As filed with the Securities and Exchange Commission
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on August 9, 2004
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004 Commission File Number 0-17440
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
Federally chartered instrumentality
of the United States 52-1578738
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1133 Twenty-First Street, N.W.,
Suite 600 20036
Washington, D.C.
(Address of principal executive (Zip code)
offices)
(202) 872-7700
(Registrant's telephone number, including area code)
-----------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of August 2, 2004, there were 1,030,780 shares of Class A Voting Common
Stock, 500,301 shares of Class B Voting Common Stock and 10,571,485 shares of
Class C Non-Voting Common Stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
The following interim condensed consolidated financial statements of the
Federal Agricultural Mortgage Corporation ("Farmer Mac" or the "Corporation")
have been prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. These interim condensed consolidated
financial statements reflect all normal and recurring adjustments that are, in
the opinion of management, necessary to present a fair statement of the
financial condition and the results of operations and cash flows of Farmer Mac
for the interim periods presented. Certain information and footnote disclosures
normally included in annual consolidated financial statements have been
condensed or omitted as permitted by such rules and regulations. Management
believes that the disclosures are adequate to present fairly the condensed
consolidated financial position, condensed consolidated results of operations
and condensed consolidated cash flows as of the dates and for the periods
presented. These condensed consolidated financial statements should be read in
conjunction with the audited 2003 consolidated financial statements of Farmer
Mac included in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2003. Results for interim periods are not necessarily indicative of
those that may be expected for the fiscal year.
The following information concerning Farmer Mac's interim condensed
consolidated financial statements is included in this report beginning on the
pages listed below:
Condensed Consolidated Balance Sheets as of June 30, 2004 and
December 31, 2003..............................................3
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 2004 and 2003...................4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2004 and 2003...........................5
Notes to Condensed Consolidated Financial Statements.............6
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
June 30, December 31,
2004 2003
------------- -------------
Assets:
Cash and cash equivalents $ 581,502 $ 623,674
Investment securities 1,061,475 1,064,782
Farmer Mac Guaranteed Securities 1,384,814 1,508,134
Loans held for sale 24,243 46,662
Loans held for investment 919,645 942,929
Allowance for loan losses (5,565) (5,967)
------------- -------------
Loans, net 938,323 983,624
Real estate owned, net of valuation allowance of
$0.5 million and $0.2 million 9,179 15,478
Financial derivatives 2,662 961
Interest receivable 51,216 58,423
Guarantee and commitment fees receivable 18,554 16,885
Deferred tax asset, net 10,461 10,891
Prepaid expenses and other assets 22,364 16,798
------------- -------------
Total Assets $ 4,080,550 $ 4,299,650
------------- -------------
Liabilities and Stockholders' Equity:
Liabilities:
Notes payable:
Due within one year $ 2,364,793 $ 2,799,384
Due after one year 1,360,338 1,136,110
------------- -------------
Total notes payable 3,725,131 3,935,494
Financial derivatives 51,566 67,670
Accrued interest payable 25,201 26,342
Guarantee and commitment obligation 16,714 14,144
Accounts payable and accrued expenses 22,692 29,574
Reserve for losses 13,187 13,172
------------- -------------
Total Liabilities 3,854,491 4,086,396
Stockholders' Equity:
Preferred Stock:
Series A, stated at redemption/liquidation value,
$50 per share, 700,000 shares authorized,
issued and outstanding 35,000 35,000
Common Stock:
Class A Voting, $1 par value, no maximum authorization,
1,030,780 shares issued and outstanding 1,031 1,031
Class B Voting, $1 par value, no maximum authorization,
500,301 shares issued and outstanding 500 500
Class C Non-Voting, $1 par value, no maximum authorization,
10,565,918 and 10,522,513 shares issued and outstanding
as of June 30, 2004 and December 31, 2003 10,566 10,523
Additional paid-in capital 89,546 88,652
Accumulated other comprehensive loss (214) (2,295)
Retained earnings 89,630 79,843
------------- -------------
Total Stockholders' Equity 226,059 213,254
------------- -------------
Total Liabilities and Stockholders' Equity $ 4,080,550 $ 4,299,650
------------- -------------
See accompanying notes to condensed consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Interest income:
Investments and cash equivalents $ 8,109 $ 8,890 $ 16,445 $ 18,496
Farmer Mac Guaranteed Securities 16,239 18,688 32,866 38,200
Loans 12,565 13,288 26,690 26,137
----------- ----------- ------------ ----------
Total interest income 36,913 40,866 76,001 82,833
Interest expense 29,074 31,501 58,695 63,594
----------- ----------- ------------ ----------
Net interest income 7,839 9,365 17,306 19,239
Provision for loan losses 230 (1,416) (2,563) (2,624)
----------- ----------- ------------ ----------
Net interest income after provision
for loan losses 8,069 7,949 14,743 16,615
Guarantee and commitment fees 5,251 5,111 10,473 10,205
Gains/(Losses) on financial derivatives
and trading assets (6,152) 3,669 (2,903) 7,003
Gain on sale of Farmer Mac Guaranteed Securities 367 - 367 -
Gains/(Losses) on the sale of
real estate owned 30 (225) (252) (102)
Miscellaneous income 1,960 138 2,482 389
----------- ----------- ------------ ----------
Total revenues 9,525 16,642 24,910 34,110
----------- ----------- ------------ ----------
Expenses:
Compensation and employee benefits 1,717 1,465 3,512 2,905
General and administrative 1,820 1,213 3,893 2,404
Regulatory fees 649 382 1,061 765
REO operating costs, net 268 - 343 -
Provision for losses 1,845 472 668 1,490
----------- ------------ ----------- ----------
Total operating expenses 6,299 3,532 9,477 7,564
----------- ------------ ----------- ----------
Income before income taxes 3,226 13,110 15,433 26,546
Income tax expense 706 4,184 4,526 8,636
---------- - ------------ ----------- ----------
Net income 2,520 8,926 10,907 17,910
---------- - ------------ ----------- ----------
Preferred stock dividends (560) (560) (1,120) (1,120)
---------- - ------------ ----------- ----------
Net income available to common stockholders 1,960 $ 8,366 $ 9,787 $ 16,790
---------- - ------------ ----------- ----------
Earnings per common share:
Basic earnings per common share $ 0.16 $ 0.72 $ 0.81 $ 1.44
Diluted earnings per common share $ 0.16 $ 0.70 $ 0.80 $ 1.40
See accompanying notes to condensed consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six Months Ended
----------------------------
June 30, 2004 June 30, 2003
------------- -------------
Cash flows from operating activities:
Net income $ 10,907 $ 17,910
Adjustments to reconcile net income to net cash provided by
operating activities:
Net amortization of investment premiums and discounts 906 281
Amortization of debt premiums, discounts and issuance costs 13,791 18,615
Proceeds from repayment of trading investment securities 2,516 5,207
Net change in fair value of trading securities and derivatives 3,869 (7,635)
Amortization of settled financial derivatives contracts 541 823
Gain on sale of Farmer Mac Guaranteed Securities (367) -
Losses on the sale of real estate owned 252 102
Total provision for losses 3,231 4,114
Decrease in interest receivable 7,207 9,105
(Increase)/decrease in guarantee and commitment fees receivable (1,669) 1,290
Increase in other assets (7,913) (40,428)
Increase in accrued interest payable (1,141) (407)
Increase/(decrease) in other liabilities (8,287) 11,774
------------ ------------
Net cash provided by operating activities 23,843 20,751
Cash flows from investing activities:
Purchases of available-for-sale investment securities (359,853) (400,675)
Purchases of Farmer Mac II Guaranteed Securities and
AgVantage bonds (80,216) (130,410)
Purchases of loans (61,963) (174,181)
Proceeds from repayment of investment securities 359,157 257,685
Proceeds from repayment of Farmer Mac Guaranteed Securities 149,958 195,586
Proceeds from repayment of loans 78,363 101,105
Proceeds from sale of loans and Farmer Mac Guaranteed Securities 63,408 35,084
Proceeds from sale of real estate owned 8,029 3,285
------------ ------------
Net cash provided by/(used in) investing activities 156,883 (112,521)
Cash flows from financing activities:
Proceeds from issuance of discount notes 36,433,510 32,047,218
Proceeds from issuance of medium-term notes 650,881 155,027
Payments to redeem discount notes (37,108,240) (32,126,608)
Payments to redeem medium-term notes (199,020) (85,400)
Settlement of financial derivatives 154 (2,695)
Proceeds from common stock issuance 937 2,129
Preferred stock dividends (1,120) (1,120)
------------ ------------
Net cash used in financing activities (222,898) (11,449)
------------ ------------
Net decrease in cash and cash equivalents (42,172) (103,219)
Cash and cash equivalents at beginning of period 623,674 723,800
------------ ------------
Cash and cash equivalents at end of period $ 581,502 $ 620,581
------------ ------------
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Accounting Policies
(a) Cash and Cash Equivalents
Farmer Mac considers highly liquid investment securities with remaining
maturities of three months or less at the time of purchase to be cash
equivalents. Changes in the balance of cash and cash equivalents are reported in
the Condensed Consolidated Statements of Cash Flows. The following table sets
forth information regarding certain cash and non-cash transactions for the six
months ended June 30, 2004 and 2003.
Six Months Ended
June 30,
------------------
2004 2003
------- --------
(in thousands)
Cash paid for:
Interest $ 31,632 $ 30,652
Income taxes 5,500 6,750
Non-cash activity:
Real estate owned acquired through foreclosure 5,732 18,310
Loans acquired and securitized as Farmer Mac
Guaranteed Securities 51,908 35,171
Loans acquired from on-balance sheet Farmer Mac
Guaranteed Securities 5,893 22,413
(b) Allowance for Losses
As of June 30, 2004, Farmer Mac maintained a $21.8 million allowance and
contingent obligation for probable losses ("allowance for losses") to cover
estimated probable losses on loans held for investment, real estate owned, and
loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and long-term
standby purchase commitments ("LTSPCs") in accordance with Statement of
Financial Accounting Standard No. 5, Accounting for Contingencies ("SFAS 5"),
and Statement of Financial Accounting Standard No. 114, Accounting by Creditors
for Impairment of a Loan, as amended ("SFAS 114"). The methodology for
determining the allowance for losses is the same for loans held for investment
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs
because Farmer Mac believes the ultimate credit risk is substantially the same,
i.e., the underlying agricultural mortgage loans all meet the same credit
underwriting and appraisal standards.
The allowance for losses is increased through periodic provisions for loan
losses that are charged against net interest income and provisions for losses
that are charged to operating expense and is reduced by charge-offs for actual
losses, net of recoveries. Charge-offs represent losses on the outstanding
principal balance, any interest payment previously accrued or advanced and
expected costs of liquidation.
The table below summarizes the components of Farmer Mac's allowance for
losses, which includes its contingent obligation for probable losses, as of June
30, 2004 and December 31, 2003.
June 30, December 31,
2004 2003
------------ -----------
(in thousands)
Allowance for loan losses $ 5,565 $ 5,967
Real estate owned valuation allowance 545 238
Reserve for losses:
On-balance sheet Farmer Mac I Guaranteed Securities 2,504 2,861
Off-balance sheet Farmer Mac I Guaranteed Securities 1,166 1,070
LTSPCs 9,517 9,241
Contingent obligation for probable losses 2,501 2,676
------------ -----------
Total $ 21,798 $ 22,053
------------ -----------
No allowance for losses has been made for loans underlying Farmer Mac I
Guaranteed Securities issued prior to the Farm Credit System Reform Act of 1996
(the "1996 Act") or securities issued under the Farmer Mac II program ("Farmer
Mac II Guaranteed Securities"). Farmer Mac I Guaranteed Securities issued prior
to the 1996 Act are supported by unguaranteed first loss subordinated interests,
which are structured to exceed the estimated credit losses on those loans. The
guaranteed portions of loans collateralizing Farmer Mac II Guaranteed Securities
are guaranteed by the United States Department of Agriculture ("USDA"). Each
USDA guarantee is an obligation backed by the full faith and credit of the
United States. To date, Farmer Mac has experienced no credit losses on any
pre-1996 Act Farmer Mac I Guaranteed Securities or on any Farmer Mac II
Guaranteed Securities and does not expect to incur any such losses in the
future.
(c) Financial Derivatives
Farmer Mac enters into financial derivative transactions principally to
protect against risk from the effects of market price or interest rate movements
on the value of certain assets and future cash flows or debt issuance, not for
trading or speculative purposes. Farmer Mac enters into interest rate swap
contracts principally to adjust the characteristics of its short-term debt to
match more closely the cash flow and duration characteristics of its longer-term
mortgage and other assets, and also to adjust the characteristics of its
long-term debt to match more closely the cash flow and duration characteristics
of its short-term assets, thereby reducing interest rate risk. These
transactions also may provide an overall lower effective cost of borrowing than
would otherwise be available in the conventional debt market.
All financial derivatives are recorded on the balance sheet at fair value
as a freestanding asset or liability. Financial derivatives in hedging
relationships that mitigate exposure to changes in the fair value of assets are
considered fair value hedges. Financial derivatives in hedging relationships
that mitigate the exposure to the variability in expected future cash flows or
other forecasted transactions are considered cash flow hedges. Financial
derivatives that do not satisfy the hedging criteria of Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended ("SFAS 133") are not accounted for as hedges and changes
in the fair values of those financial derivatives are reported as gains or
losses on financial derivatives and trading assets in the condensed consolidated
statements of operations.
The following table summarizes information related to Farmer Mac's
financial derivatives as of June 30, 2004 and December 31, 2003:
June 30, 2004
-----------------------------------------------------------------------------------------------
Cash Flow Hedges Fair Value Hedges No Hedge Designation Total
----------------------- ----------------------- ----------------------- -----------------------
Notional Fair Value Notional Fair Value Notional Fair Value Notional Fair Value
---------- ----------- ---------- ----------- ---------- ------------ ----------- -----------
(in thousands)
Interest rate swaps:
Pay-fixed $611,015 $ (36,246) $ - $ - $ 14,254 $ (25) $ 625,269 $ (36,271)
Receive-fixed - - 105,000 (4,068) 100,000 (4,415) 205,000 (8,483)
Basis 283,292 (3,169) - - 391,780 (239) 675,072 (3,408)
Other - - - - 25,000 (23) 25,000 (23)
Interest rate caps - - - - 210,000 - 210,000 -
Agency forwards 69,720 (714) - - 470 (5) 70,190 (719)
---------- ----------- ---------- ----------- ---------- ------------ ----------- -----------
Total $964,027 $(40,129) $ 105,000 $ (4,068) $741,504 $ (4,707) $1,810,531 $ (48,904)
---------- ----------- ---------- ----------- ---------- ------------ ----------- -----------
December 31, 2003
-----------------------------------------------------------------------------------------------
Cash Flow Hedges Fair Value Hedges No Hedge Designation Total
----------------------- ----------------------- ----------------------- -----------------------
Notional Fair Value Notional Fair Value Notional Fair Value Notional Fair Value
---------- ----------- ---------- ----------- ---------- ------------ ----------- -----------
(in thousands)
Interest rate swaps:
Pay-fixed $ 636,213 $ (55,397) $ - $ - $ 138,177 $ (2,023) $ 774,390 $ (57,420)
Receive-fixed - - 145,000 (2,782) - - 145,000 (2,782)
Basis 307,621 (5,879) - - 14,296 (260) 321,917 (6,139)
Other - - - - 25,000 (27) 25,000 (27)
Interest rate caps - - - - 210,000 - 210,000 -
Agency forwards 54,196 (417) 26,332 76 - - 80,528 (341)
---------- ----------- ---------- ----------- ---------- ------------ ----------- -----------
Total $ 998,030 $ (61,693) $ 171,332 $ (2,706) $ 387,473 $ (2,310) $1,556,835 $ (66,709)
---------- ----------- ---------- ----------- ---------- ------------ ----------- -----------
As of June 30, 2004, Farmer Mac had approximately $30.9 million of net
after-tax unrealized losses on cash flow hedges included in accumulated other
comprehensive income/(loss). These amounts will be reclassified into earnings in
the same period or periods during which the hedged forecasted transactions
(either the payment of interest or the issuance of discount notes) affect
earnings or immediately when it becomes probable that the original hedged
forecasted transaction will not occur within two months of the originally
specified date. Over the next twelve months, Farmer Mac estimates that $5.3
million of the amount currently reported in accumulated other comprehensive
income/(loss) will be reclassified into earnings. For the quarter ended June 30,
2004, any ineffectiveness related to Farmer Mac's designated hedges was
insignificant.
(d) Earnings Per Common Share
Basic earnings per common share are based on the weighted-average number of
common shares outstanding. Diluted earnings per common share are based on the
weighted-average number of common shares outstanding adjusted to include all
potentially dilutive common stock options. The following schedule reconciles
basic and diluted earnings per common share for the three and six months ended
June 30, 2004 and 2003:
June 30, 2004 June 30, 2003
---------------------------- ----------------------------
Dilutive Dilutive
Basic stock Diluted Basic stock Diluted
EPs options EPs EPs options EPs
---------------------------- ----------------------------
(in thousands, except per share amounts)
Three Months Ended:
Net income available to $ 1,960 $ 1,960 $ 8,366 $ 8,366
common stockholders
Weighted average shares 12,089 131 12,220 11,697 262 11,959
Earnings per common share $ 0.16 $ 0.16 $ 0.72 $ 0.70
Six Months Ended:
Net income available to $ 9,787 $ 9,787 $16,790 $16,790
common stockholders
Weighted average shares 12,077 169 12,246 11,668 294 11,962
Earnings per common share $ 0.81 $ 0.80 $ 1.44 $ 1.40
(e) Stock-Based Compensation
Farmer Mac accounts for its stock-based employee compensation plans using
the intrinsic value method of accounting for employee stock options pursuant to
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
as amended ("SFAS 123"). Accordingly, no compensation expense was recognized in
second quarter 2004 or second quarter 2003 for employee stock options. Had
Farmer Mac elected to use the fair value method of accounting for employee stock
options, net income available to common stockholders and earnings per share for
the three and six months ended June 30, 2004 and 2003, would have been reduced
to the pro forma amounts indicated in the following table:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
-------- ------- -------- -------
(in thousands, except per share amounts)
Net income available to common
stockholders, as reported $ 1,960 $ 8,366 $ 9,787 $ 16,790
Add back: Restricted stock
compensation expense included in
reported net income, net of taxes 6 164 11 330
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method
for all awards, net of tax (486) (2,519) (491) (2,685)
Pro forma net income available to
common stockholders -------- ------- -------- -------
$ 1,480 $ 6,011 $ 9,307 $ 14,435
-------- ------- -------- -------
Earnings per common share:
Basic - as reported $ 0.16 $ 0.72 $ 0.81 $ 1.44
Basic - pro forma $ 0.12 $ 0.51 $ 0.77 $ 1.24
Diluted - as reported $ 0.16 $ 0.70 $ 0.80 $ 1.40
Diluted - pro forma $ 0.12 $ 0.50 $ 0.76 $ 1.21
The following table summarizes stock option activity for the three and six
months ended June 30, 2004 and 2003:
June 30, 2004 June 30, 2003
---------------------- --------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ----------- ---------- ---------
Three Months Ended:
Outstanding, beginning of period 1,557,355 $ 23.00 1,637,111 $ 19.45
Granted 90,000 22.11 343,104 22.40
Exercised (26,000) 20.75 (159,834) 9.49
Canceled (34,699) 22.26 (3,332) 29.10
---------- ----------- ---------- ---------
Outstanding, end of period 1,586,656 $ 23.01 1,817,049 $ 20.86
---------- ----------- ---------- ---------
Six Months Ended:
Outstanding, beginning of period 1,575,980 $ 22.92 1,637,111 $ 19.45
Granted 90,000 22.11 343,104 22.40
Exercised (42,124) 18.02 (159,834) 9.49
Canceled (37,200) 22.79 (3,332) 29.10
---------- ----------- ---------- ---------
Outstanding, end of period 1,586,656 $ 23.01 1,817,049 $ 20.86
---------- ----------- ---------- ---------
Options exercisable at end of period 1,395,288 1,492,572
---------- ----------
(f) Reclassifications
Certain reclassifications of prior period information were made to conform
to the current period presentation.
(g) New Accounting Standards
In March 2004, the Emerging Issues Task Force ("EITF") amended EITF 03-01,
The Meaning of Other-Than-Temporary Impairment, to introduce a three-step model
to: (1) determine whether an investment is impaired; (2) evaluate whether the
impairment is other-than-temporary; and (3) account for other-than-temporary
impairments. In part, this amendment requires companies to apply qualitative and
quantitative measures to determine whether a decline in the fair value of a
security is other-than-temporary. The amount of other-than-temporary impairment
to be recognized, if any, will depend on market conditions and management's
intent and ability to hold investments until the forecasted recovery in fair
value. This amendment is effective for financial periods beginning after June
15, 2004. Farmer Mac is evaluating this amendment and will adopt it beginning in
third quarter 2004.
On January 1, 2003, Farmer Mac adopted the liability recognition provisions
of the Financial Accounting Standards Board Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"), which requires Farmer Mac to
recognize, at the inception of a guarantee, a liability for the fair value of
its obligation to stand ready to perform under the terms of each guarantee
agreement and an asset that is equal to the fair value of the fees that will be
received over the life of each guarantee. In December 2003, the Securities and
Exchange Commission provided additional guidance on the "day two" accounting for
these financial instruments. In accordance with this guidance, Farmer Mac has
adopted the amortized cost model for day two accounting prospectively effective
January 1, 2004.
Note 2. Farmer Mac Guaranteed Securities
The following table sets forth information about Farmer Mac Guaranteed
Securities retained by Farmer Mac as of June 30, 2004 and December 31, 2003.
June 30, 2004 December 31, 2003
-------------------------------------------------------------------------------
Available- Held-to- Available- Held-to-
for-Sale Maturity Total for-Sale Maturity Total
------------ -------------- ------------- ----------- ----------- ----------
(in thousands)
Farmer Mac I $ 663,688 $ 51,423 $ 715,111 $ 779,560 $ 49,901 $ 829,461
Farmer Mac II - 669,703 669,703 - 678,673 678,673
------------ -------------- ------------ ------------ ----------- ------------
Total $ 663,688 $ 721,126 $ 1,384,814 $ 779,560 $ 728,574 $ 1,508,134
------------ -------------- ------------ ------------ ----------- ------------
Amortized cost $ 627,821 $ 721,126 $ 1,348,947 $ 725,674 $ 728,574 $ 1,454,248
Unrealized gains 35,867 5,972 41,839 53,902 14,434 68,336
Unrealized losses - - - (16) - (16)
------------ -------------- ------------ ----------- ----------- -------------
Fair value $ 663,688 $ 727,098 $ 1,390,786 $ 779,560 $ 743,008 $ 1,522,568
------------ -------------- ------------ ----------- ----------- -------------
The table below presents a sensitivity analysis for Farmer Mac's retained
Farmer Mac Guaranteed Securities as of June 30, 2004.
June 30, 2004
----------------------------
(dollars in thousands)
Fair value of beneficial interests retained
in Farmer Mac Guaranteed Securities $ 1,390,786
Weighted-average remaining life (in years) 5.2
Weighted-average prepayment speed (annual rate) 8.1%
Effect on fair value of a 10% adverse change $ (376)
Effect on fair value of a 20% adverse change $ (705)
Weighted-average discount rate 4.9%
Effect on fair value of a 10% adverse change $ (18,836)
Effect on fair value of a 20% adverse change $ (37,445)
These sensitivities are hypothetical. As the figures indicate, changes in
fair value based on a 10 percent variation in assumptions generally cannot be
extrapolated because the relationship of the change in assumptions to the change
in fair value may not be linear. Also, in this table the effect of a variation
in a particular assumption on the fair value of the retained interest is
calculated without changing any other assumption. In fact, changes in one factor
may result in changes in another (for example, increases in market interest
rates may result in lower prepayments), which might amplify or counteract the
sensitivities.
The table below presents the outstanding principal balances, 90-day
delinquencies and net credit losses as of and for the periods indicated for
Farmer Mac Guaranteed Securities, loans, and LTSPCs.
Outstanding Principal 90-Day
Amount Delinquencies (1) Net Credit Losses
-------------------------- -------------------------- ----------------------------
As of As of As of As of For the Six Months Ended
June 30, December 31, June 30, December 31, June 30,
----------- ----------- ----------- ----------- ----------- ----------
2004 2003 2004 2003 2004 2003
----------- ----------- ----------- ----------- ----------- ----------
(in thousands)
On-balance sheet assets:
Farmer Mac I:
Loans $ 931,527 $ 976,280 $ 30,186 $ 28,089 $ 2,965 $ 842
Guaranteed Securities 680,592 777,134 - - - 180
Farmer Mac II:
Guaranteed Securities 669,296 678,229 - - - -
----------- ----------- ----------- ----------- ----------- ----------
Total on-balance sheet $ 2,281,415 $ 2,431,643 $ 30,186 $ 28,089 $ 2,965 $ 1,022
----------- ----------- ----------- ----------- ----------- ----------
Off-balance sheet assets:
Farmer Mac I:
LTSPCs $ 2,390,779 $ 2,348,703 $ 2,587 $ 1,967 $ - $ -
Guaranteed Securities 921,338 952,134 - - - -
Farmer Mac II:
Guaranteed Securities 46,454 51,241 - - - -
----------- ----------- ----------- ----------- ----------- ----------
Total off-balance sheet $ 3,358,571 $ 3,352,078 $ 2,587 $ 1,967 $ - $ -
----------- ----------- ----------- ----------- ----------- ----------
Total $ 5,639,986 $ 5,783,721 $ 32,773 $ 30,056 $ 2,965 $ 1,022
----------- ----------- ----------- ----------- ----------- ----------
<FN>
(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.
</FN>
Note 3. Off-Balance Sheet Guarantees and Long-Term Standby Purchase Commitments
Overview
Farmer Mac offers approved agricultural and rural residential mortgage
lenders two off-balance sheet alternatives to increase their liquidity or
lending capacity while retaining the cash flow benefits of their loans: (1)
Farmer Mac Guaranteed Securities, which are available through either the Farmer
Mac I program or the Farmer Mac II program, and (2) LTSPCs, which are available
only through the Farmer Mac I program. Both of these alternatives result in
off-balance sheet transactions for Farmer Mac.
Off-Balance Sheet Farmer Mac Guaranteed Securities
Periodically Farmer Mac transfers agricultural mortgage loans into trusts
that are used as vehicles for the securitization of the transferred assets and
the beneficial interests in the trusts are sold to third party investors. The
table below summarizes certain cash flows received from and paid to these
trusts.
Six Months Ended June 30,
-------------------------------
2004 2003
------------ ------------
(in thousands)
Proceeds from new securitizations $ 51,908 $ 35,171
Guarantee fees received 688 807
Purchases of assets from the trusts 2,433 24,001
Servicing advances 22 315
Repayment of servicing advances 21 -
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 June 30, 2004 and
December 31, 2003, not including offsets provided by any recourse provisions,
recoveries from third parties or collateral for the underlying loans.
Outstanding Balance of Off-Balance Sheet
Farmer Mac Guaranteed Securities
- ----------------------------------------------------------------
June 30, December 31,
2004 2003
----------- ------------
(in thousands)
Farmer Mac I Guaranteed Securities $ 921,338 $ 952,134
Farmer Mac II Guaranteed Securities 46,454 51,241
----------- ------------
Total Farmer Mac I and II $ 967,792 $ 1,003,375
----------- ------------
As of June 30, 2004, the weighted-average remaining maturity of all loans
underlying off-balance sheet Farmer Mac Guaranteed Securities was 16.3 years.
For the off-balance sheet Farmer Mac I Guaranteed Securities that were executed
on or before December 31, 2002, Farmer Mac has recorded an allowance for
probable losses of $1.2 million as of June 30, 2004 and $1.1 million as of
December 31, 2003. For those securities that were issued or modified on or after
January 1, 2003, Farmer Mac has recorded the fair value of its initial
obligation to stand ready under the guarantee as a liability. This liability
approximated $4.8 million as of June 30, 2004 and $4.1 million as of December
31, 2003 and is reported in the guarantee and commitment obligation on the
condensed consolidated balance sheet.
Long-Term Standby Purchase Commitments (LTSPCs)
An LTSPC is a commitment by Farmer Mac to purchase eligible loans, either
for cash or in exchange for Farmer Mac I Guaranteed Securities, on one or more
undetermined future dates.
As of June 30, 2004 and December 31, 2003, the maximum principal amount of
potential undiscounted future payments that Farmer Mac could be requested to
make under LTSPCs, not including offsets provided by any recourse provisions,
recoveries from third parties or collateral for the underlying loans, was $2.4
billion and $2.3 billion, respectively. For all LTSPC transactions to date,
Farmer Mac has incurred a charge-off on one loan.
As of June 30, 2004, the weighted-average remaining maturity of all loans
underlying LTSPCs was 14.7 years. For the LTSPCs that were executed on or before
December 31, 2002, Farmer Mac has recorded an allowance for probable losses of
$9.5 million as of June 30, 2004 and $9.2 million as of December 31, 2003. For
those LTSPCs that were issued or modified on or after January 1, 2003, Farmer
Mac has recorded the fair value of its initial obligation to stand ready under
the commitment as a liability. This liability approximated $9.4 million as of
June 30, 2004 and $7.3 million as of December 31, 2003 and was included in the
guarantee and commitment obligation on the condensed consolidated balance sheet.
Note 4. Comprehensive Income
Comprehensive income is comprised of net income plus other changes in
stockholders' equity not resulting from investments by or distributions to
stockholders. The following table sets forth comprehensive income for the three
and six months ended June 30, 2004 and 2003.
Three Months Ended Six Months Ended
June 30 June 30
-------------------- -------------------
2004 2003 2004 2003
-------------------- --------------------
(in thousands)
Net income $ 2,520 $ 8,926 $ 10,907 $ 17,910
Other comprehensive income/(loss):
Available-for-sale securities:
Change in net unrealized gains (26,672) 13,395 (19,292) 8,538
Tax effect 9,335 (4,688) 6,752 (2,988)
-------- -------- -------- --------
Net change from available-for-sale securities (17,337) 8,707 (12,540) 5,550
Cash flow hedges:
Change in fair value, net of
reclassification adjustments 41,642 (9,988) 22,494 (8,225)
Tax effect (14,575) 3,496 (7,873) 2,879
-------- -------- -------- --------
Net change from cash flow hedges 27,067 (6,492) 14,621 (5,346)
-------- -------- -------- --------
Other comprehensive income/(loss) 9,730 2,215 2,081 204
-------- -------- -------- --------
Comprehensive income $ 12,250 $ 11,141 $ 12,988 $ 18,114
-------- -------- -------- --------
Note 5. Investments
Farmer Mac's investment portfolio is comprised of the following:
June 30, December 31,
2004 2003
----------- -----------
(in thousands)
Held-to-maturity $ 10,604 $ 10,604
Available-for-sale 1,039,096 1,039,673
Trading 11,775 14,505
----------- -----------
$ 1,061,475 $ 1,064,782
----------- -----------
The amortized cost and estimated fair values of investments as of June 30,
2004 and December 31, 2003 were as follows. Fair value was estimated based on
quoted market prices.
June 30, 2004 December 31, 2003
-------------------------------------------------- ---------------------------------------------------
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gain Loss Fair Value Cost Gain Loss Fair Value
---------- ------------ ------------ ------------ ---------- ------------ ------------ ------------
(in thousands)
Cash investment in
fixed rate guaranteed
investment contract $ 10,604 $ 8 $ - $ 10,612 $ 10,604 $ 342 $ - $ 10,946
----------- -------- --------- ----------- ----------- -------- -------- -----------
Total held-to-maturity $ 10,604 $ 8 $ - $ 10,612 $ 10,604 $ 342 $ - $ 10,946
----------- -------- --------- ----------- ----------- -------- -------- -----------
Floating rate
asset-backed securities $ 113,547 $ 286 $ (906) $ 112,927 $ 78,817 $ 682 $ - $ 79,499
Floating rate corporate
debt securities 396,085 340 (148) 396,277 370,145 573 (100) 370,618
Fixed rate preferred
stock 185,756 11,508 - 197,264 186,253 12,196 - 198,449
Fixed rate
commercial paper 79,876 - - 79,876 120,452 - - 120,452
Floating rate
municipal bonds - - - - 2,820 - - 2,820
Floating rate mortgage-
backed securities 252,443 406 (97) 252,752 268,522 198 (885) 267,835
----------- -------- --------- ----------- ----------- -------- -------- -----------
Total available-for-sale $ 1,027,707 $ 12,540 $ (1,151) $ 1,039,096 $ 1,027,009 $ 13,649 $ (985) $ 1,039,673
----------- -------- --------- ----------- ----------- -------- -------- -----------
Adjustable rate mortgage-
backed securities $ 11,780 $ 9 $ (14) $ 11,775 $ 14,296 $ 209 $ - $ 14,505
----------- -------- --------- ----------- ----------- -------- -------- -----------
Total trading $ 11,780 $ 9 $ (14) $ 11,775 $ 14,296 $ 209 $ - $ 14,505
----------- -------- --------- ----------- ----------- -------- -------- -----------
The amortized cost, fair value and yield of investments by remaining
contractual maturity as of June 30, 2004 are set forth below. Asset- and
mortgage-backed securities are included based on their final maturities,
although the actual maturities may differ due to prepayments of the underlying
assets or mortgages. As of June 30, 2004 Farmer Mac owned one held-to-maturity
investment that matures after ten years with an amortized cost and fair value of
$10.6 million and a yield of six percent.
Available-for-Sale Trading Total
----------------------------------- ------------------------------------ ------------------------------------
Amortized Cost Fair Value Yield Amortized Cost Fair Value Yield Amortized Cost Fair Value Yield
-------------- ------------ ------- -------------- ------------ ------- -------------- ------------ -------
(dollars in thousands)
Due within one year $ 125,072 $ 125,069 1.38% $ - $ - - $ 125,072 $ 125,069 1.38%
Due after one year
through five years 315,901 316,097 1.49% - - - 315,901 316,097 1.49%
Due after five years
through ten years 128,649 133,806 6.03% - - - 128,649 133,806 6.03%
Due after ten years 458,085 464,124 3.02% 11,780 11,775 3.75% 469,865 475,899 3.04%
-------------- ------------ ------- -------------- ------------ ------- -------------- ------------ ------
Total $ 1,027,707 $ 1,039,096 2.73% $ 11,780 $ 11,775 3.75% $ 1,039,487 $ 1,050,871 2.74%
-------------- ------------ ------- -------------- ------------ ------- -------------- ------------ ------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following Management's Discussion and Analysis of
Financial Condition and Results of Operations in conjunction with (1) the
condensed consolidated financial statements and the related notes that appear
elsewhere in this report and (2) Farmer Mac's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003.
Special Note Regarding Forward-Looking Statements
Certain statements made in this report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995
pertaining to management's current expectations as to Farmer Mac's future
financial results, business prospects and business developments. Forward-looking
statements include, without limitation, any statement that may predict,
forecast, indicate or imply future results, performance or achievements, and
typically are accompanied by, and identified with, such terms as "anticipates,"
"believes," "expects," "intends," "should" and similar phrases. The following
management's discussion and analysis includes forward-looking statements
addressing Farmer Mac's:
o prospects for earnings;
o growth in loan purchase, guarantee, LTSPC and securitization
volume;
o trends in net interest income;
o trends in provisions for losses;
o changes in capital position; and
o other business and financial matters.
Management's expectations for Farmer Mac's future necessarily involve a
number of assumptions and estimates and the evaluation of risks and
uncertainties. Various factors could cause Farmer Mac's actual results or events
to differ materially from the expectations as expressed or implied by the
forward-looking statements, including uncertainties regarding:
o the rate and direction of development of the secondary market for
agricultural mortgage loans;
o the possible establishment of additional statutory or regulatory
restrictions or constraints on Farmer Mac that could hamper its
growth or diminish its profitability;
o legislative or regulatory developments or interpretations of
Farmer Mac's statutory charter that could adversely affect Farmer
Mac or the ability or motivation of certain lenders to
participate in its programs or the terms of any such
participation, or increase the cost of regulation and related
corporate activities;
o possible reaction in the financial markets to events involving
government-sponsored enterprises other than Farmer Mac;
o Farmer Mac's access to the debt markets at favorable rates and
terms;
o the possible effect of the risk-based capital requirement, which
could, under certain circumstances, be in excess of the statutory
minimum capital requirement;
o the rate of growth in agricultural mortgage indebtedness;
o lender interest in Farmer Mac credit products and the Farmer Mac
secondary market;
o borrower preferences for fixed-rate agricultural mortgage
indebtedness;
o competitive pressures in the purchase of agricultural mortgage
loans and the sale of agricultural mortgage-backed securities and
debt securities;
o substantial changes in interest rates, agricultural land values,
commodity prices, export demand for U.S. agricultural products
and the general economy;
o protracted adverse weather, market or other conditions affecting
particular geographic regions or particular commodities related
to agricultural mortgage loans backing Farmer Mac I Guaranteed
Securities or under LTSPCs;
o the willingness of investors to invest in agricultural
mortgage-backed securities; or
o the effects on the agricultural economy or the value of
agricultural real estate of any changes in federal assistance for
agriculture.
The foregoing factors are not exhaustive. Other sections of this report may
include additional factors that could adversely affect Farmer Mac's business and
its financial performance. Furthermore, new risk factors emerge from time to
time and it is not possible for management to predict all such risk factors, nor
assess the effects of such factors on Farmer Mac's business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from the expectations expressed or implied by the forward-looking
statements. In light of these potential risks and uncertainties, no undue
reliance should be placed on any forward-looking statements expressed in this
report. Furthermore, Farmer Mac undertakes no obligation to release publicly the
results of revisions to any forward-looking statements that may be made to
reflect any future events or circumstances, except as otherwise mandated by the
Securities and Exchange Commission.
Critical Accounting Policy and Estimates
The critical accounting policy that is both important to the portrayal of
Farmer Mac's financial condition and results of operations and requires complex,
subjective judgments is the accounting policy for the allowance for losses. For
a discussion of Farmer Mac's critical accounting policy, as well as Farmer Mac's
use of estimates and assumptions that affect the amounts reported in the
condensed consolidated financial statements and related notes for the periods
presented, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Critical Accounting Policy and Estimates" in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2003,
filed with the SEC on March 15, 2004.
Results of Operations
Overview. Net income available to common stockholders for second quarter
2004 was $2.0 million or $0.16 per diluted common share, compared to $8.4
million or $0.70 per diluted common share for second quarter 2003. This decrease
was principally due to the decrease in the fair value of financial derivatives
as accounted for in accordance with SFAS 133, as explained below. During second
quarter 2004, Farmer Mac:
o added $127.1 million of Farmer Mac I eligible loans under LTSPCs;
o purchased $27.5 million of newly originated Farmer Mac I eligible
loans; and
o purchased $34.7 million of Farmer Mac II eligible USDA-guaranteed
portions of loans.
USDA is currently forecasting national farm cash receipts to increase to
$215.0 billion in 2004 from the $212.4 billion forecasted level in 2003. Prices
available to farmers have been rising as a result of strong domestic and foreign
demand. Forecasted net cash income on farms for 2004 is $55.9 billion, a $7.1
billion decrease from 2003 forecasted levels of $63.0 billion, but still higher
than the $49.1 billion level of 2002. The forecasted net cash income on farms
for 2004 includes government payments of $10.3 billion, as compared to $17.4
billion in 2003 and $11.0 billion in 2002.
Despite the decline in farm income in 2004, the rise in farm business
assets, debt, and equity values is expected to continue through the end of the
year. USDA forecasts the value of U.S. farm real estate assets to rise 3.5
percent to $1.13 trillion in 2004, up from $1.09 trillion in 2003. Total farm
real estate debt is expected to approach $116.5 billion by the end of 2004, a
4.7 percent increase over the 2003 level. This more moderate rise in farm real
estate debt follows growth of 7.7 percent in 2003 and 7.7 percent in 2002.
Sector equity is expected to rise more than 3 percent, as the gain in asset
values exceeds the increase in debt by approximately $36 billion.
The financial measures reflect farm investors' and lenders' collective
decisions about the long-term expected profitability of farm investments and
agriculture generally. These expectations should be favorable for Farmer Mac's
long-term business plans, as they indicate increased U.S. farm real estate
values, an expanding mortgageable farm real estate base, and a stronger equity
position in U.S. agriculture, which should in the aggregate improve Farmer Mac's
ability to recover in foreclosures.
Farmer Mac is subject to interest rate risk on all assets held for
investment because of possible timing differences in the cash flows of the
assets and related liabilities. This risk is primarily related to loans held and
on-balance sheet Farmer Mac Guaranteed Securities because of the ability of
borrowers to prepay their mortgages before the scheduled maturities, thereby
increasing the risk of asset and liability cash flow mismatches. Yield
maintenance provisions and other prepayment penalties contained in many
agricultural mortgage loans reduce, but do not eliminate, this prepayment risk,
particularly in the case of a defaulted loan where yield maintenance may not be
collected.
Farmer Mac's primary exposure to credit risk is the risk of loss resulting
from the inability of borrowers to repay their mortgages in conjunction with a
deficiency in the value of the collateral relative to the amount outstanding on
the mortgage and the costs of liquidation. Farmer Mac has established
underwriting, appraisal and documentation standards for agricultural mortgage
loans to mitigate the risk of loss from borrower defaults and to provide
guidance concerning the management, administration and conduct of underwriting
and appraisals to all participating sellers and potential sellers in its
programs.
As of June 30, 2004, Farmer Mac's outstanding program volume was $5.6
billion, which represented approximately 13 percent of management's estimate of
a $44.5 billion market of eligible agricultural mortgage loans. For Farmer Mac
to succeed in realizing its business development and profitability objectives
over the longer term, the use of Farmer Mac's programs and products by
agricultural mortgage lenders, whether traditional or non-traditional, must
continue to expand.
In the aggregate, approximately 285 lenders were actively participating
either directly or indirectly in one or both of the Farmer Mac I or Farmer Mac
II programs as of June 30, 2004, with loans to approximately 20,000 borrowers.
As of June 30, 2004, there were 144 approved loan sellers in the Farmer Mac
I program ranging from single-office to multi-branch institutions, spanning
community banks, Farm Credit System associations, mortgage companies, large
multi-state Farm Credit System banks, commercial banks and insurance companies.
During 2003, there were 81 approved loan sellers active in the Farmer Mac I
program. In addition to participating directly in the Farmer Mac I program, some
of the approved loan sellers enable other lenders to participate indirectly in
the Farmer Mac I program by managing correspondent networks of lenders from
which they purchase loans to sell to Farmer Mac. As of June 30, 2004, more than
75 lenders were participating in those networks, bringing the total Farmer Mac I
program participants to more than 200 as of June 30, 2004.
Any lender authorized by the USDA to obtain a USDA guarantee on a loan may
be a seller in the Farmer Mac II program. As of June 30, 2004, there were 128
active sellers in the Farmer Mac II program, compared to 150 as of December 31,
2003 and 143 as of June 30, 2003. Sellers in the Farmer Mac II program consist
mostly of community and regional banks.
Set forth below is a more detailed discussion of Farmer Mac's results of
operations.
Net Interest Income. Net interest income, which does not include guarantee
fees for loans purchased prior to April 1, 2001 (the effective date of Statement
of Financial Accounting Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 140")),
was $7.8 million for second quarter 2004 and $17.3 million for the six months
ended June 30, 2004, compared to $9.4 million and $19.2 million, respectively,
for the same periods in 2003. The net interest yield was 87 basis points for the
six months ended June 30, 2004, compared to 95 basis points for the six months
ended June 30, 2003. The effect of the adoption of SFAS 140 was a
reclassification of approximately $2.2 million (11 basis points) of guarantee
fee income as interest income for the six months ended June 30, 2004, compared
to $2.2 million (11 basis points) for the six months ended June 30, 2003.
As a result of the application of additional guidance provided in 2003 by
the Chief Accountant at the U.S. Securities and Exchange Commission, the net
interest income and expense realized on financial derivatives that are not in
fair value or cash flow hedge relationships have been reclassified from net
interest income into gains and losses on financial derivatives and trading
assets. For the six months ended June 30, 2004 and 2003, this reclassification
resulted in the decrease of the net interest yield of 5 basis points and an
increase of 3 basis points, respectively.
The net interest yields for the six months ended June 30, 2004 and 2003
included the benefits of yield maintenance payments received of 12 basis points.
Yield maintenance payments represent the present value of expected future
interest income streams and accelerate the recognition of interest income from
the related loans. Because the timing and amounts of these payments vary
greatly, variations should not be considered indicative of positive or negative
trends to gauge future financial results. For the six months ended June 30, 2004
and 2003, the effects of yield maintenance payments on net income and diluted
earnings per share were $1.6 million or $0.13 per diluted share and $1.7 million
or $0.14 per diluted share, respectively.
The following table provides information regarding the average balances and
rates of interest-earning assets and funding for the six months ended June 30,
2004 and 2003. The balance of non-accruing loans is included in the average
balance of interest-earning loans presented, though no related income is
included in the income figures presented. The decreases in the average rates for
cash and cash equivalents reflect their short-term nature. The decreases in the
average rates for investments and loans and Farmer Mac Guaranteed Securities
reflect the relatively large proportion of adjustable rates in those asset
categories (69.9 percent of investments and 65.8 percent of loans and Farmer Mac
Guaranteed Securities). The decrease in the average rate for discount notes also
reflects their short-term nature. The decreases in all of these rates track the
general decrease in market rates between the two periods.
Six Months Ended June 30,
----------------------------------------------------------------------
2004 2003
---------------------------------- ----------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
---------------------------------- ----------------------------------
(dollars in thousands)
$ 636,504 $ 3,606 1.13% $ 712,539 $ 4,744 1.33%
995,617 12,839 2.58% 889,142 13,752 3.09%
2,343,805 59,556 5.08% 2,438,231 64,337 5.28%
---------- -------- ------- ---------- -------- -------
Total interest-earning assets 3,975,926 76,001 3.82% 4,039,912 82,833 4.10%
---------- -------- ---------- --------
Notes payable due within one year 2,294,421 25,630 2.23% 2,752,969 32,330 2.35%
Notes payable due after one year 1,489,571 33,065 4.44% 1,121,492 31,264 5.58%
---------- -------- ------- ---------- -------- -------
Total interest-bearing liabilities 3,783,992 58,695 3.10% 3,874,461 63,594 3.28%
Net non-interest-bearing funding 191,934 165,451
---------- -------- ------- ---------- -------- -------
Total funding $ 3,975,926 58,695 2.95% $ 4,039,912 63,594 3.15%
---------- -------- ------- ---------- -------- -------
$ 17,306 0.87% $ 19,239 0.95%
-------- ------- -------- -------
The following table sets forth information regarding the changes in the
components of Farmer Mac's net interest income for the periods indicated. For
each category, information is provided on changes attributable to changes in
volume (change in volume multiplied by old rate) and changes in rate (change in
rate multiplied by old volume). Combined rate/volume variances, the third
element of the calculation, are allocated based on their relative size. The
decreases due to rate reflect the short-term or adjustable-rate nature of most
assets or liabilities and the general decreases in market rates described above.
Six Months Ended June 30, 2004
Compared to Six Months Ended
June 30, 2003
----------------------------------------
Increase/(Decrease) Due to
----------------------------------------
Rate Volume Total
---------- ---------- ---------
(in thousands)
Income from interest-earning assets
Cash and cash equivalents $ (663) $ (475) $ (1,138)
Investments (2,445) 1,532 (913)
Loans and Farmer Mac Guaranteed Securities (2,337) (2,444) (4,781)
---------- ---------- ---------
Total (5,445) (1,387) (6,832)
Expense from interest-bearing liabilities (3,438) (1,461) (4,899)
---------- ---------- ---------
Change in net interest income $ (2,007) $ 74 $ (1,933)
---------- ---------- ---------
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Regulatory Matters" for actions by Farmer Mac's federal
regulator, the Farm Credit Administration ("FCA"), that may potentially affect
future net interest income.
Guarantee and Commitment Fees. Guarantee and commitment fees were $5.3
million for second quarter 2004, compared to $5.1 million for second quarter
2003. The increase in guarantee and commitment fees reflects an increase in the
average balance of outstanding guarantees and LTSPCs. The effects of the
adoption of SFAS 140 reclassified $1.1 million of guarantee fee income as
interest income for second quarter 2004 and second quarter 2003, although
management considers the amount to have been earned in consideration for the
assumption of credit risk. That portion of the difference or "spread" between
the cost of Farmer Mac's debt funding for loans and the yield on post-1996 Act
Farmer Mac I Guaranteed Securities held on its books compensates for credit and
interest rate risk. If a post-1996 Act Farmer Mac I Guaranteed Security is sold
to a third party, Farmer Mac continues to receive the guarantee fee component of
that spread, which continues to compensate Farmer Mac for its assumption of
credit risk. The portion of the spread that compensates for interest rate risk
would not typically continue to be received by Farmer Mac if the asset were
sold, except to the extent attributable to any retained interest-only strip.
Farmer Mac's ongoing guarantee and commitment fee income reflects the
annuity-like revenue stream of that aspect of the Corporation's business. That
fee income is earned on the cumulative outstanding principal balance of
guaranteed securities and loans underlying LTSPCs. Accordingly, GAAP earnings
increase or decrease through changes in periodic business volume in proportion
to the change in that cumulative outstanding principal balance, not in
proportion to the change in periodic volume.
Other Income. During second quarter 2004, through a competitive bid
process, the Corporation sold Farmer Mac Guaranteed Securities in the amount of
$26.9 million to a related party in a transaction that resulted in a $0.4
million gain on sale. Also during the quarter, Farmer Mac received $1.8 million
from two sellers (one of which was a related party) for breaches of
representations and warranties associated with prior sales of agricultural
mortgage loans to Farmer Mac. Farmer Mac had previously charged off these
amounts as losses on the associated loans.
Expenses. Compensation and employee benefits for second quarter 2004 were
$1.7 million, compared to $1.5 million for second quarter 2003. General and
administrative expenses for second quarter 2004 were $1.8 million, compared to
$1.2 million for second quarter 2003. The increases in compensation and employee
benefits and general and administrative expenses were due, in large part, to
increased staffing levels necessary for increased regulatory compliance
activities, including requirements of the Sarbanes-Oxley Act of 2002 and FCA, as
well as heightened focus on the regulatory environment for government-sponsored
enterprises generally. Regulatory fees assessed by FCA for second quarter 2004
and 2003 were $0.6 million and $0.4 million, respectively. FCA has advised
Farmer Mac that its estimated assessment level for the year ending September 30,
2004 will be $1.7 million. After the end of a federal government fiscal year,
FCA may revise its prior year estimated assessments to reflect actual costs
incurred, and has issued both additional assessments and refunds in the past.
Farmer Mac's total provision for losses was $1.6 million for second quarter
2004, compared to $1.9 million for second quarter 2003. (See "--Quantitative and
Qualitative Disclosures About Market Risk Management--Credit Risk" for
additional information regarding Farmer Mac's provision for losses and provision
for loan losses.) As of June 30, 2004, Farmer Mac's total allowance for losses
totaled $21.8 million, or 0.45 percent of outstanding loans held or loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, compared
to $22.1 million (0.44 percent of outstanding loans held or loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs) as of December 31,
2003.
Gains and Losses on Financial Derivatives and Trading Assets. For second
quarter 2004, the loss on financial derivatives and trading assets was $6.2
million, compared to a gain of $3.7 million for second quarter 2003. The loss in
second quarter 2004 and the gain in second quarter 2003 resulted primarily from
fluctuations in the fair values of financial derivatives, resulting from
movements in interest rates, that have not been designated in either fair value
or cash flow hedge relationships in accordance with SFAS 133.
Non-GAAP Performance Measures. Farmer Mac reports its financial results in
accordance with GAAP. In addition to GAAP measures, Farmer Mac presents certain
non-GAAP performance measures. Farmer Mac uses these non-GAAP performance
measures to develop financial plans, to measure corporate economic performance,
and to set incentive compensation. As described below, because FASB has adopted
a mixed attribute accounting model that does not reflect the economics for
transactions involving Farmer Mac's callable swaps, in management's view the
non-GAAP measures provide a more accurate representation of Farmer Mac's
economic performance, transaction economics and business trends. Investors and
the investment analyst community have previously relied upon similar measures to
evaluate performance and issue projections. These non-GAAP disclosures are not
intended to replace GAAP information but, rather, to supplement it.
One such non-GAAP measure is core earnings, which Farmer Mac developed to
present net income less the after-tax effects of SFAS 133. Core earnings for the
three and six months ended June 30, 2004 were $6.2 million and $12.1 million,
respectively, compared to $5.8 million and $11.7 million for the three and six
months ended June 30, 2003. The reconciliation of GAAP net income available to
common stockholders to core earnings is presented in the following table:
Reconciliation of GAAP Net Income Available to Common Stockholders to Core Earnings
- ------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
-------------------------------- -------------------------------
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
--------------- --------------- --------------- ---------------
(in thousands)
GAAP net income available
to common stockholders $ 1,960 $ 8,366 $ 9,787 $ 16,790
Less the effects of SFAS 133:
Unrealized gains/(losses)
on financial derivatives and
trading assets, net of tax (4,336) 2,521 (2,511) 4,963
Benefit from non-amortization
of premium payments
on financial derivatives,
net of tax 76 81 152 162
------------ ----------- ------------- -----------
Core earnings $ 6,220 $ 5,764 $ 12,146 $ 11,665
------------ ----------- ------------- -----------
Business Volume. The following tables set forth the amount of all Farmer
Mac I and Farmer Mac II loan purchase and guarantee activities for newly
originated and current seasoned loans during the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2004 2003 2004 2003
---------- --------- --------- ---------
(in thousands)
Loan purchase and guarantee and
commitment activity:
Farmer Mac I:
Loans $ 27,520 $ 65,615 $ 52,964 $124,669
LTSPCs 127,098 179,025 274,371 345,599
Farmer Mac II Guaranteed Securities 34,671 77,636 69,154 119,529
---------- --------- --------- ---------
Total purchases, guarantees
and commitments $ 189,289 $322,276 $ 396,489 $589,797
---------- --------- --------- ---------
Farmer Mac I Guaranteed Securities issuances:
Retained $ - $ - $ - $ -
Sold 24,705 21,910 51,908 35,171
---------- --------- --------- ---------
Total $ 24,705 $ 21,910 $ 51,908 $ 35,171
---------- --------- --------- ---------
To fulfill its guarantee and commitment obligations, Farmer Mac purchases
delinquent loans underlying Farmer Mac Guaranteed Securities and LTSPCs. The
decreases in defaulted loans purchased and in defaulted loans transferred to
loans reflect a reduction in newly delinquent loans underlying Farmer Mac
Guaranteed Securities and LTSPCs. The following table presents Farmer Mac's loan
purchases of newly originated and current seasoned loans and defaulted loans
purchased underlying Farmer Mac I Guaranteed Securities and LTSPCs.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
2004 2003 2004 2003
------- -------- -------- --------
(in thousands)
Farmer Mac I newly originated
and current seasoned loan purchases $27,520 $ 65,615 $ 52,964 $ 124,669
Defaulted loans purchased from
off-balance sheet Farmer Mac I
Guaranteed Securities 1,387 523 2,433 24,001
Defaulted loans transferred from
on-balance sheet Farmer Mac I
Guaranteed Securities 1,149 2,394 5,893 22,413
Defaulted loans purchased
from LTSPCs 673 2,239 673 3,098
------- -------- -------- ---------
Total loan purchases $30,729 $ 70,771 $ 61,963 $ 174,181
------- -------- -------- ---------
The weighted-average age of the Farmer Mac I newly originated and current
seasoned loans purchased during second quarter 2004 and second quarter 2003 was
less than one month. Of the Farmer Mac I newly originated and current seasoned
loans purchased during second quarter 2004 and second quarter 2003, 80 percent
and 75 percent, respectively, had principal amortization periods longer than the
maturity date, resulting in balloon payments at maturity, with a
weighted-average remaining term to maturity of 15.2 years and 15.1 years,
respectively. The weighted-average age of delinquent loans purchased out of
securitized pools and LTSPCs during second quarter 2004 and second quarter 2003
was 5.0 years and 6.1 years, respectively.
As of June 30, 2004, outstanding commitments to purchase Farmer Mac I loans
totaled $5.4 million, compared to $10.7 million as of June 30, 2003. Of the
total Farmer Mac I commitments outstanding as of June 30, 2004 and 2003, $5.4
million and $3.6 million, respectively, were mandatory commitments. Loans
submitted for approval or approved but not yet committed to purchase totaled
$18.7 million as of June 30, 2004, compared to $59.8 million as of June 30,
2003. Not all of these loans will be purchased, as some will ultimately be
denied for credit reasons or withdrawn by the seller.
New business volume for second quarter 2004 was $189.3 million, down $133.0
million from the same period in 2003. Presently, Farmer Mac's new business with
agricultural mortgage lenders has been slowed by:
o reduced growth rates in the agricultural mortgage market;
o increased liquidity of agricultural borrowers;
o increased capital and liquidity at those agricultural mortgage
lenders in the current interest rate and regulatory environments;
and
o increased regulatory pressure on government-sponsored
enterprises.
Regulatory actions by the Farm Credit Administration (FCA), the federal
regulator of both Farmer Mac and the primary lenders in the Farm Credit System
(FCS) and the Farm Credit System Insurance Corporation (FCSIC), a U.S.
Government controlled corporation managed by a three-member board of directors
composed of the members of the FCA Board, may diminish Farmer Mac's business
prospects. Statements by either FCA or FCSIC, or both, have cautioned other
entities they regulate about doing business with GSEs, including Farmer Mac, and
have raised objections to FCS institutions' use of Farmer Mac swaps. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Regulatory Matters" for other actions by FCA that may potentially
affect existing and future business volume.
Notwithstanding the developments described above, Farmer Mac continues to
see promising new business opportunities, with marketing initiatives advanced by
new and expanded business relationships, including a strategic alliance, product
enhancements and refined security structures.
Balance Sheet Review
During the six months ended June 30, 2004, total assets decreased by $219.1
million from December 31, 2003, with decreases in program assets (Farmer Mac
Guaranteed Securities and loans) of $169.0 million. For further information
regarding off-balance sheet program activities, see "--Off-Balance Sheet Program
Activities" below. Consistent with the decrease in total assets during the
period, total liabilities decreased by $231.9 million from December 31, 2003 to
June 30, 2004.
During the six months ended June 30, 2004, accumulated other comprehensive
income/(loss) increased $2.1 million, which is the net after-tax effect of a
$12.5 million decrease in unrealized gains on securities available for sale and
a $14.6 million increase in the fair value of financial derivatives classified
as cash flow hedges. Accumulated other comprehensive income/(loss) is not a
component of Farmer Mac's core capital or regulatory capital.
As of June 30, 2004, Farmer Mac's core capital totaled $226.3 million,
compared to $215.5 million as of December 31, 2003. As of June 30, 2004, core
capital exceeded Farmer Mac's statutory minimum capital requirement of $136.4
million by $89.9 million.
Farmer Mac was in compliance with the risk-based capital standards under
the regulation as of June 30, 2004. As of June 30, 2004, the risk-based capital
stress test generated a regulatory capital requirement of $49.3 million. Farmer
Mac's regulatory capital of $247.5 million exceeded that amount by approximately
$198.2 million. The increase in the risk-based capital requirement from December
31, 2003 ($38.8 million) to June 30, 2004 ($49.3 million) was a result of
changes in the interest rate environment. Farmer Mac is required to hold capital
at the higher of the statutory minimum capital requirement or the amount
required by the risk-based capital stress test.
Off-Balance Sheet Program Activities
Farmer Mac offers approved agricultural and rural residential mortgage
lenders two off-balance sheet alternatives to increase their liquidity or
lending capacity while retaining the cash flow benefits of their loans: (1)
Farmer Mac Guaranteed Securities, which are available through either the Farmer
Mac I program or the Farmer Mac II program, and (2) LTSPCs, which are available
only through the Farmer Mac I program. Both of these alternatives result in
off-balance sheet transactions for Farmer Mac.
Quantitative and Qualitative Disclosures About Market Risk Management
Interest Rate Risk. Farmer Mac is subject to interest rate risk on all
assets held for investment because of possible timing differences in the cash
flows of the assets and related liabilities. This risk is primarily related to
loans held and on-balance sheet Farmer Mac Guaranteed Securities because of the
ability of borrowers to prepay their mortgages before the scheduled maturities,
thereby increasing the risk of asset and liability cash flow mismatches. Cash
flow mismatches in a changing interest rate environment can reduce the earnings
of the Corporation if assets repay sooner than expected and the resulting cash
flows must be reinvested in lower-yielding investments when Farmer Mac's funding
costs cannot be correspondingly reduced, or if assets repay more slowly than
expected and the associated debt must be replaced by higher-cost debt.
Yield maintenance provisions and other prepayment penalties contained in
many agricultural mortgage loans reduce, but do not eliminate, this prepayment
risk, particularly in the case of a defaulted loan where yield maintenance may
not be collected. Those provisions require borrowers to make an additional
payment when they prepay their loans, so that, when reinvested with the prepaid
principal, yield maintenance payments generate substantially the same cash flows
that would have been generated had the loan not prepaid. Those provisions create
a disincentive to prepayment and compensate the Corporation for its interest
rate risks to a large degree. As of June 30, 2004, 58 percent of the outstanding
balance of all loans held and loans underlying on-balance sheet Farmer Mac I
Guaranteed Securities (including 79 percent of all loans with fixed interest
rates) were covered by yield maintenance provisions and other prepayment
penalties. Of the Farmer Mac I new and current loans purchased in second quarter
2004, nine percent had yield maintenance or another form of prepayment
protection. None of the USDA-guaranteed portions underlying Farmer Mac II
Guaranteed Securities had yield maintenance provisions.
Cash and cash equivalents and investment securities pose only limited
interest rate risk, due to their closely matched funding. Farmer Mac's $581.5
million of cash and cash equivalents as of June 30, 2004 mature within three
months and are match-funded with discount notes having similar maturities.
Investment securities of $1.1 billion as of June 30, 2004 consist of $773.7
million (69.9 percent) of floating rate securities that all have rates that
adjust within one year. These floating rate investments are funded using:
o a series of discount note issuances in which each successive
discount note is issued and matures on or about the corresponding
interest rate reset date of the related investment;
o floating-rate notes having similar rate reset provisions as the
related investment; or
o fixed-rate notes swapped to floating rates having similar reset
provisions as the related investment.
The most comprehensive stress test of the long-term interest rate risk in
Farmer Mac's current portfolio is the sensitivity of its Market Value of Equity
("MVE") to yield curve shocks. MVE represents the present value of all future
cash flows from on- and off-balance sheet assets, liabilities and financial
derivatives, discounted at current interest rates and spreads. The following
schedule summarizes the results of Farmer Mac's MVE sensitivity analysis as of
June 30, 2004 and December 31, 2003 to an immediate and instantaneous parallel
shift in the yield curve.
Percentage Change in MVE from
Base Case
-----------------------------
Interest Rate June 30, December 31,
Scenario 2004 2003
----------- ------------ -------------
+ 300 bp -6.7% -0.4%
+ 200 bp -4.1% 0.2%
+ 100 bp -1.7% 0.4%
- 100 bp 0.2% 0.0%
- 200 bp N/A* N/A*
- 300 bp N/A* N/A*
* As of the dates indicated, a -200 bp parallel shift of the U. S. Treasury
yield curve produced negative interest rates for maturities of 2 years and
shorter.
During second quarter 2004, Farmer Mac maintained a relatively low level of
interest rate sensitivity through ongoing asset and liability management
activities. As of June 30, 2004, a uniform or "parallel" increase of 100 basis
points would have increased NII, a shorter-term measure of interest rate risk,
by 8.2 percent, while a parallel decrease of 100 basis points would have
decreased NII by 9.8 percent. Farmer Mac also measures the sensitivity of both
MVE and NII to a variety of non-parallel interest rate shocks, including
flattening and steepening yield curve scenarios. As of June 30, 2004, both MVE
and NII showed similar or lesser sensitivity to non-parallel shocks as to the
parallel shocks. As of June 30, 2004, Farmer Mac's effective duration gap,
another standard measure of interest rate risk that measures the expected life
of assets compared to that of liabilities, was positive 0.6 months, compared to
minus 0.1 months as of December 31, 2003. Duration matching helps to maintain
the correlation of cash flows and stable portfolio earnings even when interest
rates are not stable. The sensitivity of Farmer Mac's MVE and NII to both
parallel and non-parallel interest rate shocks, and its duration gap, are
indicators of the effectiveness of the Corporation's approach to managing its
interest rate risk exposures.
As of June 30, 2004, Farmer Mac had $1.5 billion combined notional amount
of interest rate swaps with terms ranging from 1 to 15 years. Of those interest
rate swaps, $625.3 million were floating-to-fixed rate interest rate swaps,
$675.1 million were basis swaps and $205.0 million were fixed-to-floating
interest rate swaps.
Farmer Mac uses financial derivatives as an end-user for hedging purposes,
not for trading or speculative purposes. When financial derivatives meet the
specific hedge criteria under SFAS 133, they are accounted for as either fair
value hedges or cash flow hedges. Financial derivatives that do not satisfy
those hedge criteria are not accounted for as hedges and changes in the fair
value of those financial derivatives are reported as a gain or loss on financial
derivatives and trading assets in the consolidated statements of operations. All
of Farmer Mac's financial derivative transactions are conducted under standard
collateralized agreements that limit Farmer Mac's potential credit exposure to
any counterparty. As of June 30, 2004, Farmer Mac had no uncollateralized net
exposure to any counterparty.
Credit Risk. Farmer Mac's primary exposure to credit risk is the risk of
loss resulting from the inability of borrowers to repay their mortgages in
conjunction with a deficiency in the value of the collateral relative to the
amount outstanding on the mortgage and the costs of liquidation.
Farmer Mac's allowance for losses is presented in four components on its
consolidated balance sheet:
o an "Allowance for loan losses" on loans held for investment;
o a valuation allowance on real estate owned, which is included in
the balance sheet under "Real estate owned, net of valuation
allowance";
o an allowance for losses on loans underlying post-1996 Act Farmer
Mac I Guaranteed Securities and LTSPCs entered into or modified
after January 1, 2003, which is included in the balance sheet as
a portion of the amount reported as "Guarantee and commitment
obligation"; and
o an allowance for losses on loans underlying post-1996 Act Farmer
Mac I Guaranteed Securities and LTSPCs entered into prior to
January 1, 2003, which is included in the balance sheet under
"Reserve for losses."
Farmer Mac's provision for losses is presented in two components on its
consolidated statement of operations:
o a "Provision for loan losses," which represents estimated
probable losses on Farmer Mac's loans held for investment; and
o a "Provision for losses," which represents estimated probable
losses on loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs and real estate owned.
Farmer Mac estimates probable losses using a systematic process that begins
with management's evaluation of the results of its proprietary loan pool
simulation and guarantee fee model (the "Model"). The Model draws upon
historical information from a data set of agricultural mortgage loans recorded
over a longer period of time than Farmer Mac's own experience to date, screened
to include only those loans with credit characteristics similar to those on
which Farmer Mac has assumed credit risk. The results generated by the Model are
modified by the application of management's judgment, as required to take key
factors into account, including:
o economic conditions;
o geographic and agricultural commodity concentrations in Farmer
Mac's portfolio;
o the credit profile of Farmer Mac's portfolio;
o delinquency trends of Farmer Mac's portfolio;
o Farmer Mac's experience in the management and sale of real estate
owned; and
o historical charge-off and recovery activities of Farmer Mac's
portfolio.
Management believes that the general allowance, which is the difference
between the total allowance for losses (generated through use of the Model) and
the specific allowances, adequately covers any probable losses inherent in the
portfolio of performing loans under Statement of Financial Accounting Standard
No. 5, Accounting for Contingencies ("SFAS 5").
The following table summarizes the changes in the components of Farmer
Mac's allowance for losses for the three and six months ended June 30, 2004 and
2003:
June 30, 2004
-----------------------------------------------------------------------
Contingent
Allowance REO Obligation Total
for Loan Valuation Reserve for Probable Allowance
Losses Allowance for Losses Losses for Losses
--------- ---------- --------- --------- ---------
(in thousands)
Three Months Ended:
Beginning balance $ 7,671 $ 193 $11,952 $ 2,343 $ 22,159
Provision for losses (230) 452 1,235 158 1,615
Net charge-offs (1,876) (100) - - (1,976)
--------- ---------- --------- --------- ---------
Ending balance $ 5,565 $ 545 $13,187 $ 2,501 $ 21,798
--------- ---------- --------- --------- ---------
Six Months Ended:
Beginning balance $ 5,967 $ 238 $13,172 $ 2,676 $ 22,053
Provision for losses 2,564 827 15 (175) 3,231
Net charge-offs (2,966) (520) - - (3,486)
--------- ---------- --------- --------- ---------
Ending balance $ 5,565 $ 545 $13,187 $ 2,501 $ 21,798
--------- ---------- --------- --------- ---------
June 30, 2003
-----------------------------------------------------------------------
Contingent
Allowance REO Obligation Total
for Loan Valuation Reserve for Probable Allowance
Losses Allowance for Losses Losses for Losses
--------- ---------- --------- --------- ---------
(in thousands)
Three Months Ended:
Beginning balance $ 3,028 $ 592 $17,472 $ - $ 21,092
Provision for losses 1,416 (225) 697 - 1,888
Net charge-offs (1,342) 225 - - (1,117)
--------- ---------- --------- --------- ---------
Ending balance $ 3,102 $ 592 $18,169 $ - $ 21,863
--------- ---------- --------- --------- ---------
Six Months Ended:
Beginning balance $ 2,662 $ 592 $16,757 $ - $ 20,011
Provision for losses 2,624 (102) 1,592 - 4,114
Net charge-offs (2,184) 102 (180) - (2,262)
--------- ---------- --------- --------- ---------
Ending balance $ 3,102 $ 592 $18,169 $ - $ 21,863
--------- ---------- --------- --------- ---------
Farmer Mac's total provision for losses was $1.6 million for second quarter
2004, compared to $2.1 million for second quarter 2003. During second quarter
2004, Farmer Mac charged off $2.0 million in losses against the allowance for
losses and received $1.8 million from two sellers (one of which was a related
party) for breaches of representations and warranties associated with prior
sales of agricultural mortgage loans to Farmer Mac, which amount Farmer Mac had
previously charged off as losses on the associated loans. This recovery is
reported as miscellaneous income. During second quarter 2003, Farmer Mac charged
off $1.3 million in losses against the allowance for losses and had no
recoveries. The net charge-offs for second quarter 2004 and 2003 did not include
previously accrued or advanced interest on loans and Farmer Mac I Guaranteed
Securities. As of June 30, 2004, Farmer Mac's allowance for losses totaled $21.8
million, or 45 basis points of the outstanding principal balance of loans held
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs, compared to $22.1 million (44 basis points) as of December 31, 2003.
As of June 30, 2004, Farmer Mac's 90-day delinquencies totaled $32.8
million and represented 0.68 percent of the principal balance of all loans held
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs, compared to $51.3 million (1.06 percent) as of June 30, 2003. As of June
30, 2004, Farmer Mac's non-performing assets (which includes 90-day
delinquencies, loans performing under either their original loan terms or a
court-approved bankruptcy plan, and real estate owned) totaled $69.8 million and
represented 1.43 percent of the principal balance of all loans held and loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, compared
to $80.2 million (1.64 percent) as of June 30, 2003. Loans that have been
restructured after delinquency were insignificant and are included within the
reported 90-day delinquency and non-performing asset disclosures. From quarter
to quarter, Farmer Mac anticipates that 90-day delinquencies and non-performing
assets will fluctuate, both in dollars and as a percentage of the outstanding
portfolio, with higher levels likely at the end of the first and third quarters
of each year corresponding to the semi-annual (January 1st and July 1st) payment
characteristics of most Farmer Mac I loans.
The following table presents historical information regarding Farmer Mac's
non-performing assets and 90-day delinquencies:
Outstanding
Post-1996 Act Less:
Loans, Non- REO and
Guarantees and performing Performing 90-Day
LTSPCs Assets Percentage Bankruptcies Delinquencies Percentage
-------------- ---------- ---------- ------------ ------------- ----------
(dollars in thousands)
As of:
June 30, 2004 $ 4,882,505 $ 69,751 1.43% $ 36,978 $ 32,773 0.68%
March 31, 2004 4,922,759 91,326 1.86% 33,951 57,375 1.17%
December 31, 2003 5,020,032 69,964 1.39% 39,908 30,056 0.60%
September 30, 2003 4,871,756 84,583 1.74% 37,442 47,141 0.98%
June 30, 2003 4,875,059 80,169 1.64% 28,883 51,286 1.06%
March 31, 2003 4,820,887 94,822 1.97% 18,662 76,160 1.58%
December 31, 2002 4,821,634 75,308 1.56% 17,094 58,214 1.21%
September 30, 2002 4,506,330 91,286 2.03% 11,460 79,826 1.77%
June 30, 2002 4,489,735 65,196 1.45% 14,931 50,265 1.12%
As of June 30, 2004, approximately $1.6 billion (32.2 percent) of Farmer
Mac's outstanding loans held and loans underlying post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs were in their peak delinquency and default
years (approximately years three through five after origination) compared to
$1.8 billion (37.1 percent) of such loans as of June 30, 2003. The Model takes
the portfolio age distribution and maturation into consideration. Accordingly,
those trends did not cause management to alter the Model's projection for the
provisions for losses.
As of June 30, 2004, Farmer Mac analyzed the following three categories of
assets for impairment, based on the fair vale of the underlying collateral:
o $69.8 million of non-performing assets;
o $32.9 million of loans for which Farmer Mac has adjusted the
timing of borrowers' payment schedules within the past three
years, but still expects to collect all amounts due and has not
made economic concessions; and
o $54.4 million of performing loans that have previously been
delinquent or are secured by real estate that produces
commodities currently under stress.
Those individual assessments covered a total of $157.1 million of assets
measured for impairment against updated appraised values, other updated
collateral valuations or discounted values. Of the $157.1 million of assets
analyzed, $135.8 million were adequately collateralized. For the $21.3 million
that were not adequately collateralized, individual collateral shortfalls
totaled $2.4 million. Accordingly, Farmer Mac allocated specific allowances of
$2.4 million to those under-collateralized assets as of June 30, 2004. As of
June 30, 2004, after the allocation of specific allowances to
under-collateralized loans, Farmer Mac had additional non-specific or general
allowances of $19.4 million, bringing the total allowance for losses to $21.8
million.
The following table summarizes Farmer Mac's assets specifically reviewed
for impairment and allowance for losses:
Farmer Mac I Post-1996 Act Assets Specifically Reviewed
for Impairment and Allowance for Losses
- -------------------------------------------------------------------------------------------------------
As of June 30, 2004 As of December 31, 2003
------------------------------- -------------------------------
(in thousands)
Specific Specific
Non-performing Allowance Non-performing Allowance
Assets for Losses Assets for Losses
------------- ----------- ------------- ----------
Loans 90 days or more past due $ 9,530 $ 16 $ 5,185 $ 100
Loans in foreclosure 10,682 234 11,016 119
Loans in bankruptcy * 39,556 292 38,047 2,769
Real estate owned 9,983 545 15,716 238
Other loans specifically reviewed 87,355 1,315 102,736 536
------------- ----------- ------------- ----------
Total $ 157,106 $ 2,402 $ 172,700 $ 3,762
------------- ----------- ------------- ----------
Allowance Allowance
for Losses for Losses
----------- ----------
Specific allowance for losses $ 2,402 $ 3,762
General allowance for losses 19,396 18,291
----------- ----------
Total allowance for losses $ 21,798 $ 22,053
----------- ----------
* Includes loans that are performing under either their original loan terms
or a court-approved bankruptcy plan.
As of June 30, 2004, the weighted-average original loan-to-value ("LTV")
ratio for all loans held and loans underlying post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs was 49 percent, and the weighted-average
original LTV ratio for all post-1996 Act non-performing assets was 56 percent.
The following table summarizes the post-1996 Act non-performing assets by
original LTV ratio:
Distribution of Post-1996 Act Non-performing
Assets by Original LTV Ratio
as of June 30, 2004
- ------------------------------------------------
(dollars in thousands)
Post-1996 Act
Non-performing
Original LTV Ratio Assets Percentage
- ------------------ -------------- ----------
0.00% to 40.00% $ 6,939 10%
40.01% to 50.00% 9,435 14%
50.01% to 60.00% 33,696 48%
60.01% to 70.00% 17,742 25%
70.01% to 80.00% 1,762 3%
80.01% + 177 0%
---------- ---------
Total $ 69,751 100%
---------- ---------
The following table presents outstanding loans held and loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, post-1996 Act
non-performing assets and specific allowances for losses as of June 30, 2004 by
year of origination, geographic region and commodity.
Farmer Mac I Post-1996 Act Non-performing Assets and Specific Allowance for Losses
- -----------------------------------------------------------------------------------------------------------------
Distribution of
Outstanding Outstanding Post-1996 Act
Loans, Loans, Non- Non- Specific
Guarantees and Guarantees and performing performing Allowance
LTSPCs LTSPCs Assets (1) Asset Rate for Losses
------------- --------------- ------------ ----------- ----------
(dollars in thousands)
By year of origination:
Before 1994 12% $ 587,138 $ 2,455 0.42% $ -
1994 3% 141,738 1,313 0.93% -
1995 3% 142,385 2,860 2.01% 85
1996 6% 317,950 12,058 3.79% 483
1997 8% 380,076 10,201 2.68% 435
1998 12% 602,068 12,466 2.07% 654
1999 13% 619,048 12,673 2.05% 258
2000 8% 370,726 6,767 1.83% 445
2001 12% 565,216 8,450 1.50% 42
2002 12% 610,233 508 0.08% -
2003 9% 460,323 - 0.00% -
2004 2% 85,604 - 0.00% -
------------- ------------ ----------- ----------- ----------
Total 100% $ 4,882,505 $ 69,751 1.43% $ 2,402
------------- ------------ ----------- ----------- ----------
By geographic region (2):
Northwest 21% $ 1,005,200 $ 42,248 4.20% $ 1,311
Southwest 47% 2,308,729 18,809 0.81% 803
Mid-North 13% 633,931 2,070 0.33% 106
Mid-South 5% 264,382 4,516 1.71% 1
Northeast 8% 367,590 1,628 0.44% 72
Southeast 6% 302,673 480 0.16% 109
------------- ------------ ----------- ----------- ----------
Total 100% $ 4,882,505 $ 69,751 1.43% $ 2,402
------------- ------------ ----------- ----------- ----------
By commodity:
Crops 44% $ 2,158,610 $ 26,994 1.25% $ 336
Permanent plantings 27% 1,312,928 27,917 2.13% 1,755
Livestock 22% 1,079,882 11,172 1.03% 160
Part-time farm 6% 297,210 3,668 1.23% 151
Other 1% 33,875 - 0.00% -
------------- ------------ ----------- ----------- ----------
Total 100% $ 4,882,505 $ 69,751 1.43% $ 2,402
------------- ------------ ----------- ----------- ----------
<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 credit losses and
current specific allowances relative to the cumulative original balance for all
loans purchased and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs. This information is presented by year of origination,
geographic region and commodity. The purpose of this table is to present
information regarding losses and collateral deficiencies relative to original
guarantees and commitments.
Farmer Mac I Post-1996 Act Credit Losses and Specific Allowance for Losses
Relative to all Cumulative Original Loans, Guarantees and LTSPCs
- -------------------------------------------------------------------------------------------------------------------------
Cumulative Cumulative Combined
Original Loans, Net Credit Cumulative Current Credit Loss
Guarantees Losses / Loss Specific and Specific
and LTSPCs (Gains) Rate Allowances Allowance Rate
-------------- ----------- ------------ ------------ --------------
(dollars in thousands)
By year of origination:
Before 1994 $ 1,984,151 $ - 0.00% $ - 0.00%
1994 367,211 - 0.00% - 0.00%
1995 324,103 961 0.30% 85 0.32%
1996 630,513 1,943 0.31% 483 0.38%
1997 721,131 2,879 0.40% 435 0.46%
1998 1,071,287 3,017 0.28% 654 0.34%
1999 1,062,603 1,196 0.11% 258 0.14%
2000 661,879 1,615 0.24% 445 0.31%
2001 878,099 650 0.07% 42 0.08%
2002 815,108 - 0.00% - 0.00%
2003 483,769 - 0.00% - 0.00%
2004 98,658 - 0.00% - 0.00%
----------- ----------- ------------ ------------ -----------
Total $ 9,098,512 $ 12,261 0.13% $ 2,402 0.16%
----------- ----------- ------------
By geographic region (1):
Northwest $ 2,006,625 $ 5,389 0.27% $ 1,311 0.33%
Southwest 4,006,931 4,935 0.12% 803 0.14%
Mid-North 1,137,205 38 0.00% 106 0.01%
Mid-South 444,199 1,782 0.40% 1 0.40%
Northeast 726,350 - 0.00% 72 0.01%
Southeast 777,202 117 0.02% 109 0.03%
----------- ----------- ------------ ------------ -----------
Total $ 9,098,512 $ 12,261 0.13% $ 2,402 0.16%
----------- ----------- ------------
By commodity:
Crops $ 3,947,637 $ 552 0.01% $ 336 0.02%
Permanent plantings 2,376,608 8,734 0.37% 1,755 0.44%
Livestock 2,075,834 2,613 0.13% 160 0.13%
Part-time farm 602,703 362 0.06% 151 0.09%
Other 95,730 - 0.00% - 0.00%
----------- ----------- ------------ ------------ -----------
Total $ 9,098,512 $ 12,261 0.13% $ 2,402 0.16%
----------- ----------- ------------
<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>
Liquidity and Capital Resources
Farmer Mac has sufficient liquidity and capital resources to support its
operations for the next twelve months and has a contingency funding plan to
handle unanticipated disruptions in its access to the capital markets.
Debt Issuance. Farmer Mac funds its program operations primarily by issuing
debt obligations of various maturities in the public capital markets. Farmer
Mac's debt obligations consist of discount notes and medium-term notes,
including floating rate notes, issued to obtain funds principally to cover the
costs of purchasing and holding loans and securities (including Farmer Mac
Guaranteed Securities). Farmer Mac also issues discount notes and medium-term
notes to obtain funds for investments, transaction costs and guarantee payments.
The interest and principal on Farmer Mac's debt are not guaranteed by and do not
constitute debts or obligations of FCA or the United States or any agency or
instrumentality of the United States other than Farmer Mac. Farmer Mac is an
institution of the Farm Credit System, but is not liable for any debt or
obligation of any other institution of the Farm Credit System. Likewise, neither
the Farm Credit System nor any other individual institution of the Farm Credit
System is liable for any debt or obligation of Farmer Mac. Income on Farmer
Mac's discount notes and medium-term notes has no tax exemption under federal
law from federal, state or local taxation. The Corporation's discount notes and
medium-term notes are not currently rated by a nationally recognized statistical
rating organization (NRSRO), although Farmer Mac intends to obtain a rating to
eliminate the absence of a rating as a future point of contention. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Regulatory Matters" below.)
Farmer Mac's board of directors has authorized the issuance of up to $5.0
billion of discount notes and medium-term notes (of which $3.7 billion was
outstanding as of June 30, 2004), subject to periodic review of the adequacy of
that level relative to Farmer Mac's borrowing requirements. Farmer Mac invests
the proceeds of such issuances in loans, Farmer Mac Guaranteed Securities and
non-program investment assets in accordance with guidelines established by its
board of directors.
Liquidity. The funding and liquidity needs of Farmer Mac's business
programs are driven by the purchase and retention of eligible loans and Farmer
Mac Guaranteed Securities, the maturities of Farmer Mac's discount notes and
medium-term notes and payment of principal and interest on Farmer Mac Guaranteed
Securities. Farmer Mac's primary sources of funds to meet these needs are:
o principal and interest payments and ongoing guarantee and
commitment fees received on loans, Farmer Mac Guaranteed
Securities and LTSPCs;
o principal and interest payments received from investment
securities; and
o the issuance of discount notes and medium-term notes.
As a result of Farmer Mac's regular issuance of discount notes and
medium-term notes, as well as its status as a federally chartered
instrumentality of the United States, Farmer Mac has been able to issue debt
securities in the capital markets at favorable rates of interest. Farmer Mac has
also used fixed-to-floating interest rate swaps, combined with medium-term
notes, as a source of floating rate funding, and floating-to-fixed interest rate
swaps, combined with discount note issuances, as a source of fixed-rate funding.
While the swap market may provide favorable fixed rates, swap transactions
expose Farmer Mac to the risk of future widening of its own issuance spreads
versus corresponding LIBOR rates. If the spreads on the Farmer Mac discount
notes were to increase relative to LIBOR, Farmer Mac would be exposed to a
commensurate reduction on its net interest yield on the notional amount of its
floating-to-fixed interest rate swaps and other LIBOR-based floating rate
assets. Farmer Mac compensates for this risk by maintaining the flexibility to
adjust the required net yield on program asset purchases to reflect the change
in the discount note to LIBOR relationship, as necessary. During the second
quarter, Farmer Mac continued its practice of issuing floating rate notes as an
alternative to discount notes.
For liquidity, Farmer Mac maintains an investment portfolio of cash and
cash equivalents (including commercial paper and other short-term money market
instruments) and investment securities consisting mostly of floating rate
securities whose rates reset within one year, and a Farmer Mac II portfolio of
USDA Guaranteed Portions (full faith and credit of the U.S. Government). As of
June 30, 2004, Farmer Mac's cash and cash equivalents, investment securities and
USDA Guaranteed Portions, were $0.6 billion, $1.1 billion, and $0.7 billion,
respectively, a combined 60 percent of total liabilities. Farmer Mac has a
policy of maintaining a minimum of 60 days of liquidity and a target of 90 days
of liquidity. For second quarter 2004, Farmer Mac maintained an average of
greater than 90 days of liquidity.
Regulatory Matters
During second quarter 2004, FCA published a proposed regulation relating to
Farmer Mac's investments and liquidity, adding administrative requirements and
restricting the future composition of the non-program investment liquidity
portfolio and its growth in proportion to Farmer Mac's total guarantees and
commitments. Farmer Mac believes that the proposed regulation would not be
largely inconsistent with the Corporation's current policies and expects to be
able to comply with the regulation, though analysis indicates it could limit
future increases in Farmer Mac's non-program investment portfolio and the
related net interest income. Farmer Mac believes there are good and sufficient
reasons why the proposed regulation should not be adopted in its current form
and, as part of the formal rule-making process, will provide written comments to
FCA within the public comment period, which on ends on September 13, 2004.
Additionally, on June 10, 2004, the FCA Board approved a proposed
regulation that would establish a new risk-weight allocation of capital
applicable to Farmer Mac transactions with FCS institutions, a major segment of
Farmer Mac's customer base. The proposed regulation would require FCS
institutions to risk-weight assets on their books that are guaranteed by a GSE
based on the financial strength rating of the GSE, as determined by an NRSRO.
Under the proposed regulation: (a) the 20 percent risk-weight would apply to
such assets only if the GSE guarantor had a AAA or AA rating from an NRSRO; (b)
an A rating would result in a 50 percent risk-weight; and (c) a lower rating (or
no rating) would result in a 100 percent risk-weight. Farmer Mac is currently
unrated. Currently, all banking regulators and FCA accord a 20 percent
risk-weight to assets backed by guarantees of government sponsored enterprises
(GSEs) such as Fannie Mae, Freddie Mac or Farmer Mac.
The proposed regulation was published in the Federal Register on August 6,
2004, starting a 90-day public comment period. As proposed, the regulation would
require FCS institutions to comply with the risk-weight allocation of capital
eighteen months after the effective date of the final regulation. If the
proposed regulation is adopted as a final rule in its current form and Farmer
Mac does not receive a rating of at least AA within the period provided for in
the proposed regulation, not only would the benefit to an FCS institution of
doing business with Farmer Mac be diminished after the adoption of the
regulation, but also, based on the language of the proposed regulation, a
significant portion of the current $2.8 billion of outstanding Farmer Mac I
guarantees and commitments currently in place with FCS institutions might be
subject to early termination.
There can be no assurance that the regulation will not be adopted as a
final rule in its current form, or in a modified form with substantially the
same effect. Likewise, Farmer Mac currently is not rated, and there can be no
assurance that Farmer Mac would receive a AAA or AA rating from an NRSRO.
Without regard to the proposed regulation, Farmer Mac intends to obtain a rating
from an NRSRO well before the effective date of any final regulation. Farmer Mac
believes there are good and sufficient reasons why the proposed regulation
should not be adopted in its current form and, as part of the formal rule-making
process, will provide written comments to FCA setting forth those reasons.
Farmer Mac's comments will include the facts that the proposed regulation is
inconsistent with regulations with respect to secondary market GSEs currently in
effect at other federal regulators; that it would defeat the legislative intent
of Congress that Farmer Mac should be able reliably to increase the lending
capacity of all agricultural lenders; and that its logic is essentially
circular, in that Farmer Mac's financial strength would become a function of the
NRSRO's rating of its financial strength. Always conscious of the importance of
oversight and sound regulation in the performance of its mission for the
farmers, ranchers and rural homeowners of America, Farmer Mac looks forward to
participating in the regulatory process as to both of the proposed regulations.
Other Matters
On August 3, 2004 the Board of Directors adopted a policy to begin paying a
quarterly dividend of $0.10 per share on all classes of the Corporation's common
stock in the fourth quarter of 2004, and authorized a program to repurchase up
to ten percent of the Corporation's outstanding Class C non-voting common stock.
The Board's decisions were made in consideration of the Corporation's forward
capital requirements to support fulfillment of its mission of providing greater
liquidity and lending capacity to agricultural lenders and increasing the
availability of capital markets-based funding for mortgage loans to the Nation's
farmers, ranchers and rural homeowners. The Board determined that Farmer Mac's
capital was more than sufficient to meet those requirements. Likewise, the
Board's decisions gave due regard to Farmer Mac's level of excess capital above
both statutory minimum and risk-based capital requirements, 66 percent and 391
percent, respectively, and the annuity-like nature of the Corporation's income
streams.
Considering recent market price levels of Class C common stock, the Board
concluded that the repurchase program would enable Farmer Mac to reacquire
shares at prices inconsistent with the Board's and management's positive view of
the Corporation's long-term business outlook. Under the program, Farmer Mac will
use a broker-dealer as repurchasing agent to acquire shares from time to time
over the next 2 years through open market transactions, block purchases or
private transactions. The timing of purchases and the number of shares to be
purchased will depend on market conditions. The plan does not obligate the
Corporation to acquire any specific number of shares and may be discontinued at
any time. Farmer Mac intends to fund such repurchases with currently available
working capital. Shares repurchased under the program will become authorized but
unissued shares available for future issuance, as determined by the Board.
Supplemental Information
The following tables present quarterly and annual information regarding
loan purchases, guarantees and LTSPCs and outstanding guarantees and LTSPCs.
Farmer Mac Purchases, Guarantees and LTSPCs
- ----------------------------------------------------------------------------
Farmer Mac I
------------------------
Loans and
Guaranteed
Securities LTSPCs Farmer Mac II Total
------------- ----------- ---------------- -----------
(in thousands)
For the quarter ended:
June 30, 2004 $ 27,520 $ 127,098 $ 34,671 $ 189,289
March 31, 2004 25,444 147,273 34,483 207,200
December 31, 2003 25,148 218,097 44,971 288,216
September 30, 2003 42,760 199,646 106,729 349,135
June 30, 2003 65,615 179,025 77,636 322,276
March 31, 2003 59,054 166,574 41,893 267,521
December 31, 2002 62,841 395,597 38,714 497,152
September 30, 2002 58,475 140,157 37,374 236,006
June 30, 2002 551,690 280,904 57,769 890,363
For the year ended:
December 31, 2003 192,577 763,342 271,229 1,227,148
December 31, 2002 747,881 1,155,479 173,011 2,076,371
Outstanding Balance of Farmer Mac Loans and
On- and Off-Balance Sheet Guarantees and LTSPCs (1)
- -------------------------------------------------------------------------------
Farmer Mac I
------------------------------------------
Post-1996 Act
-------------------------
Loans and
Guaranteed
Securities LTSPCs Pre-1996 Act Farmer Mac II Total
------------- -------- -------------- --------------- -----------
(in thousands)
As of:
June 30, 2004 $ 2,521,026 $ 2,390,779 $ 22,155 $ 715,750 $ 5,649,710
March 31, 2004 2,566,412 2,382,648 22,261 722,978 5,694,299
December 31, 2003 2,696,530 2,348,702 24,734 729,470 5,799,436
September 30, 2003(2) 2,721,775 2,174,182 25,588 720,584 5,642,129
June 30, 2003 2,108,180 2,790,480 28,057 668,899 5,595,616
March 31, 2003 2,111,861 2,732,620 29,216 650,152 5,523,849
December 31, 2002 2,168,994 2,681,240 31,960 645,790 5,527,984
September 30, 2002 2,127,460 2,407,469 35,297 630,452 5,200,678
June 30, 2002 2,180,948 2,336,886 37,873 617,503 5,173,210
<FN>
(1) Farmer Mac assumes 100 percent of the credit risk on post-1996 Act loans.
Pre-1996 Act loans back securities that are supported by unguaranteed first
loss subordinated interests representing approximately 10 percent of the
balance of the loans. Farmer Mac II loans are guaranteed by the USDA.
(2) The Loans and Guaranteed Securities and LTSPCs amounts reflect the
conversion of $722.3 million of existing LTSPCs to a Farmer Mac I
Guaranteed Security during third quarter 2003 at the request of a program
participant, Farm Credit West, ACA, of which Farmer Mac director Kenneth A.
Graff is President.
</FN>
Outstanding Balance of Loans Held and Loans Underlying
On-Balance Sheet Farmer Mac Guaranteed Securities
- -----------------------------------------------------------------------------------------------
Total
Fixed Rate 5-to-10-Year 1-Month-to-3-Year Held in
(10-yr. wtd. avg.terms) ARMs & Resets ARMs Portfolio
----------------------- --------------- ----------------- ------------
(in thousands)
As of:
June 30, 2004 $ 782,854 $ 978,531 $ 529,654 $ 2,291,039
March 31, 2004 818,497 978,263 548,134 2,344,894
December 31, 2003 860,874 1,045,217 542,024 2,448,115
September 30, 2003 865,817 1,037,168 535,915 2,438,900
June 30, 2003 889,839 1,064,824 511,700 2,466,363
March 31, 2003 880,316 1,057,310 515,910 2,453,536
December 31, 2002 1,003,434 981,548 494,713 2,479,695
September 30, 2002 1,000,518 934,435 498,815 2,433,768
June 30, 2002 1,016,997 892,737 516,892 2,426,626
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Farmer Mac is exposed to market risk attributable to changes in interest
rates. Farmer Mac manages this market risk by entering into various financial
transactions, including financial derivatives, and by monitoring its exposure to
changes in interest rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quantitative and Qualitative
Disclosures About Market Risk Management--Interest Rate Risk" for more
information about Farmer Mac's exposure to interest rate risk and strategies to
manage such risk. For information regarding Farmer Mac's use of and accounting
policies for financial derivatives, see Note 1(c) to the condensed consolidated
financial statements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" for
further information regarding Farmer Mac's debt issuance and liquidity risks.
Item 4. Controls and Procedures
Farmer Mac maintains disclosure controls and procedures designed to ensure
that information required to be disclosed in the Corporation's periodic filings
under the Securities Exchange Act of 1934 (the "Exchange Act"), including this
report, is recorded, processed, summarized and reported on a timely basis. These
disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed under the Exchange Act is
accumulated and communicated to the Corporation's management on a timely basis
to allow decisions regarding required disclosure. Farmer Mac's Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of the
design and operation of the Corporation's disclosure controls and procedures (as
defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30,
2004. Based upon that evaluation, Farmer Mac's Chief Executive Officer and Chief
Financial Officer have concluded that the Corporation's disclosure controls and
procedures are adequate and effective. For the quarter ended June 30, 2004,
there were no significant changes in Farmer Mac's internal controls, or in other
factors that could materially affect these controls, subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies or material weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Farmer Mac is not a party to any material pending legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Farmer Mac is a federally chartered instrumentality of the United
States and its Common Stock is exempt from registration pursuant
to Section 3(a)(2) of the Securities Act of 1933.
Pursuant to Farmer Mac's policy that permits Directors of Farmer
Mac to elect to receive shares of Class C Non-Voting Common Stock
in lieu of their annual cash retainers, on April 2, 2004, Farmer
Mac issued an aggregate of 787 shares of its Class C Non-Voting
Common Stock, at an issue price of $26.21 per share, to the
eleven Directors who elected to receive such stock in lieu of
their cash retainers.
During second quarter 2004, Farmer Mac granted options under its
1997 Stock Option Plan to purchase an aggregate of 90,000 shares
of Class C Non-Voting Common Stock, at an exercise price of
$22.11 per share, to directors as incentive compensation.
(d) Not applicable.
(e) Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Farmer Mac's Annual Meeting of Stockholders was held on June 3,
2004.
(b) See paragraph (c)(1) below. In addition to the Directors elected
at the Annual Meeting of Stockholders on June 3, 2004, the
following Directors appointed by the President of the United
States continue to serve as Directors of Farmer Mac:
Fred L. Dailey (Chairman)
Julia Bartling
Grace T. Daniel
Lowell L. Junkins
Glen O. Klippenstein
(c) (1) Election of Directors (cumulative voting):
Class A Nominees
Number of Shares
For Withheld
------------------------
Dennis L. Brack 698,366 2,100
Dennis A. Everson 698,666 1,800
Mitchell A. Johnson 698,266 2,200
Timothy F. Kenny 698,366 2,100
Charles E. Kruse 698,866 1,600
Class B Nominees
Number of Shares
For Withheld
------------------------
Ralph "Buddy" Cortese 391,678 200
Paul A. DeBriyn 391,678 200
Kenneth E. Graff 892,443 1,050
John G. Nelson, III 391,678 200
John Dan Raines 391,678 200
(2) Selection of Independent Auditors (Deloitte & Touche LLP):
Class A Stockholders
Number of Shares
--------------------
For 697,166
Against 1,300
Abstain 2,000
Class B Stockholders
Number of Shares
--------------------
For 492,401
Against 0
Abstain 0
(d) Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
* 3.1 - Title VIII of the Farm Credit Act of 1971, as most recently
amended by the Farm Credit System Reform Act of 1996, P.L. 104-105
(Form 10-K filed March 29, 1996).
** 3.2 - Amended and restated By-Laws of the Registrant.
* 4.1 - Specimen Certificate for Farmer Mac Class A Voting Common Stock
(Form 10-Q filed May 15, 2003).
* 4.2 - Specimen Certificate for Farmer Mac Class B Voting Common Stock
(Form 10-Q filed May 15, 2003).
* 4.3 - Specimen Certificate for Farmer Mac Class C Non-Voting Common
Stock (Form 10-Q filed May 15, 2003).
* 4.4 - Certificate of Designation of Terms and Conditions of Farmer Mac
6.40% Cumulative Preferred Stock, Series A (Form 10-Q filed May 15,
2003).
+* 10.1 - Stock Option Plan (Previously filed as Exhibit 19.1 to Form 10-Q
filed August 14, 1992).
+* 10.1.1 - Amendment No. 1 to Stock Option Plan (Previously filed as Exhibit
10.2 to Form 10-Q filed August 16, 1993).
+* 10.1.2 - 1996 Stock Option Plan (Form 10-Q filed August 14, 1996).
+* 10.1.3 - Amended and Restated 1997 Incentive Plan (Form 10-Q filed November
14, 2003).
+* 10.2 - Employment Agreement dated May 5, 1989 between Henry D. Edelman
and the Registrant (Previously filed as Exhibit 10.4 to Form 10-K
filed February 14, 1990).
+* 10.2.1 - Amendment No. 1 dated as of January 10, 1991 to Employment Contract
between Henry D. Edelman and the Registrant (Previously filed as
Exhibit 10.4 to Form 10-K filed April 1, 1991).
_________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 10.2.2 - Amendment to Employment Contract dated as of June 1, 1993 between
Henry D. Edelman and the Registrant (Previously filed as Exhibit
10.5 to Form 10-Q filed November 15, 1993).
+* 10.2.3 - Amendment No. 3 dated as of June 1, 1994 to Employment Contract
between Henry D. Edelman and the Registrant (Previously filed as
Exhibit 10.6 to Form 10-Q filed August 15, 1994).
+* 10.2.4 - Amendment No. 4 dated as of February 8, 1996 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-K filed
March 29, 1996).
+* 10.2.5 - Amendment No. 5 dated as of June 13, 1996 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 1996).
+* 10.2.6 - Amendment No. 6 dated as of August 7, 1997 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
November 14, 1997).
+* 10.2.7 - Amendment No. 7 dated as of June 4, 1998 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed August
14, 1998).
+* 10.2.8 - Amendment No. 8 dated as of June 3, 1999 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed August
12, 1999).
+* 10.2.9 - Amendment No. 9 dated as of June 1, 2000 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed August
14, 2000).
+* 10.2.10- Amendment No. 10 dated as of June 7, 2001 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 2001).
+* 10.2.11- Amendment No. 11 dated as of June 6, 2002 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 2002).
_________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 10.2.12- Amendment No. 12 dated as of June 5, 2003 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 2003).
+* 10.3 - Employment Agreement dated May 11, 1989 between Nancy E. Corsiglia
and the Registrant (Previously filed as Exhibit 10.5 to Form 10-K
filed February 14, 1990).
+* 10.3.1 - Amendment dated December 14, 1989 to Employment Agreement between
Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit
10.5 to Form 10-K filed February 14, 1990).
+* 10.3.2 - Amendment No. 2 dated February 14, 1991 to Employment Agreement
between Nancy E. Corsiglia and the Registrant (Previously filed as
Exhibit 10.7 to Form 10-K filed April 1, 1991).
+* 10.3.3 - Amendment to Employment Contract dated as of June 1, 1993 between
Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit
10.9 to Form 10-Q filed November 15, 1993).
+* 10.3.4 - Amendment No. 4 dated June 1, 1993 to Employment Contract between
Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit
10.10 to Form 10-K filed March 31, 1994).
+* 10.3.5 - Amendment No. 5 dated as of June 1, 1994 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Previously filed as
Exhibit 10.12 to Form 10-Q filed August 15, 1994).
+* 10.3.6 - Amendment No. 6 dated as of June 1, 1995 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 1995).
+* 10.3.7 - Amendment No. 7 dated as of February 8, 1996 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-K filed March
29, 1996).
+* 10.3.8 - Amendment No. 8 dated as of June 13, 1996 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 1996).
_________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 10.3.9 - Amendment No. 9 dated as of August 7, 1997 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
November 14, 1997).
+* 10.3.10- Amendment No. 10 dated as of June 4, 1998 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 1998).
+* 10.3.11- Amendment No. 11 dated as of June 3, 1999 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 12, 1999).
+* 10.3.12- Amendment No. 12 dated as of June 1, 2000 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 2000).
+* 10.3.13- Amendment No. 13 dated as of June 7, 2001 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 2001).
+* 10.3.14- Amendment No. 14 dated as of June 6, 2002 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 2002).
+* 10.3.15- Amendment No. 15 dated as of June 5, 2003 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 2003).
+* 10.4 - Employment Contract dated as of September 1, 1997 between Tom D.
Stenson and the Registrant (Previously filed as Exhibit 10.8 to Form
10-Q filed November 14, 1997).
+* 10.4.1 - Amendment No. 1 dated as of June 4, 1998 to Employment Contract
between Tom D. Stenson and the Registrant (Previously filed as
Exhibit 10.8.1 to Form 10-Q filed August 14, 1998).
+* 10.4.2 - Amendment No. 2 dated as of June 3, 1999 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed August
12, 1999).
_________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 10.4.3 - Amendment No. 3 dated as of June 1, 2000 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed August
14, 2000).
+* 10.4.4 - Amendment No. 4 dated as of June 7, 2001 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed August
14, 2001).
+* 10.4.5 - Amendment No. 5 dated as of June 6, 2002 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed August
14, 2002).
+* 10.4.6 - Amendment No. 6 dated as of June 5, 2003 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed August
14, 2003).
+* 10.5 - Employment Contract dated February 1, 2000 between Jerome G. Oslick
and the Registrant (Previously filed as Exhibit 10.6 to Form 10-Q
filed May 11, 2000).
+* 10.5.1 - Amendment No. 1 dated as of June 1, 2000 to Employment Contract
between Jerome G. Oslick and the Registrant (Previously filed as
Exhibit 10.6.1 to Form 10-Q filed August 14, 2000).
+* 10.5.2 - Amendment No. 2 dated as of June 7, 2001 to Employment Contract
between Jerome G. Oslick and the Registrant (Previously filed as
Exhibit 10.6.2 to Form 10-Q filed August 14, 2001).
+* 10.5.3 - Amendment No. 3 dated as of June 6, 2002 to Employment Contract
between Jerome G. Oslick and the Registrant (Form 10-Q filed August
14, 2002).
+* 10.5.4 - Amendment No. 4 dated as of June 5, 2003 to Employment Contract
between Jerome G. Oslick and the Registrant (Form 10-Q filed August
14, 2003).
+* 10.6 - Employment Contract dated June 5, 2003 between Timothy L. Buzby and
the Registrant (Form 10-Q filed August 14, 2003).
_________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
* 10.7 - Farmer Mac I Seller/Servicer Agreement dated as of August 7, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
* 10.8 - Medium-Term Notes U.S. Selling Agency Agreement dated as of October
1, 1998 between Zions First National Bank and the Registrant (Form
10-Q filed November 14, 2002).
* 10.9 - Discount Note Dealer Agreement dated as of September 18, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
*# 10.10 - ISDA Master Agreement and Credit Support Annex dated as of June 26,
1997 between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
*# 10.11 - Master Central Servicing Agreement dated as of December 17, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
*# 10.11.1- Amendment No. 1 dated as of February 26, 1997 to Master Central
Servicing Agreement dated as of December 17, 1996 between Zions
First National Bank and the Registrant (Form 10-Q filed November 14,
2002).
**#10.11.2- Amended and Restated Master Central Servicing Agreement dated as of
May 1, 2004 between Zions First National Bank and the Registrant.
*# 10.12 - Loan File Review and Underwriting Agreement dated as of December 17,
1996 between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
*# 10.12.1- Amendment No. 1 dated as of January 20, 2000 to Loan File Review and
Underwriting Agreement dated as of December 17, 1996 between Zions
First National Bank and the Registrant (Form 10-Q filed November 14,
2002).
*# 10.13 - Long Term Standby Commitment to Purchase dated as of August 1, 1998
between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed
November 14, 2002).
*# 10.13.1- Amendment No. 1 dated as of January 1, 2000 to Long Term Standby
Commitment to Purchase dated as of August 1, 1998 between AgFirst
Farm Credit Bank and the Registrant (Form 10-Q filed November 14,
2002).
_________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
* 10.13.2- Amendment No. 2 dated as of September 1, 2002 to Long Term Standby
Commitment to Purchase dated as of August 1, 1998, as amended by
Amendment No. 1 dated as of January 1, 2000, between AgFirst Farm
Credit Bank and the Registrant (Form 10-Q filed November 14, 2002).
* 10.14 - Lease Agreement, dated June 28, 2001 between EOP - Two Lafayette,
L.L.C. and the Registrant (Previously filed as Exhibit 10.10 to Form
10-K filed March 27, 2002).
+* 10.15 - Employment Contract dated October 31, 2003 between Michael P. Morris
and the Registrant (Form 10-K filed March 15, 2004).
21 - Farmer Mac Mortgage Securities Corporation, a Delaware corporation.
** 31.1 - Certification of Chief Executive Officer relating to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004, pursuant to Rule 13a-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
** 31.2 - Certification of Chief Financial Officer relating to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004, pursuant to Rule 13a-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
** 32 - Certification of Chief Executive Officer and Chief Financial
Officer relating to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K.
On April 6, 2004, Farmer Mac filed with the Securities and Exchange
Commission a Current Report on Form 8-K announcing that, on April 1, 2004, the
Board of Directors of Farmer Mac had declared a quarterly dividend on the
Corporation's 6.40% Cumulative Preferred Stock, Series A.
On April 29, 2004, Farmer Mac furnished to the Securities and Exchange
Commission a Current Report on Form 8-K that attached a press release announcing
Farmer Mac's financial results for first quarter 2004.
On June 3, 2004, Farmer Mac furnished to the Securities and Exchange
Commission a Current Report on Form 8-K that attached a press release regarding
Farmer Mac's update to Congress on its mission achievements and financial
condition.
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
August 9, 2004
By: /s/ Henry D. Edelman
----------------------------------------
Henry D. Edelman
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Nancy E. Corsiglia
----------------------------------------
Nancy E. Corsiglia
Vice President - Finance
(Principal Financial Officer)