As filed with the Securities and Exchange Commission
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on May 10, 2005
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
Commission File Number 0-17440
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
Federally chartered instrumentality
of the United States 52-1578738
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
1133 Twenty-First Street, N.W., Suite 600
Washington, D.C. 20036
(Address of principal executive offices) (Zip code)
(202) 872-7700
(Registrant's telephone number, including area code)
-----------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of May 2, 2005, there were 1,030,780 shares of Class A Voting Common
Stock, 500,301 shares of Class B Voting Common Stock and 9,935,311 shares of
Class C Non-Voting Common Stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
The following interim unaudited condensed consolidated financial statements
of the Federal Agricultural Mortgage Corporation ("Farmer Mac" or the
"Corporation") have been prepared 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 interim condensed consolidated financial statements should be
read in conjunction with the audited 2004 consolidated financial statements of
Farmer Mac included in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 2004. 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 unaudited
condensed consolidated financial statements is included in this report beginning
on the pages listed below:
Condensed Consolidated Balance Sheets as of March 31, 2005 and
December 31, 2004..................................................3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2005 and 2004..............................4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2005 and 2004...............................5
Notes to Condensed Consolidated Financial Statements................6
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
March 31, December 31,
----------------- -----------------
2005 2004
----------------- -----------------
(in thousands)
Assets:
Cash and cash equivalents $ 424,041 $ 430,504
Investment securities 1,130,246 1,056,143
Farmer Mac Guaranteed Securities 1,326,868 1,376,847
Loans held for sale 31,186 15,281
Loans held for investment 833,712 871,988
Allowance for loan losses (3,846) (4,395)
----------------- -----------------
Loans, net 861,052 882,874
Real estate owned 4,118 3,845
Financial derivatives 5,888 1,499
Interest receivable 38,133 58,131
Guarantee and commitment fees receivable 17,986 19,871
Deferred tax asset, net 6,348 6,518
Prepaid expenses and other assets 25,509 10,585
----------------- -----------------
Total Assets $ 3,840,189 $ 3,846,817
----------------- -----------------
Liabilities and Stockholders' Equity:
Liabilities:
Notes payable:
Due within one year $ 2,616,061 $ 2,620,172
Due after one year 878,687 862,201
----------------- -----------------
Total notes payable 3,494,748 3,482,373
Financial derivatives 36,933 47,793
Accrued interest payable 24,771 25,511
Guarantee and commitment obligation 16,781 16,869
Accounts payable and accrued expenses 20,122 26,690
Reserve for losses 10,546 10,729
----------------- -----------------
Total Liabilities 3,603,901 3,609,965
----------------- -----------------
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,
10,001,963 and 10,291,041 shares issued and outstanding
as of March 31, 2005 and December 31, 2004, respectively 10,002 10,291
Additional paid-in capital 85,681 87,777
Accumulated other comprehensive income/(loss) 699 (882)
Retained earnings 103,375 103,135
----------------- -----------------
Total Stockholders' Equity 236,288 236,852
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 3,840,189 $ 3,846,817
----------------- -----------------
See accompanying notes to condensed consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three Months Ended
-----------------------------------
March 31, 2005 March 31, 2004
----------------- ----------------
Interest income:
Investments and cash equivalents $ 12,587 $ 8,335
Farmer Mac Guaranteed Securities 17,081 16,628
Loans 12,121 14,125
----------------- ----------------
Total interest income 41,789 39,088
Interest expense 33,983 29,621
----------------- ----------------
Net interest income 7,806 9,467
Provision for loan losses 584 (2,793)
----------------- ----------------
Net interest income after provision
for loan losses 8,390 6,674
Guarantee and commitment fees 4,956 5,222
Gains/(losses) on financial derivatives
and trading assets (1,709) 3,248
Losses on the sale of real estate owned (13) (282)
Representation and warranty claims income 79 -
Other income 320 522
----------------- ----------------
Total revenues 12,023 15,384
----------------- ----------------
Expenses:
Compensation and employee benefits 1,775 1,797
General and administrative 1,990 2,071
Regulatory fees 576 412
Real estate owned operating costs, net (22) 75
Provision for losses (101) (1,178)
----------------- ----------------
Total operating expenses 4,218 3,177
----------------- ----------------
Income before income taxes 7,805 12,207
Income tax expense 2,333 3,820
----------------- ----------------
Net income 5,472 8,387
----------------- ----------------
Preferred stock dividends (560) (560)
----------------- ----------------
Net income available to common stockholders $ 4,912 $ 7,827
----------------- ----------------
Earnings per common share:
Basic earnings per common share $ 0.42 $ 0.65
Diluted earnings per common share $ 0.42 $ 0.64
Common stock dividends $ 0.10 $ -
See accompanying notes to condensed consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended
-------------------------------------
March 31, 2005 March 31, 2004
------------------ ------------------
Cash flows from operating activities:
Net income $ 5,472 $ 8,387
Adjustments to reconcile net income to net cash provided by
operating activities:
Net amortization of investment premiums and discounts 554 590
Amortization of debt premiums, discounts and issuance costs 12,114 7,149
Proceeds from repayment of trading investment securities 651 1,202
Purchase of loans held for sale (18,540) (17,707)
Proceeds from repayment loans held for sale 4,822 3,119
Proceeds from sale of loans held for sale - 27,203
Net change in fair value of trading securities and derivatives 2,107 (3,098)
Amortization of settled financial derivatives contracts 438 273
Losses on the sale of real estate owned 13 282
Total provision for losses (685) 1,615
Decrease in interest receivable 19,998 21,270
Decrease in guarantee and commitment fees receivable 1,885 2,171
Decrease/(increase) in other assets 1,259 (14,219)
(Decrease)/increase in accrued interest payable (740) 2,083
Decrease in other liabilities (8,947) (16,944)
----------------- ------------------
Net cash provided by operating activities 20,401 23,376
Cash flows from investing activities:
Purchases of available-for-sale investment securities (696,142) (257,116)
Purchases of Farmer Mac II Guaranteed Securities and
AgVantage bonds (44,175) (37,511)
Purchases of loans held for investment - (7,737)
Purchases of defaulted loans (3,399) (5,790)
Proceeds from repayment of investment securities 600,386 219,090
Proceeds from repayment of Farmer Mac Guaranteed Securities 74,356 97,460
Proceeds from repayment of loans 45,957 43,455
Proceeds from sale of loans and Farmer Mac Guaranteed Securities 2,414 1,862
Proceeds from sale of real estate owned 117 1,300
----------------- ------------------
Net cash (used in)/provided by investing activities (20,486) 55,013
Cash flows from financing activities:
Proceeds from issuance of discount notes 13,260,608 24,515,765
Proceeds from issuance of medium-term notes 75,000 369,971
Payments to redeem discount notes (13,169,737) (25,183,124)
Payments to redeem medium-term notes (164,740) (66,720)
Settlement of financial derivatives 108 (1,482)
Proceeds from common stock issuance 45 332
Purchases of common stock (5,942) -
Cash dividends paid (1,720) (560)
----------------- ------------------
Net cash used in financing activities (6,378) (365,818)
----------------- ------------------
Net decrease in cash and cash equivalents (6,463) (287,429)
Cash and cash equivalents at beginning of period 430,504 623,674
----------------- ------------------
Cash and cash equivalents at end of period $ 424,041 $ 336,245
----------------- ------------------
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Accounting Policies
(a) Cash and Cash Equivalents
Farmer Mac considers highly liquid investment securities with remaining
maturities of three months or less at the time of purchase to be cash
equivalents. Changes in the balance of cash and cash equivalents are reported in
the condensed consolidated statements of cash flows. The following table sets
forth information regarding certain cash and non-cash transactions for the three
months ended March 31, 2005 and 2004.
Three Months Ended
March 31,
-------------------------
2005 2004
----------- -----------
(in thousands)
Cash paid for:
Interest $ 17,250 $ 14,415
Income taxes 700 -
Non-cash activity:
Real estate owned acquired through foreclosure 460 2,079
Loans acquired and securitized as Farmer Mac
Guaranteed Securities 1,914 27,203
(b) Allowance for Losses
As of March 31, 2005, Farmer Mac maintained a $16.3 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 long-term standby purchase commitments ("LTSPCs") and Farmer
Mac I Guaranteed Securities issued after the Farm Credit System Reform Act of
1996 (the "1996 Act") in accordance with Statement of Financial Accounting
Standards No. 5, Accounting for Contingencies ("SFAS 5") and Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for Impairment
of a Loan, as amended ("SFAS 114"). The methodology for determining the
allowance for losses is the same for loans held for investment and loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs because
Farmer Mac believes the ultimate credit risk is substantially the same, i.e.,
the underlying agricultural mortgage loans all meet the same credit underwriting
and appraisal standards.
The allowance for losses is increased through periodic provisions for loan
losses that are charged against net interest income and provisions for losses
that are charged to operating expense and is reduced by charge-offs for actual
losses, net of recoveries. Negative provisions for loan losses or provisions for
losses are recorded in the event that the estimate of probable losses as of the
end of a period is lower than the estimate at the beginning of the period.
Charge-offs represent losses on the outstanding principal balance, any interest
payments previously accrued or advanced and expected costs of liquidation.
The table below summarizes the components of Farmer Mac's allowance for
losses as of March 31, 2005 and December 31, 2004.
March 31, December 31,
2005 2004
---------------- -----------------
(in thousands)
Allowance for loan losses $ 3,846 $ 4,395
Real estate owned valuation allowance - -
Reserve for losses:
On-balance sheet Farmer Mac I Guaranteed Securities 1,857 1,973
Off-balance sheet Farmer Mac I Guaranteed Securities 971 1,004
LTSPCs 7,718 7,752
Contingent obligation for probable losses 1,939 1,977
---------------- -----------------
Total $ 16,331 $ 17,101
---------------- -----------------
No allowance for losses has been made for loans underlying Farmer Mac I
Guaranteed Securities issued prior to the 1996 Act or securities issued under
the Farmer Mac II program ("Farmer Mac II Guaranteed Securities"). Farmer Mac I
Guaranteed Securities issued prior to the 1996 Act are supported by unguaranteed
first loss subordinated interests, which are expected to exceed the estimated
credit losses on those loans. The guaranteed portions 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.
The following table summarizes the changes in the components of Farmer
Mac's allowance for losses for the three months ended March 31, 2005 and 2004:
Contingent
Allowance REO Obligation Total
for Loan Valuation Reserve for Probable Allowance
Losses Allowance for Losses Losses for Losses
-------------- -------------- ------------- -------------- -------------
(in thousands)
Balances as of December 31, 2004 $ 4,395 $ - $ 10,729 $ 1,977 $ 17,101
Provision for losses (584) 120 (183) (38) (685)
Net (charge-offs)/recoveries 35 (120) - - (85)
-------------- -------------- ------------- -------------- -------------
Balances as of March 31, 2005 $ 3,846 $ - $ 10,546 $ 1,939 $ 16,331
-------------- -------------- ------------- -------------- -------------
Contingent
Allowance REO Obligation Total
for Loan Valuation Reserve for Probable Allowance
Losses Allowance for Losses Losses for Losses
-------------- -------------- ------------- -------------- -------------
(in thousands)
Balances as of December 31, 2003 $ 5,967 $ 238 $ 13,172 $ 2,676 $ 22,053
Provision for losses 2,793 375 (1,220) (333) 1,615
Net charge-offs (1,089) (420) - - (1,509)
-------------- -------------- ------------- -------------- -------------
Balances as of March 31, 2004 $ 7,671 $ 193 $ 11,952 $ 2,343 $ 22,159
-------------- -------------- ------------- -------------- -------------
As of March 31, 2005, Farmer Mac analyzed $94.1 million of its assets for
collateral shortfalls against updated appraised values, other updated collateral
valuations or discounted values. Of the $94.1 million of assets analyzed, $81.7
million were adequately collateralized. For the $12.4 million of assets that
were not adequately collateralized, individual collateral shortfalls totaled
$0.9 million. Accordingly, Farmer Mac allocated specific allowances of $0.9
million to those under-collateralized assets as of March 31, 2005. As of March
31, 2005, after the allocation of specific allowances to under-collateralized
loans, Farmer Mac had additional non-specific or general allowances of $15.4
million, bringing the total allowance for losses to $16.3 million.
The balance of impaired assets, both on- and off-balance sheet, and the
related allowance specifically allocated to those impaired assets as of March
31, 2005 and December 31, 2004 are summarized in the following table:
March 31, 2005 December 31, 2004
--------------------------------------- ------------------------------------------
Specific Net Specific Net
Balance Allowance Balance Balance Allowance Balance
-------------- ----------- ------------ -------------- ------------ -------------
(in thousands)
Impaired assets:
Specific allowance for losses $ 12,407 $ (862) $ 11,545 $ 12,871 $ (1,433) $ 11,438
No specific allowance for losses 81,700 - 81,700 82,762 - 82,762
-------------- ----------- ------------ ------------ ------------- ------------
Total $ 94,107 $ (862) $ 93,245 $ 95,633 $ (1,433) $ 94,200
-------------- ----------- ------------ ------------ ------------- ------------
(c) Financial Derivatives
Farmer Mac enters into financial derivative transactions principally to
protect against risk from the effects of market price or interest rate movements
on the value of certain assets and future cash flows or debt issuance, not for
trading or speculative purposes. Farmer Mac enters into interest rate swap
contracts principally to adjust the characteristics of its short-term debt to
match more closely the cash flow and duration characteristics of its longer-term
mortgage and other assets, and also to adjust the characteristics of its
long-term debt to match more closely the cash flow and duration characteristics
of its short-term assets, thereby reducing interest rate risk. These
transactions also may provide an overall lower effective cost of borrowing than
would otherwise be available in the conventional debt market.
All financial derivatives are recorded on the balance sheet at fair value
as a freestanding asset or liability. Financial derivatives in hedging
relationships that mitigate exposure to changes in the fair value of assets are
considered fair value hedges. Financial derivatives in hedging relationships
that mitigate the exposure to the variability in expected future cash flows or
other forecasted transactions are considered cash flow hedges. Financial
derivatives that do not satisfy the hedging criteria of Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended ("SFAS 133") are not accounted for as hedges, and changes
in the fair values of those financial derivatives are reported as gains or
losses on financial derivatives and trading assets in the condensed consolidated
statements of operations.
The following table summarizes information related to Farmer Mac's
financial derivatives as of March 31, 2005 and December 31, 2004:
March 31, 2005
--------------------------------------------------------------------------------------------------------------
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 $ 613,851 $ (27,447) $ - $ - $ 36,623 $ 414 $ 650,474 $ (27,033)
Receive-fixed - - 105,000 (3,083) 100,000 (2,744) 205,000 (5,827)
Basis 241,268 2,094 - - 342,028 (313) 583,296 1,781
Agency forwards - - - - 9,245 34 9,245 34
------------- ------------ ------------- ------------ ------------- ------------ -------------- -------------
Total $ 855,119 $ (25,353) $ 105,000 $ (3,083) $ 487,896 $ (2,609) $1,448,015 $ (31,045)
------------- ------------ ------------- ------------ ------------- ------------ -------------- -------------
December 31, 2004
-------------------------------------------------------------------------------------------------------------
Cash Flow Hedges Fair Value Hedges No Hedge Designation Total
--------------------------- ------------------------- -------------------------- ----------------------------
Notional Fair Value Notional Fair Value Notional Fair Value Notional Fair Value
------------ ------------- ------------ ------------ ------------- ------------ --------------- ------------
(in thousands)
Interest rate swaps:
Pay-fixed $ 610,324 $ (43,386) $ - $ - $ 29,152 $ (11) $ 639,476 $ (43,397)
Receive-fixed - - 105,000 (2,212) 100,000 (272) 205,000 (2,484)
Basis 261,985 (780) - - 389,679 226 651,664 (554)
Agency forwards 20,005 127 - - 6,920 14 26,925 141
------------ ------------- ------------ ------------ ------------- ------------ --------------- ------------
Total $ 892,314 $ (44,039) $ 105,000 $ (2,212) $ 525,751 $ (43) $ 1,523,065 $ (46,294)
------------ ------------- ------------ ------------ ------------- ------------ --------------- ------------
As of March 31, 2005, Farmer Mac had approximately $22.2 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 $4.1
million of the amount currently reported in accumulated other comprehensive
income/(loss) will be reclassified into earnings. For the quarter ended March
31, 2005, 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 ("EPS") for the three months ended
March 31, 2005 and 2004:
Three Months Ended
--------------------------------------------------------------------
March 31, 2005 March 31, 2004
--------------------------------- ---------------------------------
Dilutive Dilutive
stock Diluted stock Diluted
Basic EPS options EPS Basic EPS options EPS
-------------------------------- ---------------------------------
(in thousands, except per share amounts)
Net income available to $ 4,912 $ 4,912 $ 7,827 $ 7,827
common stockholders
Weighted average shares 11,687 69 11,756 12,066 207 12,273
Earnings per common share $ 0.42 $ 0.42 $ 0.65 $ 0.64
During first quarter 2005, Farmer Mac repurchased 291,454 shares of its
Class C Non-Voting Common Stock, at an average price of $20.35 per share,
pursuant to the Corporation's previously announced stock repurchase program.
These repurchases reduced the Corporation's capital by approximately $5.9
million.
(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 ("APB 25"), and has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, as amended ("SFAS 123"). Accordingly, no compensation expense was
recognized in first quarter 2005 or first quarter 2004 for employee stock option
plans. Had Farmer Mac elected to use the fair value method of accounting for
employee stock options, there would have been no effect on net income available
to common stockholders and earnings per share for the three months ended March
31, 2005 and 2004, as no stock options were granted during either period.
The following table summarizes stock option activity for the three months
ended March 31, 2005 and 2004:
Three Months Ended
---------------------------------------------------------------
March 31, 2005 March 31, 2004
-------------------------------- -----------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
--------------- ---------------- -------------- -------------
Outstanding, beginning of period 1,812,222 $ 22.67 1,575,980 $ 22.92
Granted - - - -
Exercised (1,737) 16.38 (16,124) 13.63
Canceled (7,001) 24.28 (2,501) 30.27
--------------- ---------------- -------------- -------------
Outstanding, end of period 1,803,484 $ 22.72 1,557,355 $ 23.00
--------------- ---------------- -------------- -------------
Options exercisable at end of period 1,348,577 1,229,312
--------------- --------------
(f) Reclassifications
Certain reclassifications of prior period information were made to conform
to the current period presentation.
(g) New Accounting Standards
In December 2003, the American Institute of Certified Public Accountants
issued Statement of Position 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer ("SOP 03-3"). SOP 03-3 addresses accounting
for differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
acquired in a transfer if those differences are attributable, at least in part,
to credit quality. Specifically, SOP 03-3 limits the yield that may be accreted
and prohibits the "carry-over" of a valuation allowance for all impaired loans
that are within the scope of SOP 03-3. On January 1, 2005, Farmer Mac
prospectively adopted SOP 03-3 with no material impact on its consolidated
financial statements.
In March 2004, the Emerging Issues Task Force ("EITF") amended EITF 03-1,
The Meaning of Other-Than-Temporary Impairment, to introduce a three-step model
to: (1) determine whether an investment is impaired; (2) evaluate whether the
impairment is other-than-temporary; and (3) account for other-than-temporary
impairments. In part, this amendment requires companies to apply qualitative and
quantitative measures to determine whether a decline in the fair value of a
security is other-than-temporary. The guidance in EITF 03-1 is effective for
reporting periods beginning after June 15, 2004, with the exception of certain
sections, which have been deferred. Farmer Mac is evaluating the impact of the
amendment and will adopt it when it is effective in full. In the interim, Farmer
Mac continues to apply earlier authoritative accounting guidance, primarily SFAS
115 and EITF 99-20, Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Financial Assets, for the
measurement and recognition of other-than-temporary impairment of its debt and
equity securities.
In December 2004, the Financial Accounting Standards Board issued Statement
No. 123 (revised 2004), Share-Based Payment ("SFAS 123(R)"). SFAS 123(R) is a
revision of SFAS 123 and supersedes APB 25 and its related implementation
guidance. SFAS 123(R) requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award. The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models adjusted for the
unique characteristics of those instruments. SFAS 123(R) eliminates the
alternative to use APB 25's intrinsic value method of accounting that was
provided in SFAS 123 as originally issued. Currently, as discussed in Note 1(e),
Farmer Mac accounts for its stock-based employee compensation plans using the
intrinsic value method of accounting for employee stock options pursuant to APB
25 and has adopted the disclosure-only provisions of SFAS 123. The guidance in
SFAS 123(R) is effective for reporting periods beginning no later than the
beginning of the first fiscal year beginning after June 15, 2005. Farmer Mac is
evaluating the impact of SFAS 123(R) and will adopt it when effective.
Note 2. Farmer Mac Guaranteed Securities
The following table sets forth information about Farmer Mac Guaranteed
Securities retained by Farmer Mac as of March 31, 2005 and December 31, 2004.
March 31, 2005 December 31, 2004
------------------------------------------------ -------------------------------------------------
Available- Held-to- Available- Held-to-
for-Sale Maturity Total for-Sale Maturity Total
--------------- ---------------- --------------- ---------------- --------------- ---------------
(in thousands)
Farmer Mac I $ 556,179 $ 41,510 $ 597,689 $ 620,501 $ 42,911 $ 663,412
Farmer Mac II - 729,179 729,179 - 713,435 713,435
--------------- ---------------- --------------- ---------------- --------------- ---------------
Total $ 556,179 $ 770,689 $ 1,326,868 $ 620,501 $ 756,346 $ 1,376,847
--------------- ---------------- --------------- ---------------- --------------- ---------------
Amortized cost $ 532,376 $ 770,689 $ 1,303,065 $ 585,021 $ 756,346 $ 1,341,367
Unrealized gains 25,828 1,153 26,981 35,660 12,225 47,885
Unrealized losses (2,025) (1,184) (3,209) (180) (2,038) (2,218)
--------------- ---------------- --------------- ---------------- --------------- ---------------
Fair value $ 556,179 $ 770,658 $ 1,326,837 $ 620,501 $ 766,533 $ 1,387,034
--------------- ---------------- --------------- ---------------- --------------- ---------------
The table below presents a sensitivity analysis for Farmer Mac's retained
Farmer Mac Guaranteed Securities as of March 31, 2005.
March 31, 2005
---------------------
(dollars in thousands)
Fair value of beneficial interests retained
in Farmer Mac Guaranteed Securities $ 1,326,837
Weighted-average remaining life (in years) 5.0
Weighted-average prepayment speed (annual rate) 8.7%
Effect on fair value of a 10% adverse change $477
Effect on fair value of a 20% adverse change $909
Weighted-average discount rate 5.0%
Effect on fair value of a 10% adverse change $(18,154)
Effect on fair value of a 20% adverse change $(36,252)
These sensitivities are hypothetical. As the figures indicate, changes in
fair value based on 10 percent or 20 percent variations in assumptions generally
cannot be extrapolated because the relationship of the change in assumptions to
the change in fair value may not be linear. Also, in this table the effect of a
variation in a particular assumption on the fair value of the retained interest
is calculated without changing any other assumption. In fact, changes in one
factor may result in changes in another (for example, increases in market
interest rates may result in lower prepayments), which might amplify or
counteract the sensitivities.
The table below presents the outstanding principal balances, 90-day
delinquencies and net credit losses as of and for the periods indicated for
Farmer Mac Guaranteed Securities, loans, and LTSPCs.
Outstanding Principal 90-Day
Balances Delinquencies (1) Net Credit Losses
--------------------------- ------------------------- ----------------------------
As of As of As of As of For the Three Months Ended
March 31, December 31, March 31, December 31, March 31,
------------- ------------- ----------- ------------- ----------------------------
2005 2004 2005 2004 2005 2004
------------- ------------- ----------- ------------- ------------ ---------------
(in thousands)
On-balance sheet assets:
Farmer Mac I:
Loans $ 854,308 $ 876,866 $ 37,022 $ 24,800 $ (35) $ 1,089
Guaranteed Securities 573,232 626,952 - - -
Farmer Mac II:
Guaranteed Securities 728,424 712,653 - - - -
------------- ------------- ----------- ------------- ------------ ---------------
Total on-balance sheet $ 2,155,964 $ 2,216,471 $ 37,022 $ 24,800 $ (35) $ 1,089
------------- ------------- ----------- ------------- ------------ ---------------
Off-balance sheet assets:
Farmer Mac I:
LTSPCs $ 2,209,792 $ 2,295,103 $ 8,766 $ 483 $ - $ -
Guaranteed Securities 833,053 882,282 - - - -
Farmer Mac II:
Guaranteed Securities 49,041 55,889 - - - -
------------- ------------- ----------- ------------- ------------ ---------------
Total off-balance sheet $ 3,091,886 $ 3,233,274 $ 8,766 $ 483 $ - $ -
------------- ------------- ----------- ------------- ------------ ---------------
Total $ 5,247,850 $ 5,449,745 $ 45,788 $ 25,283 $ (35) $ 1,089
------------- ------------- ----------- ------------- ------------ ---------------
<FN>
(1) Includes loans and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs that are 90 days or more past due, in foreclosure,
restructured after delinquency, and in bankruptcy excluding loans
performing under either their original loan terms or a court-approved
bankruptcy plan.
</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.
Three Months Ended March 31,
-------------------------------------
2005 2004
------------------ -----------------
(in thousands)
Proceeds from new securitizations $ 1,914 $ 27,203
Guarantee fees received 726 616
Purchases of assets from the trusts 1,595 1,046
Servicing advances 3 15
Repayment of servicing advances 12 20
The following table presents the maximum principal amount of potential
undiscounted future payments that Farmer Mac could be required to make under
off-balance sheet Farmer Mac Guaranteed Securities as of March 31, 2005 and
December 31, 2004, not including offsets provided by any recourse provisions,
recoveries from third parties or collateral for the underlying loans.
Outstanding Balance of Off-Balance Sheet
Farmer Mac Guaranteed Securities
- -----------------------------------------------------------------------
March 31, December 31,
2005 2004
----------------- ---------------
(in thousands)
Farmer Mac I Guaranteed Securities $ 833,053 $ 882,282
Farmer Mac II Guaranteed Securities 49,041 55,889
----------------- ---------------
Total Farmer Mac I and II $ 882,094 $ 938,171
----------------- ---------------
As of March 31, 2005, the weighted-average remaining maturity of all loans
underlying off-balance sheet Farmer Mac Guaranteed Securities was 15.7 years.
For the off-balance sheet Farmer Mac I Guaranteed Securities executed on or
before December 31, 2002, Farmer Mac has recorded an allowance for probable
losses of $1.0 million as of March 31, 2005 and December 31, 2004. For those
securities issued or modified on or after January 1, 2003, Farmer Mac has
recorded a liability for its obligation to stand ready under the guarantee in
the guarantee and commitment obligation on the condensed consolidated balance
sheet. This liability approximated $4.9 million as of March 31, 2005 and $5.2
million as of December 31, 2004.
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 March 31, 2005 and December 31, 2004, 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 $2.2
billion and $2.3 billion, respectively. For all LTSPC transactions to date,
Farmer Mac has incurred a charge-off on two loans.
As of March 31, 2005, the weighted-average remaining maturity of all loans
underlying LTSPCs was 14.5 years. For the LTSPCs executed on or before December
31, 2002, Farmer Mac has recorded an allowance for probable losses on loans
underlying LTSPCs of $7.7 million as of March 31, 2005 and $7.8 million as of
December 31, 2004. For those LTSPCs issued or modified on or after January 1,
2003, Farmer Mac has recorded a liability for its obligation to stand ready
under the commitment in the guarantee and commitment obligation on the condensed
consolidated balance sheet. This liability approximated $9.9 million as of March
31, 2005 and $9.7 million as of December 31, 2004.
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 Farmer Mac's other comprehensive
income for the three months ended March 31, 2005 and 2004.
Three Months Ended
March 31,
------------------------------
2005 2004
-------------- ------------
(in thousands)
Net income available to common stockholders $ 4,912 $ 7,827
Unrealized gains/(losses) on securities:
Unrealized holding gains/(losses) arising during the period (16,357) 7,227
Less: reclassification adjustment for gains included in net income - (153)
-------------- ------------
Unrealized gains/(losses) on securities (16,357) 7,380
Cash flow hedging instruments:
Unrealized losses 18,904 (20,689)
Less: amortization of losses on forward sale contracts
into interest expense (453) (373)
Less: impact of realized gains/(losses) related to de-designated
cash flow hedges 568 (1,168)
-------------- ------------
Cash flow hedging instruments 18,789 (19,148)
Deferred compensation - 14
-------------- ------------
Other compehensive income before tax 2,432 (11,754)
Income tax related to items of other comprehensive income 851 (4,114)
-------------- ------------
Other comprehensive income/(loss), net of tax 1,581 (7,640)
------------------------------
Comprehensive income available to common stockholders $ 6,493 $ 187
-------------- ------------
Note 5. Investments
As of the dates indicated below, Farmer Mac's investment portfolio was
comprised of the following:
March 31, December 31,
2005 2004
--------------- ----------------
(in thousands)
Held-to-maturity $ 10,604 $ 10,604
Available-for-sale 1,110,482 1,035,695
Trading 9,160 9,844
--------------- ----------------
$ 1,130,246 $ 1,056,143
--------------- ----------------
The amortized cost and estimated fair values (based on quoted market
prices) of investments as of March 31, 2005 and December 31, 2004 were as
follows.
As of March 31, 2005 As of December 31, 2004
---------------------------------------------------- -------------------------------------------------
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
------------ ------------ ------------ ------------- ----------- ------------ ----------- -----------
(in thousands)
Held-to-maturity:
Cash investment in
fixed rate guaranteed
investment contract $ 10,604 $ 146 $ - $ 10,750 $ 10,604 $ 282 $ - $ 10,886
----------- ------------ ------------ ------------- ----------- ------------ ----------- -----------
Total held-to-maturity $ 10,604 $ 146 $ - $ 10,750 $ 10,604 $ 282 $ - $ 10,886
----------- ------------ ------------ ------------- ----------- ------------ ----------- -----------
Available-for-sale:
Floating rate
asset-backed securities $ 113,370 $ 2,026 $ - $ 115,396 $ 113,394 $ 403 $ - $ 113,797
Floating rate corporate
debt securities 362,238 479 (52) 362,665 372,272 398 (68) 372,602
Fixed rate corporate
debt securities 44,036 - (112) 43,924 - - - -
Floating rate auction
rate certificates 180,147 2 - 180,149 99,998 2 - 100,000
Fixed rate preferred
stock 184,989 8,400 - 193,389 185,257 14,798 - 200,055
Fixed rate
commercial paper - - - - 22,122 - - 22,122
Floating rate mortgage-
backed securities 214,256 712 (9) 214,959 226,526 598 (5) 227,119
----------- ------------ ------------ ------------- ----------- ------------ ----------- -----------
Total available-for-sale $ 1,099,036 $ 11,619 $ (173) $ 1,110,482 $1,019,569 $ 16,199 $ (73) $1,035,695
----------- ------------ ------------ ------------- ----------- ------------ ----------- -----------
Trading:
Adjustable rate mortgage-
backed securities $ 9,028 $ 132 $ - $ 9,160 $ 9,679 $ 165 $ - $ 9,844
----------- ------------ ------------ ------------- ----------- ------------ ----------- -----------
Total trading $ 9,028 $ 132 $ - $ 9,160 $ 9,679 $ 165 $ - $ 9,844
----------- ------------ ------------ ------------- ----------- ------------ ----------- -----------
As of March 31, 2005, Farmer Mac owned one held-to-maturity investment that
matures in 2006 with an amortized cost of $10.6 million, a fair value of $10.8
million, and a yield of 6.15 percent. As of March 31, 2005, Farmer Mac owned
trading investment securities that mature after 10 years with an amortized cost
of $9.0 million, a fair value of $9.2 million, and a weighted average yield of
3.38 percent. The amortized cost, fair value and yield of investments by
remaining contractual maturity for available-for-sale investment securities as
of March 31, 2005 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.
Investment Securities
Available-for-Sale
--------------------------------------------
Amortized Cost Fair Value Yield
----------------- -------------- -----------
(dollars in thousands)
Due within one year $ 185,516 $ 185,462 3.17%
Due after one year
through five years 210,758 211,142 3.07%
Due after five years
through ten years 103,198 106,319 7.30%
Due after ten years 599,564 607,559 4.00%
----------------- -------------- -----------
Total $ 1,099,036 $ 1,110,482 3.99%
----------------- -------------- -----------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Please read the following Management's Discussion and Analysis of Financial
Condition and Results of Operations in conjunction with: (1) the unaudited
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, 2004.
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 prospects for growth in loan purchase, guarantee, securitization
and LTSPC volume;
o trends in net interest income;
o trends in provisions for losses;
o trends in expenses;
o changes in capital position; and
o other business and financial matters.
Management's expectations for Farmer Mac's future necessarily involve a
number of assumptions and estimates and the evaluation of risks and
uncertainties. Various factors could cause Farmer Mac's actual results or events
to differ materially from the expectations as expressed or implied by the
forward-looking statements, including uncertainties regarding:
o the rate and direction of development of the secondary market for
agricultural mortgage loans;
o the possible establishment of additional statutory or regulatory
restrictions or constraints on Farmer Mac that could hamper its
growth or diminish its profitability;
o increases in general and administrative expenses attributable to
growth of the business and the regulatory environment, including
the hiring of additional personnel with expertise in key
functional areas;
o legislative or regulatory developments or interpretations of
Farmer Mac's statutory charter that could adversely affect Farmer
Mac, the ability of Farmer Mac to offer new products 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 ("GSEs") 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,
the general economy and other factors that may affect delinquency
levels and credit losses;
o protracted adverse weather, market or other conditions affecting
particular geographic regions or particular agricultural
commodities or products 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, 2004,
filed with the SEC on March 16, 2005.
Results of Operations
Overview. Net income available to common stockholders for first quarter
2005 was $4.9 million or $0.42 per diluted common share, compared to $7.8
million or $0.64 per diluted common share for first quarter 2004. This decrease
was due principally to the after-tax effects of the $1.7 million loss on
financial derivatives in first quarter 2005 compared to gains on financial
derivatives of $3.2 million in first quarter 2004, partially offset by the
release of $0.7 million from the allowance for losses in first quarter 2005
compared to provisions for losses of $1.6 million in first quarter 2004.
As of March 31, 2005, Farmer Mac's 90-day delinquencies (Farmer Mac I loans
purchased or placed under Farmer Mac I Guaranteed Securities or LTSPCs after
changes to Farmer Mac's statutory charter in 1996 that were 90 days or more past
due, in foreclosure, restructured after delinquency, or in bankruptcy, excluding
loans performing under either their original loan terms or a court-approved
bankruptcy plan) were $45.8 million, representing 1.04 percent of the principal
balance of all loans held and loans underlying post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs, down from $57.4 million (1.17 percent) as of
March 31, 2004.
As part of Farmer Mac's continuing evaluation of the overall credit quality
of its portfolio, the strong U.S. agricultural economy, the recent upward trends
in agricultural land values and the reduction in Farmer Mac's outstanding
guarantees and commitments, Farmer Mac determined that the appropriate level of
allowance for losses as of March 31, 2005 was $16.3 million. This resulted in
the release of approximately $0.7 million from the allowance for losses in first
quarter 2005. As of March 31, 2005, the allowance for losses was $16.3 million
and 37 basis points relative to the outstanding Farmer Mac I portfolio, compared
to $17.1 million and 37 basis points as of December 31, 2004 and $22.2 million
and 45 basis points as of March 31, 2004.
During first quarter 2005, Farmer Mac:
o added $33.3 million of Farmer Mac I eligible loans under LTSPCs;
o purchased $18.5 million of newly originated Farmer Mac I eligible
loans; and
o purchased $43.6 million of Farmer Mac II eligible USDA-guaranteed
portions of loans.
As of March 31, 2005, Farmer Mac's outstanding program volume was $5.3 billion,
which represented approximately 11.1 percent of management's estimate of a $47.8
billion market of eligible agricultural mortgage loans. Farmer Mac's ongoing
guarantee and commitment fee income reflects the annuity-like revenue stream of
that aspect of the Corporation's business. That fee income is earned on the
cumulative outstanding principal balance of Farmer Mac Guaranteed Securities and
loans underlying LTSPCs. Accordingly, guarantee and commitment fees 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.
To succeed in realizing its business development and profitability goals
over the longer term, Farmer Mac must successfully market existing and new
programs and products to agricultural mortgage lenders.
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 first quarter 2005, compared to $9.5 million for first
quarter 2004. The net interest yield was 85 basis points for the three months
ended March 31, 2005, compared to 93 basis points for the three months ended
March 31, 2004. The effect of SFAS 140 was the classification of approximately
$0.9 million (10 basis points) of guarantee fee income as interest income for
the three months ended March 31, 2005, compared to $1.1 million (10 basis
points) for the three months ended March 31, 2004.
Farmer Mac classifies the net interest income and expense realized on
financial derivatives that are not in fair value or cash flow hedge
relationships as gains and losses on financial derivatives and trading assets.
For the three months ended March 31, 2005 and 2004, this classification resulted
in the decrease of the net interest yield of 4 basis points in each of the
periods.
The net interest yields for the three months ended March 31, 2005 and 2004
included the benefits of yield maintenance payments of 17 basis points and 11
basis points, respectively. Yield maintenance payments represent the present
value of expected future interest income streams and accelerate the recognition
of interest income from the related loans. Because the timing and amounts of
these payments vary greatly, variations should not be considered indicative of
positive or negative trends to gauge future financial results. For the three
months ended March 31, 2005 and 2004, the effects of yield maintenance payments
on net income and diluted earnings per share were $1.0 million or $0.08 per
diluted share and $0.8 million or $0.06 per diluted share, respectively.
The following table provides information regarding interest-earning assets
and funding for the quarters ended March 31, 2005 and 2004. The balance of
non-accruing loans is included in the average balance of interest-earning loans
presented, though no related income is included in the income figures presented.
Therefore, as the balance of non-accruing loans increases or decreases, the net
interest yield will increase or decrease accordingly. Net interest income and
the yield will also fluctuate due to the uncertainty of the timing and size of
yield maintenance payments. The low average rate earned on cash and cash
equivalents reflects the relatively low level of short-term interest rates in
2005 and 2004, and an increase in short-term market rates during first quarter
2005. The increase in the average rate for investments reflects the general
increase in short-term rates and the floating rate nature of most investments
acquired or reset during first quarter 2005 and outstanding during first quarter
2005. The higher average rate on loans and Farmer Mac Guaranteed Securities
during first quarter 2005 reflects the increase in market rates during the
latter part of 2004 and first quarter 2005, which affected the rates on loans
acquired or reset during that period and outstanding during first quarter 2005.
The average rates on Farmer Mac's notes payable due within one year are
consistent with general trends in average short-term rates during the periods
presented. The downward trend in the average rate on notes payable due after one
year reflects the retirement of older, higher rate debt, as well as the issuance
of new debt at lower rates during the latter half of 2004 and first quarter 2005
and the relative stability of long-term interest rates during 2005 and 2004.
Three Months Ended March 31,
------------------------------------------------------------------------
2005 2004
------------------------------------ -----------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
------------ ---------- ----------- ------------- ----------- ----------
(dollars in thousands)
Interest-earning assets:
Cash and cash equivalents $ 485,245 $ 2,995 2.47% $ 702,546 $ 1,993 1.13%
Investments 1,021,698 9,592 3.76% 961,262 6,342 2.64%
Loans and Farmer Mac Guaranteed Securities 2,154,734 29,202 5.42% 2,396,623 30,753 5.13%
------------ ---------- ----------- ------------- ----------- ----------
Total interest-earning assets 3,661,677 41,789 4.57% 4,060,431 39,088 3.85%
------------ ---------- ----------- ------------- ----------- ----------
Funding:
Notes payable due within one year 1,819,416 16,064 3.53% 2,416,202 12,974 2.15%
Notes payable due after one year 1,647,521 17,919 4.35% 1,445,586 16,647 4.61%
------------ ---------- ----------- ------------- ----------- ----------
Total interest-bearing liabilities 3,466,937 33,983 3.92% 3,861,788 29,621 3.07%
Net non-interest-bearing funding 194,740 198,643
------------ ---------- ----------- ------------- ----------- ----------
Total funding $ 3,661,677 33,983 3.71% $ 4,060,431 29,621 2.92%
------------ ---------- ----------- ------------- ----------- ----------
Net interest income/yield $ 7,806 0.85% $ 9,467 0.93%
---------- ------------ ----------- -----------
The following table sets forth information regarding the changes in the
components of Farmer Mac's net interest income for the periods indicated. For
each category, information is provided on changes attributable to changes in
volume (change in volume multiplied by old rate) and changes in rate (change in
rate multiplied by old volume). Combined rate/volume variances, the third
element of the calculation, are allocated based on their relative size. The
increases due to rate reflect the short-term or adjustable-rate nature of the
assets or liabilities and the general increases in short term market rates.
Three Months Ended March 31, 2005
Compared to Three Months Ended
March 31, 2004
--------------------------------------------
Increase/(Decrease) Due to
--------------------------------------------
Rate Volume Total
--------------- -------------- -------------
(in thousands)
Income from interest-earning assets
Cash and cash equivalents $ 4,698 $ (3,696) $ 1,002
Investments 2,829 421 3,250
Loans and Farmer Mac Guaranteed Securities 8,322 (9,873) (1,551)
--------------- -------------- -------------
Total 15,849 (13,148) 2,701
Expense from interest-bearing liabilities 16,472 (12,110) 4,362
--------------- -------------- -------------
Change in net interest income $ (623) $ (1,038) $ (1,661)
--------------- -------------- -------------
See "--Regulatory Matters" for actions by Farmer Mac's federal regulator,
the Farm Credit Administration ("FCA"), that may potentially affect future net
interest income.
Guarantee and Commitment Fees. Guarantee and commitment fees were $5.0
million for first quarter 2005, compared to $5.2 million for first quarter 2004.
The effects of the adoption of SFAS 140 were $0.9 million and $1.1 million,
respectively, of guarantee fee income being classified as interest income for
first quarter 2005 and first quarter 2004, 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. When
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.
Expenses. General and administrative expenses for first quarter 2005 were
$2.0 million, compared to $2.1 million for first quarter 2004. Compensation and
employee benefits were $1.8 million in both first quarter 2005 and first quarter
2004. During 2004, and into 2005, Farmer Mac undertook (and expects to continue)
several initiatives to validate and enhance its risk management practices,
internal controls, and accounting and financial reporting. These initiatives are
the result of ongoing corporate diligence and a number of regulatory
considerations, including compliance with the Sarbanes-Oxley Act of 2002 and FCA
requirements, as well as the heightened focus on the regulatory environment for
GSEs generally. Regulatory fees assessed by FCA for first quarter 2005 and 2004
were $0.6 million and $0.4 million, respectively. FCA's regulatory fees charged
to Farmer Mac for the federal fiscal year ended September 30, 2004 were $2.0
million, and FCA has advised the Corporation that its estimated fees for the
federal fiscal year ending September 30, 2005 will be $2.3 million. After the
end of a federal government fiscal year, FCA may revise its prior year estimated
assessments to reflect actual costs incurred, and has issued both additional
assessments and refunds in the past. Farmer Mac expects all of the
above-mentioned expenses and regulatory fees to continue at or above current
levels through 2005.
During first quarter 2005, Farmer Mac released $0.7 million from the
allowance for losses, compared to provisions of $1.6 million for first quarter
2004. See "--Quantitative and Qualitative Disclosures About Market Risk
Management--Credit Risk" for additional information regarding Farmer Mac's
provision for losses and provision for loan losses. As of March 31, 2005, Farmer
Mac's total allowance for losses totaled $16.3 million, or 0.37 percent of
outstanding loans held or loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs, compared to $17.1 million and 0.37 percent as of December
31, 2004.
Gains and Losses on Financial Derivatives and Trading Assets. For first
quarter 2005, the loss on financial derivatives and trading assets was $1.7
million, compared to a gain of $3.2 million for first quarter 2004. The loss in
first quarter 2005 and the gain in first quarter 2004 resulted primarily from
fluctuations in the fair values of financial derivatives, resulting from
movements in interest rates, that were not designated as either fair value
hedges or cash flow hedges 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 because, in management's view, the non-GAAP
measures provide a more meaningful 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
intended to supplement, not replace, GAAP information.
Farmer Mac developed non-GAAP core earnings to present net income less the
after-tax effects of SFAS 133. Core earnings for the three months ended March
31, 2005 were $6.3 million, compared to $5.9 million for the three months ended
March 31, 2004. The reconciliation of GAAP net income available to common
stockholders to core earnings is presented in the following table:
Reconciliation of GAAP Net Income Available to Common Stockholders to Core Earnings
- ---------------------------------------------------------------------------------------------------------
Three Months Ended
-----------------------------------------------
March 31, 2005 March 31, 2004
--------------------- ---------------------
(in thousands)
GAAP net income available
to common stockholders $ 4,912 $ 7,827
Less the effects of SFAS 133:
Unrealized gains/(losses) on financial derivatives
and trading assets, net of tax (1,353) 1,825
Benefit from non-amortization of premium
payments on financial derivatives, net of tax - 76
--------------------- ---------------------
Core earnings $ 6,265 $ 5,926
--------------------- ---------------------
Business Volume. New business volume for first quarter 2005 was $95.5
million, down $111.7 million from the same period in 2004. Presently, Farmer
Mac's new business with agricultural mortgage lenders has been slowed by:
o reduced growth rates in the agricultural mortgage market, due
largely to the increased liquidity of agricultural borrowers;
o increased available capital and liquidity of agricultural
lenders;
o new alternative sources of funding and credit enhancement for
agricultural lenders;
o increased competition in the secondary market for purchases of
quality agricultural mortgage loans;
o adverse publicity about and increased regulatory pressure on
GSEs; and
o uncertainty created by the proposed FCA regulation concerning
risk-weighting of assets held by FCS institutions which, if
adopted in its current form, could decrease the value of LTSPCs
and Farmer Mac swaps to those institutions (See "--Regulatory
Matters").
For a more detailed discussion of the above factors and the related effects
on Farmer Mac's business volume, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Outlook for 2005" in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2004,
filed with the SEC on March 16, 2005.
Looking ahead, Farmer Mac is developing innovative ways to serve the
financing needs of rural America, and remains confident of opportunities for
growth and increased business volume as a result of the Corporation's marketing
efforts.
The following tables set forth the amount of all Farmer Mac I and Farmer
Mac II loan purchase and guarantee activities for newly originated and current
seasoned loans during the periods indicated.
Three Months Ended
March 31,
-------------------------------
2005 2004
-------------- --------------
(in thousands)
Loan purchase and guarantee and
commitment activity:
Farmer Mac I:
Loans $ 18,540 $ 25,444
LTSPCs 33,282 147,273
Farmer Mac II Guaranteed Securities 43,634 34,483
-------------- --------------
Total purchases, guarantees
and commitments $ 95,456 $ 207,200
-------------- --------------
Farmer Mac I Guaranteed Securities issuances:
Retained $ - $ -
Sold 1,914 27,203
-------------- --------------
Total $ 1,914 $ 27,203
-------------- --------------
To fulfill its guarantee and commitment obligations, Farmer Mac purchases
delinquent loans underlying Farmer Mac Guaranteed Securities and LTSPCs. The
following table presents Farmer Mac's loan purchases of newly originated and
current seasoned loans and defaulted loans purchased underlying Farmer Mac I
Guaranteed Securities and LTSPCs.
Three Months Ended
March 31,
-----------------------
2005 2004
---------- -----------
(in thousands)
Farmer Mac I newly originated
and current seasoned loan purchases $18,540 $ 25,444
Defaulted loans purchased from
off-balance sheet Farmer Mac I
Guaranteed Securities 1,595 1,046
Defaulted loans transferred from
on-balance sheet Farmer Mac I
Guaranteed Securities 1,174 4,744
Defaulted loans purchased
from LTSPCs 630 -
---------- -----------
Total loan purchases $21,939 $ 31,234
---------- -----------
The decreases in defaulted loans purchased and in defaulted loans
transferred to loans reflect a reduction in newly delinquent loans underlying
Farmer Mac Guaranteed Securities and LTSPCs.
The weighted-average age of the Farmer Mac I newly originated and current
seasoned loans purchased during first quarter 2005 and first quarter 2004 was
less than one month. Of the Farmer Mac I newly originated and current seasoned
loans purchased during first quarter 2005 and first quarter 2004, 54 percent and
70 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 15.3 years and 15.2 years,
respectively. The weighted-average age of delinquent loans purchased out of
securitized pools and LTSPCs during first quarter 2005 and first quarter 2004
was 6.7 years.
More than 250 lenders were actively participating either directly or
indirectly in one or both of the Farmer Mac I or Farmer Mac II programs as of
March 31, 2005, with loans to approximately 20,000 borrowers.
As of March 31, 2005, there were 160 approved loan sellers in the Farmer
Mac I program ranging from single-office to multi-branch institutions, spanning
community banks, Farm Credit System associations, mortgage companies, large
multi-state Farm Credit System banks, commercial banks and insurance companies.
During 2004, there were 59 approved loan sellers active in the Farmer Mac I
program. In addition to participating directly in the Farmer Mac I program, some
of the approved loan sellers enable other lenders to participate indirectly in
the Farmer Mac I program by managing correspondent networks of lenders from
which they purchase loans to sell to Farmer Mac. As of March 31, 2005,
approximately 75 lenders were participating in those networks.
Any lender authorized by the USDA to obtain a USDA guarantee on a loan may
be a seller in the Farmer Mac II program. As of March 31, 2005, there were 125
active sellers in the Farmer Mac II program, compared to 133 as of December 31,
2004. Sellers in the Farmer Mac II program consist mostly of community and
regional banks.
As of March 31, 2005, outstanding commitments to purchase Farmer Mac I
loans totaled $3.5 million, compared to $2.3 million as of March 31, 2004. All
Farmer Mac I commitments outstanding as of March 31, 2005 and 2004 were
mandatory commitments. Loans submitted for approval or approved but not yet
committed to purchase totaled $20.4 million as of March 31, 2005, compared to
$25.4 million as of March 31, 2004. Not all of these loans will be purchased, as
some will ultimately be denied for credit reasons or withdrawn by the seller.
USDA's most recent publications (as available on USDA's website as of May
6, 2005) forecast:
o 2005 net cash farm income to be $78.1 billion, exceeding the two
successive record years of $77.8 billion in 2004 and $68.6
billion in 2003;
o 2005 net farm income to be $64.4 billion, which is a decrease of
$9.2 billion from the record $73.6 billion estimated for 2004 but
still $13.3 million higher than the 10-year average net farm
income;
o Total direct government payments to be $24.1 billion in 2005, an
increase from the 2004 estimate of $14.5 billion. Market prices
for crops affect direct government payment rates for government
programs; USDA anticipates program crop prices to be lower in
2005, due to large inventories from 2003 and 2004 bumper crops;
o The value of U.S. farm real estate to increase 4.5 percent in
2005 to $1.23 trillion, a smaller increase as compared to the
2004 increase of 5.4 percent. USDA is anticipating improvement in
the general economy to support further growth in farmland values,
though at a rate slower than the average annual gain of 5.85
percent since 1999; and
o The amount of farm real estate debt to increase by 5.2 percent in
2005 to $119.5 billion, up from $113.6 billion in 2004.
The USDA forecast components referenced above relate to U.S. agriculture
generally, but should be favorable for Farmer Mac's financial condition relative
to its exposure to outstanding guarantees and commitments, as they indicate
strong borrower cash flows, and generally increased values in U.S. farm real
estate.
Balance Sheet Review
During the three months ended March 31, 2005, there were $72.1 million of
net principal paydowns in program assets (Farmer Mac Guaranteed Securities and
loans) and a $67.6 million increase in the portfolio of investment securities
and cash and cash equivalents. Consistent with the net decrease in assets during
the period, total liabilities decreased $6.1 million from December 31, 2004 to
March 31, 2005. For further information regarding off-balance sheet program
activities, see "--Off-Balance Sheet Program Activities" below.
During the three months ended March 31, 2005, accumulated other
comprehensive income/(loss) increased $1.6 million, which is the net effect of a
$10.6 million decrease in after-tax unrealized gains on securities available for
sale and a $12.2 million increase in the after-tax fair value of financial
derivatives classified as cash flow hedges. Accumulated other comprehensive
income/(loss) is not a component of Farmer Mac's core capital or regulatory
capital.
As of March 31, 2005, Farmer Mac's core capital totaled $235.6 million,
compared to $237.7 million as of December 31, 2004. As of March 31, 2005, core
capital exceeded Farmer Mac's statutory minimum capital requirement of $127.9
million by $107.7 million.
Farmer Mac was in compliance with its risk-based capital standards as of
March 31, 2005. As of March 31, 2005, the risk-based capital stress test
generated a regulatory capital requirement of $59.3 million. Farmer Mac's
regulatory capital of $251.9 million as of March 31, 2005 exceeded that amount
by approximately $192.6 million. The increase in the risk-based capital
requirement from December 31, 2004 ($37.1 million) to March 31, 2005 ($59.3
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. See Note 3 to the condensed
consolidated financial statements for further information regarding Farmer Mac's
off-balance sheet program activities.
Quantitative and Qualitative Disclosures About Market Risk Management
Interest Rate Risk. Farmer Mac is subject to interest rate risk on all
assets held for investment because of possible timing differences in the cash
flows of the assets and related liabilities. This risk is primarily related to
loans held and on-balance sheet Farmer Mac Guaranteed Securities because of the
ability of borrowers to prepay their mortgages before the scheduled maturities,
thereby increasing the risk of asset and liability cash flow mismatches. Cash
flow mismatches in a changing interest rate environment can reduce the earnings
of the Corporation if assets repay sooner than expected and the resulting cash
flows must be reinvested in lower-yielding investments when Farmer Mac's funding
costs cannot be correspondingly reduced, or if assets repay more slowly than
expected and the associated debt must be replaced by higher-cost debt.
Yield maintenance provisions and other prepayment penalties contained in
many agricultural mortgage loans reduce, but do not eliminate, this prepayment
risk, particularly in the case of a defaulted loan where yield maintenance may
not be collected. Those provisions require borrowers to make an additional
payment when they prepay their loans so that, when reinvested with the prepaid
principal, yield maintenance payments generate substantially the same cash flows
that would have been generated had the loan not prepaid. Those provisions create
a disincentive to prepayment and compensate the Corporation for its interest
rate risks to a large degree. As of March 31, 2005, 57 percent of the
outstanding balance of all loans held and loans underlying on-balance sheet
Farmer Mac I Guaranteed Securities (including 80 percent of all loans with fixed
interest rates) were covered by yield maintenance provisions and other
prepayment penalties. Of the Farmer Mac I new and current loans purchased in
first quarter 2005, one percent had yield maintenance or another form of
prepayment protection. As of March 31, 2005, none of the USDA-guaranteed
portions underlying Farmer Mac II Guaranteed Securities had yield maintenance
provisions; however, 14.7 percent contained prepayment penalties. Of the
USDA-guaranteed portions purchased in first quarter 2005, 44.0 percent contained
prepayment penalties.
As of March 31, 2005, Farmer Mac had $424.0 million of cash and cash
equivalents and $1.1 billion of investment securities. Cash equivalents and
investment securities pose only limited interest rate risk to Farmer Mac, due to
their closely matched funding. Farmer Mac's cash equivalents mature within three
months and are match-funded with discount notes having similar maturities. As of
March 31, 2005, Farmer Mac's investment securities consisted of $882.3 million
(78.1 percent) of floating rate securities that have rates that adjust within
one year. These floating rate investments are funded using:
o a series of discount note issuances in which each successive
discount note is issued and matures on or about the corresponding
interest rate reset date of the related investment;
o floating-rate notes having similar rate reset provisions as the
related investment; or
o fixed-rate notes swapped to floating rates having similar reset
provisions as the related investment.
The most comprehensive stress test of Farmer Mac's exposure to long-term
interest rate risk is the sensitivity of its Market Value of Equity ("MVE") to
yield curve shocks. MVE represents the present value of all future cash flows
from on- and off-balance sheet assets, liabilities and financial derivatives,
discounted at current interest rates and spreads. The following schedule
summarizes the results of Farmer Mac's MVE sensitivity analysis as of March 31,
2005 and December 31, 2004 to an immediate and instantaneous parallel shift in
the yield curve.
Percentage Change in MVE from Base Case
--------------------------------------
Interest Rate March 31, December 31,
Scenario 2005 2004
--------------- ---------------- -----------------
+ 300 bp -11.7% -5.8%
+ 200 bp -7.2% -3.3%
+ 100 bp -3.1% -1.2%
- 100 bp 1.6% 0.0%
- 200 bp 2.1% -1.3%
- 300 bp N/A* N/A*
<FN>
* As of the dates indicated, a parallel shift of the U. S. Treasury yield
curve produced negative interest rates for maturities of 2 years and
shorter.
</FN>
During first quarter 2005, Farmer Mac maintained a relatively low level of
interest rate sensitivity through ongoing asset and liability management
activities. As of March 31, 2005, a uniform or "parallel" increase of 100 basis
points would have increased NII, a shorter-term measure of interest rate risk,
by 2.4 percent, while a parallel decrease of 100 basis points would have
decreased NII by 0.5 percent. Farmer Mac also measures the sensitivity of both
MVE and NII to a variety of non-parallel interest rate shocks, including
flattening and steepening yield curve scenarios. As of March 31, 2005, both MVE
and NII showed similar or lesser sensitivity to non-parallel shocks as to the
parallel shocks. As of March 31, 2005, 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 plus 1.8 months, compared to plus
0.4 months as of December 31, 2004. Duration matching helps to maintain the
correlation of cash flows and stable portfolio earnings even when interest rates
are not stable. The relative insensitivity of Farmer Mac's MVE and NII to both
parallel and non-parallel interest rate shocks, and its duration gap, indicate
the effectiveness of the Corporation's approach to managing its interest rate
risk exposures.
As of March 31, 2005, Farmer Mac had $1.4 billion combined notional amount
of interest rate swaps with terms ranging from 1 to 15 years. Of those interest
rate swaps, $650.5 million were floating-to-fixed rate interest rate swaps,
$205.0 million were fixed-to-floating interest rate swaps and $583.3 million
were basis swaps.
Farmer Mac uses financial derivatives as an end-user for hedging purposes,
not for trading or speculative purposes. When financial derivatives meet the
specific hedge criteria under SFAS 133, they are accounted for as either fair
value hedges or cash flow hedges. Financial derivatives that do not satisfy
those hedge criteria are not accounted for as hedges and changes in the fair
value of those financial derivatives are reported as a gain or loss on financial
derivatives and trading assets in the consolidated statements of operations. All
of Farmer Mac's financial derivative transactions are conducted under standard
collateralized agreements that limit Farmer Mac's potential credit exposure to
any counterparty. As of March 31, 2005 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 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.
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 a "Contingent obligation for probable losses" on loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs
entered into or modified after January 1, 2003, for which
inherent losses existed at the time of the guarantee or
commitment and could be reasonably estimated, 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, 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 losses on Farmer
Mac's loans held for investment; and
o a "Provision for losses," which represents losses on loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs and real estate owned.
Farmer Mac estimates probable losses using a systematic process that begins
with management's evaluation of the results of its proprietary loan pool
simulation and guarantee fee model (the "Model"). The Model draws upon
historical information from a data set of agricultural mortgage loans recorded
over a longer period of time than Farmer Mac's own experience to date, screened
to include only those loans with credit characteristics similar to those on
which Farmer Mac has assumed credit risk. The results generated by the Model are
modified by the application of management's judgment, as required to take key
factors into account, including:
o economic conditions;
o geographic and agricultural commodity/product concentrations in
Farmer Mac's portfolio;
o the credit profile of Farmer Mac's portfolio;
o delinquency trends of Farmer Mac's portfolio;
o Farmer Mac's experience in the management and sale of real estate
owned; and
o historical charge-off and recovery activities of Farmer Mac's
portfolio.
Management believes that the general allowance, which is the difference
between the total allowance for losses (generated through use of the Model) and
the specific allowances, adequately covers any probable losses inherent in the
portfolio of performing loans under Statement of Financial Accounting Standards
No. 5, Accounting for Contingencies ("SFAS 5").
The following table summarizes the changes in the components of Farmer
Mac's allowance for losses for the three months ended March 31, 2005 and 2004:
Contingent
Allowance REO Obligation Total
for Loan Valuation Reserve for Probable Allowance
Losses Allowance for Losses Losses for Losses
-------------- -------------- ------------- -------------- -------------
(in thousands)
Balances as of December 31, 2004 $ 4,395 $ - $ 10,729 $ 1,977 $ 17,101
Provision for losses (584) 120 (183) (38) (685)
Net (charge-offs)/recoveries 35 (120) - - (85)
-------------- -------------- ------------- -------------- -------------
Balances as of March 31, 2005 $ 3,846 $ - $ 10,546 $ 1,939 $ 16,331
-------------- -------------- ------------- -------------- -------------
Contingent
Allowance REO Obligation Total
for Loan Valuation Reserve for Probable Allowance
Losses Allowance for Losses Losses for Losses
-------------- -------------- ------------- -------------- -------------
(in thousands)
Balances as of December 31, 2003 $ 5,967 $ 238 $ 13,172 $ 2,676 $ 22,053
Provision for losses 2,793 375 (1,220) (333) 1,615
Net charge-offs (1,089) (420) - - (1,509)
-------------- -------------- ------------- -------------- -------------
Balances as of March 31, 2004 $ 7,671 $ 193 $ 11,952 $ 2,343 $ 22,159
-------------- -------------- ------------- -------------- -------------
During first quarter 2005, Farmer Mac released $0.7 million from the
allowance for losses, compared to provisions of $1.6 million for first quarter
2004. During first quarter 2005, Farmer Mac charged off $130,000 in losses
against the allowance for losses and had $45,000 in recoveries for net
charge-offs of $85,000. During first quarter 2004, Farmer Mac charged off $1.5
million in losses against the allowance for losses and had $37,000 in
recoveries. There was no previously accrued or advanced interest on loans and
Farmer Mac I Guaranteed Securities that were charged off in first quarter 2005
and 2004. During first quarter 2005, Farmer Mac received $0.1 million from a
seller 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 loan. This recovery was
reported as income and is not reflected in the net charge-offs for the three
months ended March 31, 2005 presented above. As of March 31, 2005, Farmer Mac's
allowance for losses totaled $16.3 million, or 37 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 $17.1 million (37
basis points) as of December 31, 2004.
As of March 31, 2005, Farmer Mac's 90-day delinquencies totaled $45.8
million and represented 1.04 percent of the principal balance of all loans held
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs, compared to $57.4 million (1.17 percent) as of March 31, 2004. As of
March 31, 2005, 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 $70.3 million and
represented 1.59 percent of the principal balance of all loans held and loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, compared
to $91.3 million (1.86 percent) as of March 31, 2004. Loans that have been
restructured after delinquency were insignificant and are included within the
reported 90-day delinquency and non-performing asset disclosures. From quarter
to quarter, Farmer Mac anticipates that 90-day delinquencies and non-performing
assets will fluctuate, both in dollars and as a percentage of the outstanding
portfolio, with higher levels likely at the end of the first and third quarters
of each year corresponding to the semi-annual (January 1st and July 1st) payment
characteristics of most Farmer Mac I loans.
The following table presents historical information regarding Farmer Mac's
non-performing assets and 90-day delinquencies:
Outstanding
Post-1996 Act Less:
Loans, Non- REO and
Guarantees and performing Performing 90-Day
LTSPCs Assets Percentage Bankruptcies Delinquencies Percentage
---------------- -------------- ------------- ---------------- -------------------- -------------
(dollars in thousands)
As of:
March 31, 2005 $ 4,433,087 $ 70,349 1.59% $ 24,561 $ 45,788 1.04%
December 31, 2004 4,642,208 50,636 1.09% 25,353 25,283 0.55%
September 30, 2004 4,756,839 75,022 1.58% 27,438 47,584 1.01%
June 30, 2004 4,882,505 69,751 1.43% 36,978 32,773 0.68%
March 31, 2004 4,922,759 91,326 1.86% 33,951 57,375 1.17%
December 31, 2003 5,020,032 69,964 1.39% 39,908 30,056 0.60%
September 30, 2003 4,871,756 84,583 1.74% 37,442 47,141 0.98%
June 30, 2003 4,875,059 80,169 1.64% 28,883 51,286 1.06%
March 31, 2003 4,820,887 94,822 1.97% 18,662 76,160 1.58%
As of March 31, 2005, approximately $1.3 billion (29.8 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
$1.6 billion (32.9 percent) of such loans as of March 31, 2004. The Model takes
the portfolio age distribution and maturation into consideration. Accordingly,
those trends did not cause management to alter the Model's projection for the
provisions for losses.
As of March 31, 2005, Farmer Mac analyzed $94.1 million of its assets for
collateral shortfalls against updated appraised values, other updated collateral
valuations or discounted values. Of the $94.1 million of assets analyzed, $81.7
million were adequately collateralized. For the $12.4 million of assets that
were not adequately collateralized, individual collateral shortfalls totaled
$0.9 million. Accordingly, Farmer Mac allocated specific allowances of $0.9
million to those under-collateralized assets as of March 31, 2005. As of March
31, 2005, after the allocation of specific allowances to under-collateralized
loans, Farmer Mac had additional non-specific or general allowances of $15.4
million, bringing the total allowance for losses to $16.3 million.
As of March 31, 2005, 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 50 percent, and the weighted-average
original LTV ratio for all post-1996 Act non-performing assets was 55 percent.
The following table summarizes the post-1996 Act non-performing assets by
original LTV ratio:
Distribution of Post-1996 Act Non-performing
Assets by Original LTV Ratio
as of March 31, 2005
- ----------------------------------------------------
(dollars in thousands)
Post-1996 Act
Non-performing
Original LTV Ratio Assets Percentage
- -------------------- ---------------- ------------
0.00% to 40.00% $ 7,308 10%
40.01% to 50.00% 11,180 16%
50.01% to 60.00% 32,142 46%
60.01% to 70.00% 18,226 26%
70.01% to 80.00% 1,493 2%
80.01% + - 0%
---------------- ------------
Total $ 70,349 100%
---------------- ------------
The following table presents outstanding loans held and loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, post-1996 Act
non-performing assets and specific allowances for losses as of March 31, 2005 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 11% $ 500,684 $ 3,658 0.73% $ -
1994 3% 121,245 1,436 1.18% -
1995 3% 120,520 2,787 2.31% 15
1996 6% 276,797 6,026 2.18% 220
1997 8% 333,426 11,857 3.56% 74
1998 12% 539,898 12,216 2.26% 335
1999 12% 540,729 13,126 2.43% 218
2000 7% 309,027 8,792 2.85% -
2001 11% 491,655 9,655 1.96% -
2002 12% 548,008 796 0.15% -
2003 10% 432,524 - 0.00% -
2004 4% 174,319 - 0.00% -
2005 1% 44,255 - 0.00% -
------------------ ------------------ ----------------- ---------------- --------------
Total 100% $ 4,433,087 $ 70,349 1.59% $ 862
------------------ ------------------ ----------------- ---------------- --------------
By geographic region (2):
Northwest 21% $ 909,372 $ 39,756 4.37% $ 708
Southwest 46% 2,035,727 18,412 0.90% 118
Mid-North 13% 573,555 3,201 0.56% 36
Mid-South 6% 278,546 6,782 2.43% -
Northeast 8% 372,244 1,369 0.37% -
Southeast 6% 263,643 829 0.31% -
------------------ ------------------ ----------------- ---------------- --------------
Total 100% $ 4,433,087 $ 70,349 1.59% $ 862
------------------ ------------------ ----------------- ---------------- --------------
By commodity:
Crops 43% $ 1,935,377 $ 24,817 1.28% $ -
Permanent plantings 26% 1,173,258 32,059 2.73% 862
Livestock 23% 1,009,323 9,259 0.92% -
Part-time farm 7% 291,832 4,057 1.39% -
Other 1% 23,297 157 0.67% -
------------------ ------------------ ----------------- ---------------- --------------
Total 100% $ 4,433,087 $ 70,349 1.59% $ 862
------------------ ------------------ ----------------- ---------------- --------------
<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 as of March 31, 2005. 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 Combined
Original Loans, Cumulative Cumulative Current Credit Loss
Guarantees Net Credit Loss Specific and Specific
and LTSPCs Losses Rate Allowances Allowance Rate
---------------- ---------------- ----------------- ----------------- -----------------
(dollars in thousands)
By year of origination:
Before 1994 $ 2,026,319 $ - 0.00% $ - 0.00%
1994 371,921 - 0.00% - 0.00%
1995 326,036 1,088 0.33% 15 0.34%
1996 633,560 1,503 0.24% 220 0.27%
1997 726,118 2,793 0.38% 74 0.39%
1998 1,079,205 4,241 0.39% 335 0.42%
1999 1,069,550 1,133 0.11% 218 0.13%
2000 666,476 2,345 0.35% - 0.35%
2001 894,182 650 0.07% - 0.07%
2002 845,797 - 0.00% - 0.00%
2003 572,100 - 0.00% - 0.00%
2004 200,835 - 0.00% - 0.00%
2005 44,373 - 0.00% - 0.00%
---------------- ---------------- ----------------- ----------------- -----------------
Total $ 9,456,472 $ 13,753 0.15% $ 862 0.15%
---------------- ---------------- -----------------
By geographic region (1):
Northwest $ 2,044,438 $ 6,827 0.33% $ 708 0.37%
Southwest 4,137,620 4,727 0.11% 118 0.12%
Mid-North 1,154,462 18 0.00% 36 0.00%
Mid-South 503,860 1,890 0.38% - 0.38%
Northeast 811,203 45 0.01% - 0.01%
Southeast 804,889 246 0.03% - 0.03%
---------------- ---------------- ----------------- ----------------- -----------------
Total $ 9,456,472 $ 13,753 0.15% $ 862 0.15%
---------------- ---------------- -----------------
By commodity:
Crops $ 4,056,537 $ 224 0.01% $ - 0.01%
Permanent plantings 2,431,176 8,996 0.37% 862 0.41%
Livestock 2,193,220 4,048 0.18% - 0.18%
Part-time farm 680,511 485 0.07% - 0.07%
Other 95,028 - 0.00% - 0.00%
---------------- ---------------- ----------------- ----------------- -----------------
Total $ 9,456,472 $ 13,753 0.15% $ 862 0.15%
---------------- ----------------- -----------------
<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. Section 8.6(e) of Farmer Mac's statutory charter (12 U.S.C.
ss. 2279aa-6(e)) authorizes Farmer Mac to issue debt obligations to purchase
eligible mortgage loans and Farmer Mac Guaranteed Securities and to maintain
reasonable amounts for business operations, including adequate liquidity. Farmer
Mac funds its program operations primarily by issuing debt obligations of
various maturities in the public capital markets. Farmer Mac's debt obligations
consist of discount notes and medium-term notes, 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 to finance its
investments, transaction costs, guarantee payments and LTSPC 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 to the
purchaser of a Farmer Mac discount note or medium-term note is not exempt under
federal law from federal, state or local taxation. The Corporation's discount
notes and medium-term notes are not currently rated by a nationally recognized
statistical rating organization (NRSRO). (See "--Regulatory Matters" below.)
Farmer Mac's board of directors has authorized the issuance of up to $5.0
billion of discount notes and medium-term notes (of which $3.5 billion was
outstanding as of March 31, 2005), 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 new discount notes and medium-term notes.
As a result of Farmer Mac's regular issuance of discount notes and
medium-term notes and its status as a federally chartered instrumentality of the
United States, Farmer Mac has been able to access the capital markets at
favorable rates. Farmer Mac has also used floating-to-fixed interest rate swaps,
combined with discount note issuances, as a source of fixed-rate funding. While
the swap market may provide favorable fixed rates, swap transactions expose
Farmer Mac to the risk of future widening of its own issuance spreads versus
corresponding LIBOR rates. If the spreads on the Farmer Mac discount notes were
to increase relative to LIBOR, Farmer Mac would be exposed to a commensurate
reduction on its net interest yield on the notional amount of its
floating-to-fixed interest rate swaps and other LIBOR-based floating rate
assets. Farmer Mac compensates for this risk by pricing the required net yield
on program asset purchases to reflect the cost of medium-term notes without
regard to the savings that may be achievable in the interest rate swap market.
Farmer Mac maintains a liquidity investment portfolio of cash and cash
equivalents (including commercial paper and other short-term money market
instruments) and investment securities consisting mostly of floating rate
securities with rates that adjust within one year, which can be drawn upon for
liquidity needs. As of March 31, 2005, Farmer Mac's cash and cash equivalents
and investment securities were $424.0 million and $1.1 billion, respectively. In
addition, as of March 31, 2005, Farmer Mac held a $728.4 million portfolio of
Farmer Mac II Guaranteed Securities backed by USDA-guaranteed portions that
carry the full faith and credit of the U.S. Government. As of March 31, 2005,
the aggregate of the Farmer Mac II Guaranteed Securities and the liquidity
investment portfolio represented 62.5 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 first quarter 2005, Farmer Mac maintained an average of
greater than 90 days of liquidity.
Capital. During first quarter 2005, Farmer Mac repurchased 291,454 shares
of its Class C Non-Voting Common Stock, at an average price of $20.35 per share,
pursuant to the Corporation's previously announced stock repurchase program.
These repurchases reduced the Corporation's capital by approximately $5.9
million.
Regulatory Matters
Regulatory actions continue to affect Farmer Mac's business outlook. Both
FCA and the Farm Credit System Insurance Corporation ("FCSIC"), a U.S.
Government controlled corporation managed by a three-member board of directors
composed of the members of the FCA Board, have cautioned FCS institutions about
doing business with GSEs, including Farmer Mac, and FCSIC has raised technical
objections to FCS institutions' use of Farmer Mac Farmer Mac Guaranteed
Securities swaps.
During second quarter 2004, FCA published a proposed regulation relating to
Farmer Mac's investments and liquidity. Farmer Mac expects to be able to comply
with the regulation if it is adopted in its current form, though analysis
indicates it could limit future increases in Farmer Mac's non-program investment
portfolio and the related net interest income. The Corporation disagrees with
certain aspects of the proposed regulation and submitted comments on the
proposal to FCA accordingly.
On August 6, 2004, FCA published a proposed regulation that, if adopted as
proposed, could adversely affect Farmer Mac's business by establishing a new
risk-weight allocation of capital applicable to Farmer Mac transactions with FCS
institutions, which comprise 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 GSEs
such as Fannie Mae, Freddie Mac or Farmer Mac. The proposed regulation was
subject to a 90-day public comment period and, as drafted, would have an
effective date eighteen months after the final regulation is published.
If the proposed regulation is adopted as a final rule in its current form
and Farmer Mac does not receive a rating of at least AA within the period
provided for in the proposed regulation, not only would the benefit to an FCS
institution of doing business with Farmer Mac be diminished after the adoption
of the regulation, but also, based on the language of the proposed regulation, a
significant portion of the current $2.8 billion of outstanding Farmer Mac I
guarantees and commitments currently in place with FCS institutions might be
subject to early termination. There can be no assurance that the regulation will
not be adopted as a final rule in its current form or in a modified form with
substantially the same effect. Likewise, Farmer Mac currently is not rated, and
there can be no assurance that Farmer Mac would receive a AAA or AA rating from
an NRSRO. As set forth in prior disclosures, Farmer Mac disagrees with the
proposed regulation as it would affect the Corporation, and has submitted a
comment letter to FCA setting forth its position.
Other Matters
In fourth quarter 2004 and first quarter 2005, Farmer Mac paid a quarterly
dividend of $0.10 per share on the Corporation's three classes of common stock -
Class A Voting Common Stock, Class B Voting Common Stock, and Class C Non-Voting
Common Stock. Each dividend was paid on the last day of each quarter to holders
of record as of the 15th day of the month in which the dividend was paid. Farmer
Mac expects to continue to pay comparable quarterly cash dividends for the
foreseeable future, subject to the outlook and indicated capital needs of the
Corporation and the determination of the board of directors. Farmer Mac's
ability to declare and pay dividends could be restricted if it were to fail to
comply with regulatory capital requirements. See "Business--Government
Regulation of Farmer Mac--Regulation--Capital Standards--Enforcement levels" in
Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31,
2004. Farmer Mac's ability to pay dividends on its common stock is also subject
to the payment of dividends on its outstanding preferred stock.
Supplemental Information
The following tables present quarterly and annual information regarding
loan purchases, guarantees and LTSPCs and outstanding guarantees and LTSPCs.
Farmer Mac Purchases, Guarantees and LTSPCs
- ---------------------------------------------------------------------------------------------------
Farmer Mac I
-----------------------------------
Loans and
Guaranteed
Securities LTSPCs Farmer Mac II Total
---------------- ----------------- ----------------- -------------
(in thousands)
For the quarter ended:
March 31, 2005 $ 18,540 $ 33,282 $ 43,634 $ 95,456
December 31, 2004 28,211 34,091 55,122 117,424
September 30, 2004 23,229 84,097 49,798 157,124
June 30, 2004 27,520 127,098 34,671 189,289
March 31, 2004 25,444 147,273 34,483 207,200
December 31, 2003 25,148 218,097 44,971 288,216
September 30, 2003 42,760 199,646 106,729 349,135
June 30, 2003 65,615 179,025 77,636 322,276
March 31, 2003 59,054 166,574 41,893 267,521
For the year ended:
December 31, 2004 104,404 392,559 174,074 671,037
December 31, 2003 192,577 763,342 271,229 1,227,148
Outstanding Balance of Farmer Mac Loans,
Guarantees and LTSPCs (1)
- ---------------------------------------------------------------------------------------------------------------
Farmer Mac I
--------------------------------------------------
Post-1996 Act
--------------------------------
Loans and
Guaranteed
Securities LTSPCs Pre-1996 Act Farmer Mac II Total
---------------- ---------------- ---------------- ---------------- ---------------
(in thousands)
As of:
March 31, 2005 $ 2,247,595 $ 2,209,792 $ 17,236 $ 777,465 $ 5,252,088
December 31, 2004 2,371,405 2,295,103 18,639 768,542 5,453,689
September 30, 2004 2,406,133 2,381,006 18,909 742,474 5,548,522
June 30, 2004 2,521,026 2,390,779 22,155 715,750 5,649,710
March 31, 2004 2,566,412 2,382,648 22,261 722,978 5,694,299
December 31, 2003 2,696,530 2,348,702 24,734 729,470 5,799,436
September 30, 2003 (2) 2,721,775 2,174,182 25,588 720,584 5,642,129
June 30, 2003 2,108,180 2,790,480 28,057 668,899 5,595,616
March 31, 2003 2,111,861 2,732,620 29,216 650,152 5,523,849
<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 guaranteed portions 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. term) ARMs & Resets ARMs Portfolio
----------------------- ---------------------- ---------------------- -------------------
(in thousands)
As of:
March 31, 2005 $ 828,985 $ 822,275 $ 492,358 $ 2,143,618
December 31, 2004 763,210 923,520 533,686 2,220,416
September 30, 2004 753,205 929,641 520,246 2,203,092
June 30, 2004 782,854 978,531 529,654 2,291,039
March 31, 2004 818,497 978,263 548,134 2,344,894
December 31, 2003 860,874 1,045,217 542,024 2,448,115
September 30, 2003 865,817 1,037,168 535,915 2,438,900
June 30, 2003 889,839 1,064,824 511,700 2,466,363
March 31, 2003 880,316 1,057,310 515,910 2,453,536
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
Evaluation of Disclosure Controls and Procedures. Farmer Mac maintains
disclosure controls and procedures designed to ensure that information required
to be disclosed in the Corporation's periodic filings under the Securities
Exchange Act of 1934 (the "Exchange Act"), including this report, is recorded,
processed, summarized and reported on a timely basis. These disclosure controls
and procedures include controls and procedures designed to ensure that
information required to be disclosed under the Exchange Act is accumulated and
communicated to the Corporation's management on a timely basis to allow
decisions regarding required disclosure. Farmer Mac's Chief Executive Officer
and Chief Financial Officer have evaluated the effectiveness of the design and
operation of the Corporation's disclosure controls and procedures (as defined
under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2005.
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.
Changes in Internal Control Over Financial Reporting. There were no changes
in Farmer Mac's internal control over financial reporting during the quarter
ended March 31, 2005 that have materially affected, or are reasonably likely to
materially affect, Farmer Mac's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Farmer Mac is not a party to any material pending legal proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Farmer Mac is a federally chartered instrumentality of the United
States and its Common Stock is exempt from registration pursuant
to Section 3(a)(2) of the Securities Act of 1933. On January 4,
2005, 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, Farmer Mac
issued an aggregate of 639 shares of its Class C Non-Voting
Common Stock, at an issue price of $23.30 per share, to the eight
directors who elected to receive such stock in lieu of their cash
retainers.
(b) Not applicable.
(c) As shown in the table below, Farmer Mac repurchased 291,454
shares of its Class C Non-Voting Common Stock during first
quarter 2005 at an average price of $20.35 per share. All of the
repurchased shares were purchased in open market transactions and
were retired to become authorized but unissued shares available
for future issuance.
Issuer Purchases of Equity Securities
- ---------------------------------------------------------------------------------------------------------------
Total Number of
Class C Shares Maximum Number
Total Number Average Purchased as Part of Class C Shares
of Class C Price Paid of Publicly that May Yet Be
Shares per Class Announced Purchased Under
Period Purchased C Share Program* the Program
- ------------------------------------ ---------------- ------------ -------------------- ---------------------
January 1, 2005 - January 31, 2005 80,350 $ 21.92 80,350 675,902
February 1, 2005 - February 28, 2005 112,398 20.55 112,398 563,504
March 1, 2005 - March 31, 2005 98,706 18.83 98,706 464,798
---------------- ------------ -------------------- ---------------------
Total 291,454 $ 20.35 291,454 464,798
---------------- ------------ -------------------- ---------------------
Item 3. Defaults Upon Senior Securities
(a) Not applicable.
(b) Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
(a) None.
(b) Not applicable.
Item 6. Exhibits
* 3.1 - Title VIII of the Farm Credit Act of 1971, as most recently
amended by the Farm Credit System Reform Act of 1996, P.L.
104-105 (Form 10-K filed March 29, 1996).
* 3.2 - Amended and restated By-Laws of the Registrant (Form 10-Q filed
August 9, 2004).
* 4.1 - Specimen Certificate for Farmer Mac Class A Voting Common Stock
(Form 10-Q filed May 15, 2003).
* 4.2 - Specimen Certificate for Farmer Mac Class B Voting Common Stock
(Form 10-Q filed May 15, 2003).
* 4.3 - Specimen Certificate for Farmer Mac Class C Non-Voting Common
Stock (Form 10-Q filed May 15, 2003).
* 4.4 - Certificate of Designation of Terms and Conditions of Farmer Mac
6.40% Cumulative Preferred Stock, Series A (Form 10-Q filed
May 15, 2003).
+* 10.1 - Stock Option Plan (Previously filed as Exhibit 19.1 to Form 10-Q
filed August 14, 1992).
_____________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 10.1.1 - 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).
+* 10.1.4 - Form of stock option award agreement under 1997 Incentive Plan
(Form 10-K filed March 16, 2005).
+* 10.2 - Employment Agreement dated May 5, 1989 between Henry D. Edelman
and the Registrant (Previously filed as Exhibit 10.4 to Form 10-K
filed February 14, 1990).
+* 10.2.1 - Amendment No. 1 dated as of January 10, 1991 to Employment
Contract between Henry D. Edelman and the Registrant (Previously
filed as Exhibit 10.4 to Form 10-K filed April 1, 1991).
+* 10.2.2 - Amendment to Employment Contract dated as of June 1, 1993 between
Henry D. Edelman and the Registrant (Previously filed as Exhibit
10.5 to Form 10-Q filed November 15, 1993).
+* 10.2.3 - Amendment No. 3 dated as of June 1, 1994 to Employment Contract
between Henry D. Edelman and the Registrant (Previously filed as
Exhibit 10.6 to Form 10-Q filed August 15, 1994).
+* 10.2.4 - Amendment No. 4 dated as of February 8, 1996 to Employment
Contract between Henry D. Edelman and the Registrant (Form 10-K
filed March 29, 1996).
+* 10.2.5 - Amendment No. 5 dated as of June 13, 1996 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 1996).
+* 10.2.6 - Amendment No. 6 dated as of August 7, 1997 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
November 14, 1997).
_____________________
* 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.
+* 10.2.7 - Amendment No. 7 dated as of June 4, 1998 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 1998).
+* 10.2.8 - Amendment No. 8 dated as of June 3, 1999 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 12, 1999).
+* 10.2.9 - Amendment No. 9 dated as of June 1, 2000 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 2000).
+* 10.2.10 - Amendment No. 10 dated as of June 7, 2001 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 2001).
+* 10.2.11 - Amendment No. 11 dated as of June 6, 2002 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 2002).
+* 10.2.12 - Amendment No. 12 dated as of June 5, 2003 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 2003).
+* 10.2.13 - Amendment No. 13 dated as of August 3, 2004 to Employment
Contract between Henry D. Edelman and the Registrant (Form 10-Q
filed November 9, 2004).
+* 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).
_____________________
* 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.
+* 10.3.4 - Amendment No. 4 dated June 1, 1993 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.10 to Form 10-K filed March 31, 1994).
+* 10.3.5 - Amendment No. 5 dated as of June 1, 1994 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Previously filed
as Exhibit 10.12 to Form 10-Q filed August 15, 1994).
+* 10.3.6 - Amendment No. 6 dated as of June 1, 1995 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 1995).
+* 10.3.7 - Amendment No. 7 dated as of February 8, 1996 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form 10-K
filed March 29, 1996).
+* 10.3.8 - Amendment No. 8 dated as of June 13, 1996 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 1996).
+* 10.3.9 - Amendment No. 9 dated as of August 7, 1997 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
November 14, 1997).
+* 10.3.10 - Amendment No. 10 dated as of June 4, 1998 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 1998).
+* 10.3.11 - 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).
_____________________
* 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.
+* 10.3.13 - Amendment No. 13 dated as of June 7, 2001 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 2001).
+* 10.3.14 - Amendment No. 14 dated as of June 6, 2002 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 2002).
+* 10.3.15 - Amendment No. 15 dated as of June 5, 2003 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 2003).
+* 10.3.16 - Amendment No. 16 dated as of August 3, 2004 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q
filed November 9, 2004).
+* 10.4 - Employment Contract dated as of September 1, 1997 between
Tom D. Stenson and the Registrant (Previously filed as Exhibit
10.8 to Form 10-Q filed November 14, 1997).
+* 10.4.1 - Amendment No. 1 dated as of June 4, 1998 to Employment Contract
between Tom D. Stenson and the Registrant (Previously filed as
Exhibit 10.8.1 to Form 10-Q filed August 14, 1998).
+* 10.4.2 - Amendment No. 2 dated as of June 3, 1999 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed
August 12, 1999).
+* 10.4.3 - Amendment No. 3 dated as of June 1, 2000 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed
August 14, 2000).
+* 10.4.4 - Amendment No. 4 dated as of June 7, 2001 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed
August 14, 2001).
+* 10.4.5 - Amendment No. 5 dated as of June 6, 2002 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed
August 14, 2002).
_____________________
* 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.
+* 10.4.6 - Amendment No. 6 dated as of June 5, 2003 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed
August 14, 2003).
+* 10.4.7 - Amendment No. 7 dated as of August 3, 2004 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed
November 9, 2004).
+* 10.5 - Employment Contract dated February 1, 2000 between Jerome G.
Oslick and the Registrant (Previously filed as Exhibit 10.6 to
Form 10-Q filed May 11, 2000).
+* 10.5.1 - Amendment No. 1 dated as of June 1, 2000 to Employment Contract
between Jerome G. Oslick and the Registrant (Previously filed
as Exhibit 10.6.1 to Form 10-Q filed August 14, 2000).
+* 10.5.2 - Amendment No. 2 dated as of June 7, 2001 to Employment Contract
between Jerome G. Oslick and the Registrant (Previously filed
as Exhibit 10.6.2 to Form 10-Q filed August 14, 2001).
+* 10.5.3 - Amendment No. 3 dated as of June 6, 2002 to Employment Contract
between Jerome G. Oslick and the Registrant (Form 10-Q filed
August 14, 2002).
+* 10.5.4 - Amendment No. 4 dated as of June 5, 2003 to Employment Contract
between Jerome G. Oslick and the Registrant (Form 10-Q filed
August 14, 2003).
+* 10.6 - Employment Contract dated June 5, 2003 between Timothy L. Buzby
and the Registrant (Form 10-Q filed August 14, 2003).
+* 10.6.1 - Amendment No. 1 dated as of August 3, 2004 to Employment Contract
between Timothy L. Buzby and the Registrant (Form 10-Q filed
November 9, 2004).
* 10.7 - Farmer Mac I Seller/Servicer Agreement dated as of August 7, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
_____________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
* 10.8 - Medium-Term Notes U.S. Selling Agency Agreement dated as of
October 1, 1998 between Zions First National Bank and the
Registrant (Form 10-Q filed November 14, 2002).
* 10.9 - Discount Note Dealer Agreement dated as of September 18, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
*# 10.10 - ISDA Master Agreement and Credit Support Annex dated as of June
26, 1997 between Zions First National Bank and the Registrant
(Form 10-Q filed November 14, 2002).
*# 10.11 - Master Central Servicing Agreement dated as of December 17, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
*# 10.11.1 - Amendment No. 1 dated as of February 26, 1997 to Master Central
Servicing Agreement dated as of December 17, 1996 between Zions
First National Bank and the Registrant (Form 10-Q filed
November 14, 2002).
*# 10.11.2 - Amended and Restated Master Central Servicing Agreement dated as
of May 1, 2004 between Zions First National Bank and the
Registrant (Form 10-Q filed August 9, 2004).
*# 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 greement, dated June 28, 2001 between EOP - Two Lafayette,
L.L.C. and the Registrant (Previously filed as Exhibit 10.10 to
Form 10-K filed March 27, 2002).
+* 10.15 - Employment Contract dated October 31, 2003 between Michael P.
Morris and the Registrant (Form 10-K filed March 15, 2004).
+* 10.15.1 - Amendment No. 1 dated August 3, 2004 to Employment Contract
between Michael P. Morris and the Registrant (Form 10-Q filed
November 9, 2004).
*# 10.16 - Long Term Standby Commitment to Purchase dated as of June 1, 2003
between Farm Credit Bank of Texas and the Registrant (Form 10-Q
filed November 9, 2004).
*# 10.17 - Central Servicer Delinquent Loan Servicing Transfer Agreement
dated as of July 1, 2004 between AgFirst Farm Credit Bank and
the Registrant (Form 10-Q filed November 9, 2004).
** 31.1 - Certification of Chief Executive Officer relating to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2005, pursuant to Rule 13a-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
** 31.2 - Certification of Chief Financial Officer relating to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2005, pursuant to Rule 13a-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
** 32 - Certification of Chief Executive Officer and Chief Financial
Officer relating to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2005, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
_____________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
May 10, 2005
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)