitments.
Farmer Mac is exposed to interest rate risk from the time it commits to purchase
a loan to the time it either: (a) sells Farmer Mac Guaranteed Securities backed
by the loan or (b) issues debt to retain the loan in its portfolio. There were
no commitments to sell Farmer Mac Guaranteed Securities as of December 31, 2002
and 2001. Farmer Mac manages the interest rate risk related to loans not yet
sold or funded as a retained investment through the use of forward sale
contracts involving government sponsored enterprise debt and mortgage-backed
securities and futures contracts involving U.S. Treasury securities. See Note
2(h) and Note 6 for information regarding financial derivatives.
Rental expense for Farmer Mac's office space was $0.5 million, $0.3 million and
$0.3 million for each of the years ended December 31, 2002, 2001 and 2000,
respectively. The future minimum lease payments under Farmer Mac's
non-cancelable lease for its office space are as follows:
Future Minimum Lease Payments
- -----------------------------------------
(in thousands)
2003 $ 531
2004 545
2005 558
2006 573
2007 586
Thereafter 2,498
---------------
Total $ 5,291
---------------
13. FAIR VALUE DISCLOSURES
The following table sets forth the estimated fair values and the carrying values
for financial assets and liabilities as of December 31, 2002 and 2001.
Significant estimates, assumptions and present value calculations are used for
the following disclosure, resulting in a high degree of subjectivity in the
indicated fair values. Accordingly, these estimated fair values are not
necessarily indicative of what Farmer Mac would realize in an actual sale or
purchase.
As of December 31,
-------------------------------------------------------
2002 2001
--------------------------- ---------------------------
Carrying Carrying
Fair Value Amount Fair Value Amount
------------- ------------- -------------- -------------
(in thousands)
Financial assets:
Cash and cash equivalents $ 723,800 $ 723,800 $ 437,831 $ 437,831
Investment securities 831,299 830,409 1,007,691 1,007,954
Farmer Mac Guaranteed Securities 1,632,883 1,608,507 1,724,697 1,690,376
Loans 1,008,706 963,461 203,144 198,003
Financial derivatives 317 317 15 15
Financial liabilities:
Notes payable:
Due within one year 2,863,224 2,895,746 2,234,240 2,233,267
Due after one year 1,168,760 985,318 1,020,989 968,463
Financial derivatives 94,314 94,314 20,762 20,762
Farmer Mac estimates the fair value of its loans and Farmer Mac Guaranteed
Securities by discounting the projected cash flows of these instruments at
projected interest rates. Because the cash flows of these instruments may be
interest rate path dependent, these values and projected discount rates are
derived using a Monte Carlo simulation model. Notes payable and interest rate
contracts are valued using a similar methodology. For investment securities,
futures contracts and commitments to purchase and sell government sponsored
enterprise debt and mortgage-backed securities, fair values are based on market
quotes. The carrying value of cash and cash equivalents approximates fair value.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2002 Quarter Ended 2001 Quarter Ended
------------------------------------------------- ------------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
----------- ------------ ----------- ----------- ----------- ------------ ----------- -----------
(dollars in thousands, except per share amounts)
Interest income $43,643 $45,761 $43,491 $37,144 $39,253 $45,160 $46,369 $50,431
Interest expense 34,914 35,784 34,641 29,674 32,056 37,292 39,947 44,978
----------- ------------ ----------- ----------- ----------- ------------------------- ----------
Net interest income 8,729 9,977 8,850 7,470 7,197 7,868 6,422 5,453
Provision for loan losses (389) (324) (315) (312) (300) (150) (100) (50)
----------- ------------ ----------- ----------- ----------- ------------ ------------ ----------
Net interest income after
provision for loan losses 8,340 9,653 8,535 7,158 6,897 7,718 6,322 5,403
Guarantee and commitment fees 5,114 4,874 4,723 4,567 4,534 4,177 3,669 3,428
Gains/(Losses) on derivatives (2,903) (1,451) (230) 224 317 (295) (159) (589)
Miscellaneous 114 458 368 392 140 137 116 166
----------- ------------ ----------- ----------- ----------- ------------ ------------ ----------
Total revenues 10,665 13,534 13,396 12,341 11,888 11,737 9,948 8,408
Total operating expenses 4,161 5,607 4,727 4,249 4,120 4,354 4,142 3,938
----------- ------------ ----------- ----------- ----------- ------------ ------------ ----------
Income before income taxes 6,504 7,927 8,669 8,092 7,768 7,383 5,806 4,470
Income tax expense 1,854 2,342 2,630 2,505 2,287 2,455 2,091 1,588
Cumulative effect of change
in accounting principles, - - - - - - - (726)
net of taxes
Extraordinary gain/(loss),
net of taxes (1,313) - 583 1,620 - - - -
----------- ------------ ----------- ----------- ----------- ------------ ------------ ----------
Net income 3,337 5,585 6,622 7,207 5,481 4,928 3,715 2,156
----------- ------------ ----------- ----------- ----------- ------------ ------------ ----------
Preferred stock dividends (560) (560) (336) - - - - -
----------- ------------ ----------- ----------- ----------- ------------------------- ----------
Net income available to
common stockholders $ 2,777 $ 5,025 $ 6,286 $ 7,207 $ 5,481 $ 4,928 $ 3,715 $ 2,156
----------- ------------ ----------- ----------- ----------- -------------------------- ---------
Earnings per share:
Basic net earnings $ 0.24 $ 0.43 $ 0.55 $ 0.62 $ 0.48 $ 0.43 $ 0.33 $ 0.19
Diluted net earnings $ 0.23 $ 0.42 $ 0.52 $ 0.59 $ 0.46 $ 0.41 $ 0.32 $ 0.18
Earnings per share before
cumulative effect of change
in accounting principles
and extraordinary items:
Basic net earnings $ 0.35 $ 0.43 $ 0.50 $ 0.48 $ 0.48 $ 0.43 $ 0.33 $ 0.26
Diluted net earnings $ 0.34 $ 0.42 $ 0.48 $ 0.46 $ 0.46 $ 0.41 $ 0.32 $ 0.25
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference to the
Corporation's Proxy Statement to be filed on or about April 18, 2003.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
Corporation's Proxy Statement to be filed on or about April 18, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
Corporation's Proxy Statement to be filed on or about April 18, 2003.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
Corporation's Proxy Statement to be filed on or about April 18, 2003.
Item 14. Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing date of
this Annual Report on Form 10-K, the Corporation's Chief Executive Officer and
Chief Financial Officer have concluded that the Corporation's disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14(c) and
15d-14(c)) are adequate and effective to ensure that information required to be
disclosed by the Corporation in reports that it files or submits under the
Exchange Act are recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in the Corporation's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements.
Refer to Item 8 above.
(2) Financial Statement Schedules.
All schedules are omitted since they are not applicable, not required or
the information required to be set forth therein is included in the consolidated
financial statements or in notes thereto.
(3) Exhibits.
* 3.1 - Title VIII of the Farm Credit Act of 1971, as most recently
amended by the Farm Credit System Reform Act of 1996, P.L.
104-105 (Form 10-K filed March 29, 1996).
* 3.2 - Amended and restated By-Laws of the Registrant (Form 10-Q
filed August 12, 1999).
+* 10.1 - Stock Option Plan (Previously filed as Exhibit 19.1 to
Form 10-Q filed August 14, 1992).
+* 10.1.1 - Amendment No. 1 to Stock Option Plan (Previously filed
as Exhibit 10.2 to Form 10-Q filed August 16, 1993).
+* 10.1.2 - 1996 Stock Option Plan (Form 10-Q filed August 14, 1996).
+* 10.1.3 - Amended and Restated 1997 Incentive Plan (Form 10-Q filed
August 14, 1997).
+* 10.2 - Employment Agreement dated May 5, 1989 between Henry D.
Edelman and the Registrant (Previously filed as Exhibit 10.4 to
Form 10-K filed February 14, 1990).
+* 10.2.1 - Amendment No. 1 dated as of January 10, 1991 to Employment
Contract between Henry D. Edelman and the Registrant (Previously
filed as Exhibit 10.4 to Form 10-K filed April 1, 1991).
+* 10.2.2 - Amendment to Employment Contract dated as of June 1, 1993
between Henry D. Edelman and the Registrant (Previously
filed as Exhibit 10.5 to Form 10-Q filed November 15, 1993).
___________________
* Incorporated by reference to the indicated prior filing.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 10.2.3 - Amendment No. 3 dated as of June 1, 1994 to Employment
Contract between Henry D. Edelman and the Registrant (Previously
filed as Exhibit 10.6 to Form 10-Q filed August 15, 1994).
+* 10.2.4 - Amendment No. 4 dated as of February 8, 1996 to Employment
Contract between Henry D. Edelman and the Registrant (Form 10-K
filed March 29, 1996).
+* 10.2.5 - Amendment No. 5 dated as of June 13, 1996 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 1996).
+* 10.2.6 - Amendment No. 6 dated as of August 7, 1997 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
November 14, 1997).
+* 10.2.7 - Amendment No. 7 dated as of June 4, 1998 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 1998).
+* 10.2.8 - Amendment No. 8 dated as of June 3, 1999 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 12, 1999).
+* 10.2.9 - Amendment No. 9 dated as of June 1, 2000 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 2000).
+* 10.2.10 - Amendment No. 10 dated as of June 7, 2001 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 2001).
+* 10.2.11 - Amendment No. 11 dated as of June 6, 2002 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 2002).
+* 10.3 - 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).
____________________
* Incorporated by reference to the indicated prior filing.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 10.3.2 - Amendment No. 2 dated February 14, 1991 to Employment Agreement
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.7 to Form 10-K filed April 1, 1991).
+* 10.3.3 - Amendment to Employment Contract dated as of June 1, 1993
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.9 to Form 10-Q filed November 15, 1993).
+* 10.3.4 - Amendment No. 4 dated June 1, 1993 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.10 to Form 10-K filed March 31,1994).
+* 10.3.5 - Amendment No. 5 dated as of June 1, 1994 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.12 to Form 10-Q filed August 15,1994).
+* 10.3.6 - Amendment No. 6 dated as of June 1, 1995 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 1995).
+* 10.3.7 - Amendment No. 7 dated as of February 8, 1996 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form 10-K
filed March 29, 1996).
+* 10.3.8 - Amendment No. 8 dated as of June 13, 1996 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 1996).
+* 10.3.9 - Amendment No. 9 dated as of August 7, 1997 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
November 14, 1997).
+* 10.3.10 - Amendment No. 10 dated as of June 4, 1998 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 1998).
+* 10.3.11 - Amendmen t 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).
___________________
* Incorporated by reference to the indicated prior filing.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 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).
+* 10.4 - Employment Contract dated as of September 1, 1997 between
Tom D. Stenson and the Registrant (Previously filed as Exhibit
10.8 to Form 10-Q filed November 14, 1997).
+* 10.4.1 - Amendment No. 1 dated as of June 4, 1998 to Employment Contract
between Tom D. Stenson and the Registrant (Previously filed as
Exhibit 10.8.1 to Form 10-Q filed August 14, 1998).
+* 10.4.2 - Amendment No. 2 dated as of June 3, 1999 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed
August 12, 1999).
+* 10.4.3 - Amendment No. 3 dated as of June 1, 2000 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed
August 14, 2000).
+* 10.4.4 - Amendment No. 4 dated as of June 7, 2001 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed
August 14, 2001).
+* 10.4.5 - Amendment No. 5 dated as of June 6, 2002 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed
August 14, 2002).
+* 10.5 - 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.
+ 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).
* 10.6 - Lease Agreement, dated June 28, 2001 between EOP - Two
Lafayette, filedL.L.C. and the Registrant (Previously filed as
Exhibit 10.10 to Form 10-K filed March 27, 2002).
* 10.7 - Farmer Mac I Seller/Servicer Agreement dated as of August 7,
1996 between Zions First National Bank and the Registrant (Form
10-Q filed November 14, 2002).
* 10.8 - Medium-Term Notes U.S. Selling Agency Agreement dated as of
October 1, 1998 between Zions First National Bank and the
Registrant (Form 10-Q filed November 14, 2002).
* 10.9 - Discount Note Dealer Agreement dated as of September 18, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
*# 10.10 - ISDA Master Agreement and Credit Support Annex dated as of
June 26, 1997 between Zions First National Bank and the
Registrant (Form 10-Q filed November 14, 2002).
*# 10.11 - Master Central Servicing Agreement dated as of December 17, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
*# 10.11.1 - Amendment No. 1 dated as of February 26, 1997 to Master Central
Servicing Agreement dated as of December 17, 1996 between Zions
First National Bank and the Registrant (Form 10-Q filed
November 14, 2002).
*# 10.12 - Loan File Review and Underwriting Agreement dated as of
December 17, 1996 between Zions First National Bank and the
Registrant (Form 10-Q filed November 14, 2002).
*# 10.12.1 - Amendment No. 1 dated as of January 20, 2000 to Loan File
Review and Underwriting Agreement dated as of December 17, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
*# 10.13 - Long Term Standby Commitment to Purchase dated as of August
1, 1998 between AgFirst Farm Credit Bank and the Registrant
(Form 10-Q filed November 14, 2002).
__________________
* Incorporated by reference to the indicated prior filing.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
*# 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).
21 - Farmer Mac Mortgage Securities Corporation, a Delaware
corporation.
* 99.1 - Map of U.S. Department of Agriculture (Secretary of
Agriculture's) Regions (Previously filed as Exhibit 1.1 to Form
10-K filed April 1, 1991).
(b) Reports on Form 8-K.
On October 23, 2002, the Registrant filed a Current Report on Form 8-K that
attached a press release announcing the Registrant's financial results for third
quarter 2002 and a conference call to discuss those results.
On November 15, 2002, the Registrant filed a Current Report on Form 8-K
that attached as exhibits the certifications of the Registrant's Chief Executive
Officer and Chief Financial Officer that accompanied the Registrant's Quarterly
Report on Form 10-Q for the period ended September 30, 2002 as required pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
On December 11, 2002, the Registrant filed a Current Report on Form 8-K
that reported the declaration of a dividend on the Registrant's Preferred Stock
__________________
* Incorporated by reference to the indicated prior filing.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
/s/ Henry D. Edelman March 21, 2003
- ---------------------------------------- -------------------------------------
By: Henry D. Edelman Date
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ Fred L. Dailey Chairman of the Board and March 21, 2003
- -------------------------------- Director
Fred L. Dailey
/s/ Henry D. Edelman President and Chief Executive March 21, 2003
- -------------------------------- Officer (Principal Executive
Henry D. Edelman Officer)
/s/ Nancy E. Corsiglia Vice President - Finance, March 21, 2003
- -------------------------------- Chief Financial Officer
Nancy E. Corsiglia and Treasurer
(Principal Financial and
Accounting Officer)
Name Title Date
/s/ Dennis L. Brack Director March 21, 2003
- ---------------------------------------
Dennis L. Brack
/s/ Charles Eugene Branstool Director March 21, 2003
- ---------------------------------------
Charles Eugene Branstool
/s/ Grace T. Daniel Director March 21, 2003
- ---------------------------------------
Grace T. Daniel
/s/ Paul A. DeBriyn Director March 21, 2003
- ---------------------------------------
Paul A. DeBriyn
/s/ Kenneth E. Graff Director March 21, 2003
- ---------------------------------------
Kenneth E. Graff
/s/ W. David Hemingway Director March 21, 2003
- ---------------------------------------
W. David Hemingway
/s/ Mitchell A. Johnson Director March 21, 2003
- ---------------------------------------
Mitchell A. Johnson
/s/ Lowell L. Junkins Vice Chairman March 21, 2003
- --------------------------------------- and Director
Lowell L. Junkins
/s/ Charles E. Kruse Director March 21, 2003
- ---------------------------------------
Charles E. Kruse
/s/ James A. McCarthy Director March 21, 2003
- ---------------------------------------
James A. McCarthy
/s/ John G. Nelson Director March 21, 2003
- ---------------------------------------
John G. Nelson
/s/ Peter T. Paul Director March 21, 2003
- ---------------------------------------
Peter T. Paul
/s/ Marilyn Peters Director March 21, 2003
- ---------------------------------------
Marilyn Peters
/s/ John Dan Raines, Jr. Director March 21, 2003
- ---------------------------------------
John Dan Raines, Jr.
CERTIFICATIONS
I, Henry D. Edelman, certify that:
1. I have reviewed this annual report on Form 10-K of the Federal Agricultural
Mortgage Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/ Henry D. Edelman
-----------------------
Henry D. Edelman
Chief Executive Officer
I, Nancy E. Corsiglia, certify that:
1. I have reviewed this annual report on Form 10-K of the Federal Agricultural
Mortgage Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/ Nancy E. Corsiglia
------------------------
Nancy E. Corsiglia
Chief Financial Officer