As filed with the Securities and Exchange Commission on
November 9, 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 September 30, 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 [ ]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of November 1, 2005, there were 1,030,780 shares of Class A Voting
Common Stock, 500,301 shares of Class B Voting Common Stock and 9,586,325 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 (the "SEC"). These interim unaudited
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 unaudited 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 September 30, 2005 and
December 31, 2004..............................................3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2005 and 2004.............4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2005 and 2004......................5
Notes to Condensed Consolidated Financial Statements.............6
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
----------------- -----------------
2005 2004
----------------- -----------------
(in thousands)
Assets:
Cash and cash equivalents $ 437,561 $ 430,504
Investment securities 1,593,892 1,056,143
Farmer Mac Guaranteed Securities 1,314,689 1,376,847
Loans held for sale 51,217 15,281
Loans held for investment 780,708 871,988
Allowance for loan losses (6,668) (4,395)
----------------- -----------------
Loans held for investment, net 774,040 867,593
Real estate owned 1,830 3,845
Financial derivatives 6,913 1,499
Interest receivable 45,237 58,131
Guarantee and commitment fees receivable 18,813 19,871
Deferred tax asset, net 5,921 6,518
Prepaid expenses and other assets 7,042 10,585
----------------- -----------------
Total Assets $ 4,257,155 $ 3,846,817
----------------- -----------------
Liabilities and Stockholders' Equity:
Liabilities:
Notes payable:
Due within one year $ 2,496,039 $ 2,620,172
Due after one year 1,431,930 862,201
----------------- -----------------
Total notes payable 3,927,969 3,482,373
Financial derivatives 32,698 47,793
Accrued interest payable 25,253 25,511
Guarantee and commitment obligation 15,282 14,892
Accounts payable and accrued expenses 14,186 26,690
Reserve for losses 4,228 12,706
----------------- -----------------
Total Liabilities 4,019,616 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,
9,584,718 and 10,291,041 shares issued and outstanding
as of September 30, 2005 and December 31, 2004, respectively 9,585 10,291
Additional paid-in capital 83,012 87,777
Accumulated other comprehensive income/(loss) (2,693) (882)
Retained earnings 111,104 103,135
----------------- -----------------
Total Stockholders' Equity 237,539 236,852
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 4,257,155 $ 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 Nine Months Ended
--------------------------------- ----------------------------------
Sept. 30, 2005 Sept. 30, 2004 Sept. 30, 2005 Sept. 30, 2004
---------------- ---------------- ---------------- ----------------
Interest income:
Investments and cash equivalents $ 19,888 $ 9,412 $ 47,241 $ 25,857
Farmer Mac Guaranteed Securities 17,203 16,689 52,057 49,555
Loans 11,968 12,285 35,558 38,974
---------------- ---------------- ---------------- ----------------
Total interest income 49,059 38,386 134,856 114,386
Interest expense 41,186 30,417 111,054 89,112
---------------- ---------------- ---------------- ----------------
Net interest income 7,873 7,969 23,802 25,274
Recovery/(provision) for loan losses (2,465) 144 (1,678) (2,420)
---------------- ---------------- ---------------- ----------------
Net interest income after provision/recovery
for loan losses 5,408 8,113 22,124 22,854
Guarantee and commitment fees 4,844 5,269 14,689 15,742
Gains/(losses) on financial derivatives
and trading assets (2,379) 5,343 (392) 2,417
Gain on sale of Farmer Mac Guaranteed Securities - - - 367
Gains/(losses) on the sale of real estate owned 114 133 33 (120)
Representation and warranty claims income - - 79 1,816
Other income 926 710 1,671 1,398
---------------- ---------------- ---------------- ----------------
Total revenues 8,913 19,568 38,204 44,474
---------------- ---------------- ---------------- ----------------
Expenses:
Compensation and employee benefits 2,211 1,715 5,886 5,227
General and administrative 2,554 2,038 6,817 5,929
Regulatory fees 576 504 1,728 1,565
Real estate owned operating costs, net (10) (52) 27 290
Provision/(recovery) for losses (8,081) 1,759 (8,272) 2,426
---------------- ---------------- ---------------- ----------------
Total operating expenses (2,750) 5,964 6,186 15,437
---------------- ---------------- ---------------- ----------------
Income before income taxes 11,663 13,604 32,018 29,037
Income tax expense 3,470 4,440 9,582 8,966
---------------- ---------------- ---------------- ----------------
Net income 8,193 9,164 22,436 20,071
---------------- ---------------- ---------------- ----------------
Preferred stock dividends (560) (560) (1,680) (1,680)
---------------- ---------------- ---------------- ----------------
Net income available to common stockholders $ 7,633 $ 8,604 $ 20,756 $ 18,391
---------------- ---------------- ---------------- ----------------
Earnings per common share:
Basic earnings per common share $ 0.68 $ 0.71 $ 1.82 $ 1.52
Diluted earnings per common share $ 0.67 $ 0.70 $ 1.80 $ 1.50
Common stock dividends per common share $ 0.10 $ - $ 0.30 $ -
See accompanying notes to condensed consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine Months Ended
------------------------------------
Sept. 30, 2005 Sept. 30, 2004
----------------- ------------------
Cash flows from operating activities:
Net income $ 22,436 $ 20,071
Adjustments to reconcile net income to net cash provided by
operating activities:
Net amortization of investment premiums and discounts 2,040 1,714
Amortization of debt premiums, discounts and issuance costs 44,126 21,358
Proceeds from repayment of trading investment securities 2,148 3,641
Purchase of loans held for sale (78,093) (54,426)
Proceeds from repayment of loans held for sale 9,391 9,042
Net change in fair value of trading securities and financial derivatives 999 (1,027)
Amortization of settled financial derivatives contracts 1,346 805
Gain on sale of Farmer Mac Guaranteed Securities - (367)
(Gains)/losses on the sale of real estate owned (33) 120
Total (recovery)/provision for losses (6,594) 4,846
Decrease in interest receivable 12,894 20,603
Decrease/(increase) in guarantee and commitment fees receivable 1,058 (2,009)
Decrease/(increase) in other assets 1,914 (4,799)
Decrease in accrued interest payable (258) (653)
Decrease in other liabilities (14,823) (17,455)
----------------- ------------------
Net cash (used in)/provided by operating activities (1,449) 1,464
Cash flows from investing activities:
Purchases of available-for-sale investment securities (1,787,240) (434,708)
Purchases of Farmer Mac II Guaranteed Securities and
AgVantage bonds (149,547) (146,538)
Purchases of loans held for investment (650) (21,767)
Purchases of defaulted loans (11,022) (12,525)
Proceeds from repayment of investment securities 1,237,548 549,957
Proceeds from repayment of Farmer Mac Guaranteed Securities 191,363 219,309
Proceeds from repayment of loans 118,999 129,001
Proceeds from sale of loans and Farmer Mac Guaranteed Securities 24,073 117,812
Proceeds from sale of real estate owned 2,882 11,004
----------------- ------------------
Net cash (used in)/provided by investing activities (373,594) 411,545
Cash flows from financing activities:
Proceeds from issuance of discount notes 34,381,698 44,287,878
Proceeds from issuance of medium-term notes 767,643 675,783
Payments to redeem discount notes (34,242,221) (45,255,947)
Payments to redeem medium-term notes (505,240) (241,460)
Settlement of financial derivatives 158 (1,100)
Proceeds from common stock issuance 836 1,063
Purchases of common stock (15,682) (1,414)
Cash dividends paid (5,092) (1,680)
----------------- ------------------
Net cash provided by/(used in) financing activities 382,100 (536,877)
----------------- ------------------
Net increase/(decrease) in cash and cash equivalents 7,057 (123,868)
Cash and cash equivalents at beginning of period 430,504 623,674
----------------- ------------------
Cash and cash equivalents at end of period $ 437,561 $ 499,806
----------------- ------------------
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Accounting Policies
(a) Cash and Cash Equivalents
Farmer Mac considers highly liquid investment securities with remaining
maturities of three months or less at the time of purchase to be cash
equivalents. Changes in the balance of cash and cash equivalents are reported in
the condensed consolidated statements of cash flows. The following table sets
forth information regarding certain cash and non-cash transactions for the nine
months ended September 30, 2005 and 2004.
Nine Months Ended
----------------------------------------------
September 30, 2005 September 30, 2004
---------------------- -----------------------
(in thousands)
Cash paid for:
Interest $ 51,352 $ 45,159
Income taxes 8,200 8,000
Non-cash activity:
Real estate owned acquired through foreclosure 980 6,969
Loans acquired and securitized as Farmer Mac
Guaranteed Securities 24,073 88,479
(b) Allowance for Losses
As of September 30, 2005, Farmer Mac maintained an 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 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.
Historically, Farmer Mac estimated probable losses using a systematic
process that began with management's evaluation of the results of a proprietary
loan pool simulation and guarantee fee model. That model drew upon historical
information from a data set of agricultural mortgage loans screened to include
only those loans with credit characteristics similar to those eligible for
Farmer Mac's programs. The results generated by that model were then modified,
as necessary, by the application of management's judgment.
During third quarter 2005, Farmer Mac completed the planned migration of
its methodology for determining its allowance for losses away from one based on
its loan pool simulation and guarantee fee model to one based on its own
historical portfolio loss experience and credit trends. Farmer Mac recorded the
effects of that change as a change in accounting estimate as of September 30,
2005.
Farmer Mac's new methodology for determining its allowance for losses
incorporates the Corporation's proprietary automated loan classification system.
That system scores loans based on criteria such as historical repayment
performance, loan seasoning, loan size and loan-to-value ratio. For the purposes
of the loss allowance methodology, the loans in Farmer Mac's portfolio of loans
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs
have been scored and classified for each calendar quarter since first quarter
2000. The new allowance methodology captures the migration of loan scores across
concurrent and overlapping 3-year time horizons and calculates loss rates
separately within each loan classification for loans underlying LTSPCs and loans
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities. The
calculated loss rates are applied to the current classification distribution of
Farmer Mac's portfolio to estimate inherent losses, on the assumption that the
historical credit losses and trends used to calculate loss rates will continue
in the future. Management evaluates this assumption by taking into consideration
several factors, including:
o economic conditions;
o geographic and agricultural commodity/product concentrations in the
portfolio;
o the credit profile of the portfolio;
o delinquency trends of the portfolio; and
o historical charge-off and recovery activities of the portfolio.
If, based on that evaluation, management concludes that the assumption is not
valid, the loss allowance calculation is modified by the addition of further
assumptions to capture current portfolio trends and characteristics that differ
from historical experience.
As of September 30, 2005, Farmer Mac concluded that the credit profile of
its portfolio was consistent with Farmer Mac's historical credit profile and
trends. Management believes that the allowance for losses adequately covers
probable losses inherent in its portfolio under SFAS 5 and SFAS 114.
The following table summarizes the changes in the components of Farmer
Mac's allowance for losses for the three and nine months ended September 30,
2005 and 2004:
September 30, 2005
----------------------------------------------------------
Allowance REO Total
for Loan Valuation Reserve Allowance
Losses Allowance for Losses for Losses
-------------- -------------- ------------- --------------
(in thousands)
Three Months Ended:
Beginning balance $ 3,670 $ - $12,394 $ 16,064
Provision/(recovery) for losses (816) 85 (96) (827)
Net (charge-offs)/recoveries 533 (85) - 448
Change in accounting estimate 3,281 - (8,070) (4,789)
-------------- -------------- ------------- --------------
Ending balance $ 6,668 $ - $ 4,228 $ 10,896
-------------- -------------- ------------- --------------
Nine Months Ended:
Beginning balance $ 4,395 $ - $12,706 $ 17,101
Provision/(recovery) for losses (1,603) 205 (408) (1,806)
Net (charge-offs)/recoveries 595 (205) - 390
Change in accounting estimate 3,281 - (8,070) (4,789)
-------------- -------------- ------------- --------------
Ending balance $ 6,668 $ - $ 4,228 $ 10,896
-------------- -------------- ------------- --------------
September 30, 2004
----------------------------------------------------------
Allowance REO Total
for Loan Valuation Reserve Allowance
Losses Allowance for Losses for Losses
-------------- -------------- ------------- --------------
(in thousands)
Three Months Ended:
Beginning balance $ 5,565 $ 545 $15,688 $ 21,798
Provision/(recovery) for losses (144) 210 1,549 1,615
Net charge-offs (196) (755) - (951)
-------------- -------------- ------------- --------------
Ending balance $ 5,225 $ - $17,237 $ 22,462
-------------- -------------- ------------- --------------
Nine Months Ended:
Beginning balance $ 5,967 $ 238 $15,848 $ 22,053
Provision for losses 2,420 1,037 1,389 4,846
Net charge-offs (3,162) (1,275) - (4,437)
-------------- -------------- ------------- --------------
Ending balance $ 5,225 $ - $17,237 $ 22,462
-------------- -------------- ------------- --------------
The table below summarizes the components of Farmer Mac's allowance for
losses as of September 30, 2005 and December 31, 2004.
September 30, December 31,
2005 2004
---------------- -----------------
(in thousands)
Allowance for loan losses $ 6,668 $ 4,395
Real estate owned valuation allowance - -
Reserve for losses:
On-balance sheet Farmer Mac I Guaranteed Securities 2,255 1,973
Off-balance sheet Farmer Mac I Guaranteed Securities 1,178 2,981
LTSPCs 795 7,752
---------------- -----------------
Total $ 10,896 $ 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.
As of September 30, 2005, Farmer Mac individually analyzed $47.3 million of
its $94.8 million of impaired assets for collateral shortfalls against updated
appraised values, other updated collateral valuations or discounted values.
Farmer Mac evaluated the remaining $47.5 million of impaired assets for which
updated valuations were not available in the aggregate in consideration of their
similar risk characteristics and historical statistics. Of the $47.3 million of
assets analyzed, $42.5 million were adequately collateralized. For the $4.8
million of assets that were not adequately collateralized, individual collateral
shortfalls totaled $0.5 million. Accordingly, Farmer Mac recorded specific
allowances of $0.5 million for those under-collateralized assets as of September
30, 2005. As of September 30, 2005, in addition to the specific allowances
provided, Farmer Mac recorded non-specific or general allowances of $10.4
million, bringing the total allowance for losses to $10.9 million.
The balance of impaired assets, both on- and off-balance sheet, and the
related allowance specifically allocated to those impaired assets as of
September 30, 2005 and December 31, 2004 are summarized in the following table:
September 30, 2005 December 31, 2004
---------------------------------------- ----------------------------------------
Specific Net Specific Net
Balance Allowance Balance Balance Allowance Balance
-------------- ----------- ------------ ------------ ------------- -------------
(in thousands)
Impaired assets:
Specific allowance for losses $ 4,810 $ (490) $ 4,320 $ 12,871 $ (1,433) $ 11,438
No specific allowance for losses 90,020 - 90,020 82,762 - 82,762
-------------- ----------- ------------ ------------ ------------- ------------
Total $ 94,830 $ (490) $ 94,340 $ 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 September 30, 2005 and December 31, 2004:
September 30, 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 $ 592,987 $ (24,748) $ - $ - $ 36,623 $ 418 $ 629,610 $ (24,330)
Receive-fixed - - 105,000 (2,625) 100,000 (1,500) 205,000 (4,125)
Basis 225,629 2,443 - - 280,531 (845) 506,160 1,598
Agency forwards 107,368 832 - - 42,898 240 150,266 1,072
------------- ------------ ------------- ------------ ------------- ------------ -------------- -------------
Total $ 925,984 $ (21,473) $ 105,000 $ (2,625) $ 460,052 $ (1,687) $1,491,036 $ (25,785)
------------- ------------ ------------- ------------ ------------- ------------ -------------- -------------
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 September 30, 2005, Farmer Mac had approximately $19.2 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 $3.7
million of the amount currently reported in accumulated other comprehensive
income/(loss) will be reclassified into earnings. For the quarter ended
September 30, 2005, Farmer Mac recorded a gain of $0.2 million for
ineffectiveness related to Farmer Mac's designated hedges.
(d) Earnings Per Common Share
Basic earnings per common share are based on the weighted-average number of
shares of common stock outstanding. Diluted earnings per common share are based
on the weighted-average number of shares of common stock 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 and
nine months ended September 30, 2005 and 2004:
September 30, 2005 September 30, 2004
--------------------------------- ---------------------------------
Dilutive Dilutive
stock Diluted stock Diluted
Basic EPS options EPS Basic EPS options EPS
--------------------------------- ---------------------------------
(in thousands, except per share amounts)
Three Months Ended:
Net income available to $ 7,633 $ 7,633 $ 8,604 $ 8,604
common stockholders
Weighted average shares 11,205 200 11,405 12,091 132 12,223
Earnings per common share $ 0.68 $ 0.67 $ 0.71 $ 0.70
Nine Months Ended:
Net income available to $20,756 $20,756 $18,391 $18,391
common stockholders
Weighted average shares 11,434 104 11,538 12,082 157 12,239
Earnings per common share $ 1.82 $ 1.80 $ 1.52 $ 1.50
During third quarter 2005, Farmer Mac repurchased 191,810 shares of its
Class C Non-Voting Common Stock at an average price of $24.56 per share pursuant
to the Corporation's previously announced stock repurchase program. These
repurchases reduced the Corporation's capital by approximately $4.7 million.
During the nine months ended September 30, 2005, Farmer Mac repurchased 756,252
shares of its Class C Non-Voting Common Stock at an average price of $20.70,
which reduced the Corporation's capital by approximately $15.7 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 third quarter 2005 or third quarter 2004 for employee stock option
plans. Had Farmer Mac elected to use the fair value method of accounting for
employee stock options, net income available to common stockholders and earnings
per share for the three and nine months ended September 30, 2005 and 2004 would
have been reduced to the pro forma amounts indicated in the following table:
Three Months Ended Nine Months Ended
--------------------------------- --------------------------------
Sept. 30, 2005 Sept. 30, 2004 Sept. 30, 2005 Sept. 30, 2004
---------------- ---------------- ---------------- ----------------
(in thousands, except per share amounts)
Net income available to common
stockholders, as reported $ 7,633 $ 8,604 $ 20,756 $ 18,391
Add back: Restricted stock
compensation expense included in
reported net income, net of taxes - 4 - 15
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method
for all awards, net of taxes (257) (1,155) (1,920) (1,646)
Pro forma net income available to
---------------- ---------------- ---------------- ----------------
common stockholders $ 7,376 $ 7,453 $ 18,836 $ 16,760
---------------- ---------------- ---------------- ----------------
Earnings per common share:
Basic - as reported $ 0.68 $ 0.71 $ 1.82 $ 1.52
Basic - pro forma $ 0.66 $ 0.62 $ 1.65 $ 1.39
Diluted - as reported $ 0.67 $ 0.70 $ 1.80 $ 1.50
Diluted - pro forma $ 0.65 $ 0.61 $ 1.63 $ 1.37
The following table summarizes stock option activity for the three and nine
months ended September 30, 2005 and 2004:
September 30, 2005 September 30, 2004
-------------------------------- -----------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
--------------- ---------------- -------------- -------------
Three Months Ended:
Outstanding, beginning of period 2,141,300 $ 22.30 1,586,656 $ 23.01
Granted 46,000 24.34 251,984 19.91
Exercised (7,966) 19.85 (6,000) 15.33
Canceled (2,668) 21.91 (501) 26.54
--------------- ---------------- -------------- -------------
Outstanding, end of period 2,176,666 $ 22.36 1,832,139 $ 22.61
--------------- ---------------- -------------- -------------
Nine Months Ended:
Outstanding, beginning of period 1,812,222 $ 22.67 1,575,980 $ 22.92
Granted 478,561 20.95 341,984 20.49
Exercised (47,769) 15.07 (48,124) 17.69
Canceled (66,348) 26.16 (37,701) 22.84
--------------- ---------------- -------------- -------------
Outstanding, end of period 2,176,666 $ 22.36 1,832,139 $ 22.61
--------------- ---------------- -------------- -------------
Options exercisable at end of period 1,473,156 1,363,676
--------------- --------------
(f) Reclassifications
Certain reclassifications of prior period information were made to conform
to the current period presentation.
(g) New Accounting Standards
In March 2004, the Emerging Issues Task Force ("EITF") amended EITF 03-1,
The Meaning of Other-Than-Temporary Impairment, to introduce a three-step model
to: (1) determine whether an investment is impaired; (2) evaluate whether the
impairment is other-than-temporary; and (3) account for other-than-temporary
impairments. In part, this amendment requires companies to apply qualitative and
quantitative measures to determine whether a decline in the fair value of a
security is other-than-temporary. The guidance in EITF 03-1 is effective for
reporting periods beginning after June 15, 2004, with the exception of certain
sections, which have been deferred. Farmer Mac is evaluating the impact of the
deferred portions of the amendment and will adopt them when effective. 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 September 30, 2005 and December 31,
2004.
September 30, 2005 December 31, 2004
------------------------------------------------ -------------------------------------------------
Available- Held-to- Available- Held-to-
for-Sale Maturity Total for-Sale Maturity Total
--------------- ---------------- --------------- ---------------- --------------- ---------------
(in thousands)
Farmer Mac I $ 502,562 $ 42,484 $ 545,046 $ 620,501 $ 42,911 $ 663,412
Farmer Mac II - 769,643 769,643 - 713,435 713,435
--------------- ---------------- --------------- ---------------- --------------- ---------------
Total $ 502,562 $ 812,127 $ 1,314,689 $ 620,501 $ 756,346 $ 1,376,847
--------------- ---------------- --------------- ---------------- --------------- ---------------
Amortized cost $ 483,840 $ 812,127 $ 1,295,967 $ 585,021 $ 756,346 $ 1,341,367
Unrealized gains 21,869 780 22,649 35,660 12,225 47,885
Unrealized losses (3,147) (5,338) (8,485) (180) (2,038) (2,218)
--------------- ---------------- --------------- ---------------- --------------- ---------------
Fair value $ 502,562 $ 807,569 $ 1,310,131 $ 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 September 30, 2005.
September 30, 2005
----------------------
(dollars in thousands)
Fair value of beneficial interests retained
in Farmer Mac Guaranteed Securities $ 1,310,131
Weighted-average remaining life (in years) 4.6
Weighted-average prepayment speed (annual rate) 11.1%
Effect on fair value of a 10% adverse change $ (209)
Effect on fair value of a 20% adverse change $ (318)
Weighted-average discount rate 5.2%
Effect on fair value of a 10% adverse change $ (17,737)
Effect on fair value of a 20% adverse change $ (35,815)
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 as of the
periods indicated for Farmer Mac Guaranteed Securities, loans, and LTSPCs.
September 30, December 31,
2005 2004
-------------- --------------
(in thousands)
On-balance sheet assets:
Farmer Mac I:
Loans $ 812,315 $ 876,866
Guaranteed Securities 525,681 626,952
Farmer Mac II:
Guaranteed Securities 768,895 712,653
-------------- --------------
Total on-balance sheet $ 2,106,891 $ 2,216,471
-------------- --------------
Off-balance sheet assets:
Farmer Mac I:
LTSPCs $ 2,183,058 $ 2,295,103
Guaranteed Securities 792,893 882,282
Farmer Mac II:
Guaranteed Securities 41,791 55,889
-------------- --------------
Total off-balance sheet $ 3,017,742 $ 3,233,274
-------------- --------------
Total $ 5,124,633 $ 5,449,745
-------------- --------------
Net credit losses and 90-day delinquencies as of and for the periods
indicated for Farmer Mac Guaranteed Securities, loans and LTSPCs are presented
in the table below. Information is not presented for loans underlying pre-1996
Act Farmer Mac I Guaranteed Securities or Farmer Mac II Guaranteed Securities.
Pre-1996 Act Farmer Mac I Guaranteed Securities 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.
90-Day Net Credit
Delinquencies (1) Losses/(Recoveries)
------------------------------ -----------------------------
As of As of For the Nine Months Ended
September 30, December 31, September 30,
--------------- -------------- -----------------------------
2005 2004 2005 2004
--------------- -------------- ------------- ---------------
On-balance sheet assets:
Farmer Mac I:
Loans $ 34,731 $ 24,800 $ (595) $ 3,161
Guaranteed Securities - - - -
--------------- -------------- ------------- ---------------
Total on-balance sheet $ 34,731 $ 24,800 $ (595) $ 3,161
--------------- -------------- ------------- ---------------
Off-balance sheet assets:
Farmer Mac I:
LTSPCs $ 5,853 $ 483 $ - $ -
Guaranteed Securities - - - -
--------------- -------------- ------------- ---------------
Total off-balance sheet $ 5,853 $ 483 $ - $ -
--------------- -------------- ------------- ---------------
Total $ 40,584 $ 25,283 $ (595) $ 3,161
--------------- -------------- ------------- ---------------
<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.
Nine Months Ended
---------------------------------------------
September 30, 2005 September 30, 2004
--------------------- ---------------------
(in thousands)
Proceeds from new securitizations $ 24,073 $ 88,846
Guarantee fees received 1,329 1,222
Purchases of assets from the trusts 2,508 2,826
Servicing advances 6 33
Repayment of servicing advances 21 38
The following table presents the maximum principal amount of potential
undiscounted future payments that Farmer Mac could be required to make under
off-balance sheet Farmer Mac Guaranteed Securities as of September 30, 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
- -------------------------------------------------------------------------
September 30, December 31,
2005 2004
----------------- ---------------
(in thousands)
Farmer Mac I Guaranteed Securities $ 792,893 $ 882,282
Farmer Mac II Guaranteed Securities 41,791 55,889
----------------- ---------------
Total Farmer Mac I and II $ 834,684 $ 938,171
----------------- ---------------
As of September 30, 2005, the weighted-average remaining maturity of all
loans underlying off-balance sheet Farmer Mac Guaranteed Securities was 15.3
years. 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
September 30, 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 September 30, 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 September 30, 2005, the weighted-average remaining maturity of all
loans underlying LTSPCs was 14.2 years. 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 $10.4
million as of September 30, 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 and nine months ended September 30, 2005 and 2004.
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
Sept. 30, 2005 Sept. 30, 2004 Sept. 30, 2005 Sept. 30, 2004
---------------- ---------------- ---------------- ----------------
(in thousands) (in thousands)
Net income available to common stockholders $ 7,633 $ 8,604 $ 20,756 $ 18,391
Unrealized gains/(losses) on securities:
Unrealized holding gains/(losses) arising during
the period (24,581) 8,321 (26,284) (10,533)
Less: reclassification adjustment for gains/(losses)
included in net income - 83 (47) 521
---------------- ---------------- ---------------- ----------------
Unrealized gains/(losses) on securities (24,581) 8,238 (26,237) (11,054)
Cash flow hedging instruments:
Unrealized gains/(losses) 19,356 (16,731) 22,613 3,835
Less: amortization of losses on forward sale
contracts into interest expense (401) (382) (1,306) (1,142)
Less: impact of realized gains/(losses) related to
de-designated cash flow hedges (26) - 467 (1,168)
---------------- ---------------- ---------------- ----------------
Cash flow hedging instruments 19,783 (16,349) 23,452 6,145
Deferred compensation - 5 - 23
---------------- ---------------- ---------------- ----------------
Other compehensive income, before tax (4,798) (8,106) (2,785) (4,886)
Income tax related to items of other comprehensive
income (1,678) (2,837) (974) (1,710)
---------------- ---------------- ---------------- ----------------
Other comprehensive income/(loss), net of tax (3,120) (5,269) (1,811) (3,176)
---------------- ---------------- ---------------- ----------------
Comprehensive income available to common stockholders $ 4,513 $ 3,335 $ 18,945 $ 15,215
---------------- ---------------- ---------------- ----------------
Note 5. Investments
As of the dates indicated below, Farmer Mac's investment portfolio was
comprised of the following:
September 30, December 31,
2005 2004
----------------- -----------------
(in thousands)
Held-to-maturity $ 10,604 $ 10,604
Available-for-sale 1,575,672 1,035,695
Trading 7,616 9,844
----------------- -----------------
$ 1,593,892 $ 1,056,143
----------------- -----------------
The amortized cost and estimated fair values of investments as of September
30, 2005 and December 31, 2004 were as follows.
As of September 30, 2005 As of December 31, 2004
---------------------------------------------------- -------------------------------------------------
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gain Losses Fair Value Cost Gain Losses Fair Value
------------ ------------ ------------ ------------- ----------- ------------ ----------- -----------
(in thousands)
Held-to-maturity:
Cash investment in
fixed rate guaranteed
investment contract $ 10,604 $ 59 $ - $ 10,663 $ 10,604 $ 282 $ - $ 10,886
------------ ------------ ------------ ------------- ----------- ------------ ----------- -----------
Total held-to-maturity $ 10,604 $ 59 $ - $ 10,663 $ 10,604 $ 282 $ - $ 10,886
------------ ------------ ------------ ------------- ----------- ------------ ----------- -----------
Available-for-sale:
Floating rate
asset-backed securities $ 113,286 $ 861 $ - $ 114,147 $ 113,394 $ 403 $ - $ 113,797
Floating rate corporate
debt securities 245,164 551 (11) 245,704 372,272 398 (68) 372,602
Fixed rate corporate
debt securities 544,731 1,197 (46) 545,882 - - - -
Floating rate auction
rate certificates 204,450 - - 204,450 99,998 2 - 100,000
Fixed rate preferred
stock 239,940 4,872 (1,288) 243,524 185,257 14,798 - 200,055
Fixed rate
commercial paper 34,938 - - 34,938 22,122 - - 22,122
Floating rate mortgage-
backed securities 186,518 549 (40) 187,027 226,526 598 (5) 227,119
------------ ------------ ------------ ------------- ----------- ------------ ----------- -----------
Total available-for-sale $ 1,569,027 $ 8,030 $ (1,385) $ 1,575,672 $ 1,019,569 $ 16,199 $ (73) $ 1,035,695
------------ ------------ ------------ ------------- ----------- ------------ ----------- -----------
Trading:
Adjustable rate mortgage-
backed securities $ 7,531 $ 85 $ - $ 7,616 $ 9,679 $ 165 $ - $ 9,844
------------ ------------ ------------ ------------- ----------- ------------ ----------- -----------
Total trading $ 7,531 $ 85 $ - $ 7,616 $ 9,679 $ 165 $ - $ 9,844
------------ ------------ ------------ ------------- ----------- ------------ ----------- -----------
The temporary unrealized losses presented above are principally due to
changes in interest rates from the date of acquisition to September 30, 2005 and
December 31, 2004. Farmer Mac has the intent and ability to hold its investment
securities in unrealized loss positions as of September 30, 2005 for the
foreseeable future.
As of September 30, 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
$10.7 million, and a yield of 6.15 percent. As of September 30, 2005, Farmer Mac
owned trading investment securities that mature after 10 years with an amortized
cost of $7.5 million, a fair value of $7.6 million, and a weighted average yield
of 4.4 percent. The amortized cost, fair value and yield of investments by
remaining contractual maturity for available-for-sale investment securities as
of September 30, 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 $ 159,133 $ 159,165 3.80%
Due after one year
through five years 721,175 721,545 4.68%
Due after five years
through ten years 113,658 115,737 7.13%
Due after ten years 575,061 579,225 4.78%
---------------- ------------ -------------
Total $ 1,569,027 $ 1,575,672 4.80%
---------------- ------------ -------------
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
SEC.
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, changes implemented in
its methodology for determining its allowance for losses during third quarter
2005, 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 "Quantitative and Qualitative Disclosures
About Market Risk Management--Credit Risk" below.
Results of Operations
Overview. Net income available to common stockholders for third quarter
2005 was $7.6 million or $0.67 per diluted common share, compared to $8.6
million or $0.70 per diluted common share for third quarter 2004. This decrease
was due principally to the after-tax effects of the $2.4 million loss on
financial derivatives in third quarter 2005 compared to gains on financial
derivatives of $5.3 million in third quarter 2004 and partially offset by the
release from the allowance for losses during third quarter 2005 of $5.6 million
compared to provisions for losses of $1.6 million during third quarter 2004. Of
the $5.6 million of the allowance released in third quarter 2005, $4.8 million
was related to a change in accounting estimate. Net income available to common
stockholders for the nine months ended September 30, 2005 was $20.8 million or
$1.80 per diluted common share, compared to $18.4 million or $1.50 per diluted
common share for the same period in 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, the reduction in Farmer Mac's outstanding
guarantees and commitments and the recordation of a change in accounting
estimate resulting from the implementation of a new methodology to estimate
probable losses inherent in its post-1996 Act Farmer Mac I portfolio, Farmer Mac
determined that the appropriate level of allowance for losses as of September
30, 2005 was $10.9 million. This resulted in the release of approximately $5.6
million from the allowance for losses in third quarter 2005. Of that amount,
$4.8 million was to record a change in accounting estimate. As of September 30,
2005, the allowance for losses was $10.9 million and 25 basis points relative to
the outstanding post-1996 Act Farmer Mac I portfolio, compared to $17.1 million
and 37 basis points as of December 31, 2004 and $22.5 million and 47 basis
points as of September 30, 2004.
As of September 30, 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 $40.6 million, representing 0.95 percent of
the principal balance of all loans held and loans underlying post-1996 Act
Farmer Mac I Guaranteed Securities and LTSPCs, down from $47.6 million (1.01
percent) as of September 30, 2004.
During third quarter 2005, Farmer Mac:
o added $91.8 million of Farmer Mac I loans under LTSPCs;
o purchased $39.8 million of newly originated Farmer Mac I
loans; and
o purchased $52.2 million of Farmer Mac II USDA-guaranteed
portions of loans.
As of September 30, 2005, Farmer Mac's outstanding program volume was $5.1
billion, which represented approximately 11 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.
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 $7.9 million for third quarter 2005 and $23.8 million for the nine months
ended September 30, 2005, compared to $8.0 million and $25.3 million,
respectively, for the same periods in 2004. The net interest yield was 84 basis
points for the nine months ended September 30, 2005, compared to 86 basis points
for the nine months ended September 30, 2004. The effect of SFAS 140 was the
classification of approximately $2.8 million (10 basis points) of guarantee fee
income as interest income for the nine months ended September 30, 2005, compared
to $3.2 million (11 basis points) for the nine months ended September 30, 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 nine months ended September 30, 2005 and 2004, this classification
resulted in the decrease of the net interest yield of 3 basis points and 5 basis
points, respectively.
The net interest yields for the nine months ended September 30, 2005 and
2004 included the benefits of yield maintenance payments of 12 basis points and
14 basis points, respectively. Yield maintenance payments represent the present
value of expected future interest income streams and accelerate the recognition
of interest income from the related loans. Because the timing and amounts of
these payments vary greatly, variations do not necessarily indicate positive or
negative trends to gauge future financial results. For the nine months ended
September 30, 2005 and 2004, the effects of yield maintenance payments on net
income and diluted earnings per share were $2.2 million or $0.19 per diluted
share and $2.7 million or $0.22 per diluted share, respectively.
The table below provides information regarding interest-earning assets and
funding for the nine months ended September 30, 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 decrease or increase 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 the first three quarters of 2005. The
increase in the average rate for investments reflects the general increase in
short-term rates and the short-term or floating rate nature of most investments
acquired or reset during the first three quarters of 2005 and outstanding during
the first three quarters of 2005. The higher average rate on loans and Farmer
Mac Guaranteed Securities during the first nine months of 2005 reflects the
increase in market rates during the latter part of 2004 and first part of 2005,
which affected the rates on loans acquired or reset during that period and
outstanding during the first nine months of 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 average rate on notes
payable due after one year reflects the retirement of older debt and the
issuance of new debt at higher relative rates during the first part of 2005.
Nine Months Ended
September 30, 2005 September 30, 2004
------------------------------------ ------------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
------------ ---------- ----------- ------------- ----------- ----------
(dollars in thousands)
Interest-earning assets:
Cash and cash equivalents $ 475,649 $ 10,607 2.97% $ 635,091 $ 6,005 1.26%
Investments 1,180,011 36,634 4.14% 981,404 19,852 2.70%
Loans and Farmer Mac Guaranteed Securities 2,121,658 87,615 5.51% 2,299,931 88,529 5.13%
------------ ---------- ---------- ------------- ----------- ----------
Total interest-earning assets 3,777,318 134,856 4.76% 3,916,426 114,386 3.89%
------------ ---------- ------------- -----------
Funding:
Notes payable due within one year 1,875,762 53,466 3.80% 2,149,271 38,664 2.40%
Notes payable due after one year 1,701,524 57,588 4.51% 1,577,442 50,448 4.26%
------------ ---------- ---------- ------------- ----------- ----------
Total interest-bearing liabilities 3,577,286 111,054 4.14% 3,726,713 89,112 3.19%
Net non-interest-bearing funding 200,032 189,713
------------ ---------- ---------- ------------- ----------- ----------
Total funding $ 3,777,318 111,054 3.92% $ 3,916,426 89,112 3.03%
------------ ---------- ---------- ------------- ----------- ----------
Net interest income/yield $ 23,802 0.84% $ 25,274 0.86%
---------- ---------- ----------- ----------
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.
Nine Months Ended September 30, 2005
Compared to Nine Months Ended
September 30, 2004
--------------------------------------------
Increase/(Decrease) Due to
--------------------------------------------
Rate Volume Total
--------------- -------------- -------------
(in thousands)
Income from interest-earning assets
Cash and cash equivalents $ 11,519 $ (6,917) $ 4,602
Investments 12,175 4,607 16,782
Loans and Farmer Mac Guaranteed Securities 19,503 (20,417) (914)
--------------- -------------- -------------
Total 43,197 (22,727) 20,470
Expense from interest-bearing liabilities 38,240 (16,298) 21,942
--------------- -------------- -------------
Change in net interest income $ 4,957 $ (6,429) $ (1,472)
--------------- -------------- -------------
Guarantee and Commitment Fees. Guarantee and commitment fees were $4.8
million for third quarter 2005 and $14.7 million for the nine months ended
September 30, 2005, compared to $5.3 million and $15.7 million, respectively,
for the same periods in 2004. The effects of the adoption of SFAS 140 were
classification as interest income of guarantee fees of $0.9 million for third
quarter 2005 and $2.8 million for the nine months ended September 30, 2005,
compared to $1.0 million and $3.2 million, respectively, for the same periods in
2004, although management considers the amounts 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 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 were $2.6 million for third
quarter 2005 and $6.8 million for the nine months ended September 30, 2005,
compared to $2.0 million and $5.9 million, respectively, for the same periods in
2004. Compensation and employee benefits were $2.2 million for third quarter
2005 and $5.9 million for the nine months ended September 30, 2005, compared to
$1.7 million and $5.2 million, respectively, for the same periods in 2004.
Regulatory fees assessed by FCA for third quarter 2005 and 2004 were $0.6
million and $0.5 million, respectively. Regulatory fees for the nine months
ended September 30, 2005 were $1.7 million, compared to $1.6 million for the
nine months ended September 30, 2004. 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 ended 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 2006.
During third quarter 2005, Farmer Mac released $5.6 million from the
allowance for losses, compared to provisions of $1.6 million for third quarter
2004. That release included $4.8 million that resulted from a change in
accounting estimate related to the implementation of a new process for
estimating losses inherent in Farmer Mac's post-1996 Act portfolio to a
methodology that is based upon a model that reflects Farmer Mac's own historical
loss experience and credit trends. During the nine months ended September 30,
2005, Farmer Mac released $6.6 million from the allowance for losses, compared
to provision of $4.8 million for the nine months ended September 30, 2004. See
"--Quantitative and Qualitative Disclosures About Market Risk Management--Credit
Risk" for additional information regarding Farmer Mac's provision for losses,
provision for loan losses, the change in accounting estimate and Farmer Mac's
new methodology for determining its allowance for losses. As of September 30,
2005, Farmer Mac's total allowance for losses totaled $10.9 million, or 0.25
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. The loss on
financial derivatives and trading assets was $2.4 million for third quarter 2005
and $0.4 million for the nine months ended September 30, 2005, compared to a
gain of $5.3 million and $2.4 million, respectively, for the same periods in
2004. The losses in 2005 and the gains in 2004 resulted primarily from
fluctuations in the fair values of financial derivatives that were not
designated as either fair value hedges or cash flow hedges in accordance with
SFAS 133, which fluctuations resulted from movements in interest rates.
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 and nine months ended
September 30, 2005 were $9.3 million and $21.5 million, respectively, compared
to $5.4 million and $17.5 million for the three and nine months ended September
30, 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 Nine Months Ended
-------------------------------------- -------------------------------------
Sept. 30, 2005 Sept. 30, 2004 Sept. 30, 2005 Sept. 30, 2004
------------------ ------------------ ------------------ -----------------
(in thousands)
GAAP net income available
to common stockholders $ 7,633 $ 8,604 $ 20,756 $ 18,391
Less the effects of SFAS 133:
Unrealized gains/(losses) on financial derivatives
and trading assets, net of tax (1,668) 3,144 (770) 633
Benefit from non-amortization of premium
payments on financial derivatives, net of tax - 76 - 228
------------------ ------------------ ------------------ -----------------
Core earnings $ 9,301 $ 5,384 $ 21,526 $ 17,530
------------------ ------------------ ------------------ -----------------
Business Volume. New business volume for third quarter 2005 was $183.8
million, up from $161.9 million in second quarter 2005 and $157.1 million in
third quarter 2004. Farmer Mac's new business with agricultural mortgage lenders
continues to be constrained by:
o high levels of available capital and liquidity of agricultural
lenders;
o alternative sources of funding and credit enhancement for agricultural
lenders;
o increased competition in the secondary market for agricultural
mortgage loans;
o reduced growth rates in the agricultural mortgage market, due largely
to the strong liquidity of many farmers and ranchers; and
o the lower rate of growth of the Farm Credit System mortgage portfolio,
reducing the demand for LTSPCs.
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
increased business volume and income growth as a result of the Corporation's
product development and customer service efforts. In third quarter 2005:
o Farmer Mac agreed to purchase or issue LTSPCs for loans secured by
agricultural storage and processing facilities aggregating
approximately $32.0 million, primarily for ethanol processing
facilities. As of September 30, 2005, approximately $7.4 million of
those loans were not yet disbursed by the lender, though those events
are expected to occur during fourth quarter 2005.
o Farmer Mac entered into an alliance with the American Bankers
Association, finalized October 31, 2005, under which Farmer Mac agreed
to provide efficient access and improved pricing to ABA member
institutions and the ABA agreed to promote member participation in the
Farmer Mac I loan purchase program.
o Farmer Mac's satellite credit underwriting office in Ames, Iowa became
fully functional. This office facilitates the use of Farmer Mac by
Midwestern agricultural lenders, and Farmer Mac's responsiveness to
them.
o Farmer Mac purchased $500 million of three-year secured notes issued
by the National Rural Utilities Cooperative Finance Corporation
("CFC"). The notes, which are mission-related, non-program investments
that comply with parameters established by FCA, are secured by
mortgage indebtedness issued by CFC-member rural electric distribution
cooperatives serving communities across rural America. The transaction
provided CFC with a new source of liquidity for its rural utility
cooperative members that serve rural communities and support
agriculture in 47 states, and advances Farmer Mac's financial role in
and commitment to rural America.
Farmer Mac has diversified its marketing focus to include large program
transactions that emphasize high asset quality, with greater protection against
adverse credit performance and commensurately lower compensation for the
assumption of credit risk and administrative costs, resulting in marginal
returns on equity equal to or better than the current net return on equity.
Management expects those transactions to enhance Farmer Mac's mission
accomplishment and net income.
The following tables set forth the amount of all Farmer Mac I and Farmer
Mac II loan purchase and guarantee activities for newly originated and current
seasoned loans during the periods indicated.
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
Sept. 30, 2005 Sept. 30, 2004 Sept. 30, 2005 Sept. 30, 2004
--------------- --------------- --------------- ---------------
(in thousands)
Loan purchase and guarantee and
commitment activity:
Farmer Mac I:
Loans $ 39,821 $ 23,229 $ 78,743 $ 76,193
LTSPCs 91,783 84,097 221,484 358,468
Farmer Mac II Guaranteed Securities 52,181 49,798 140,938 118,952
--------------- --------------- --------------- ---------------
Total purchases, guarantees
and commitments $ 183,785 $ 157,124 $ 441,165 $ 553,613
--------------- --------------- --------------- ---------------
Farmer Mac I Guaranteed Securities issuances:
Retained $ - $ - $ - $ -
Sold 2,061 24,783 24,073 76,691
--------------- --------------- --------------- ---------------
Total $ 2,061 $ 24,783 $ 24,073 $ 76,691
--------------- --------------- --------------- ---------------
To fulfill its guarantee and commitment obligations, Farmer Mac purchases
delinquent loans underlying Farmer Mac Guaranteed Securities and LTSPCs. The
following table presents Farmer Mac's loan purchases of newly originated and
current seasoned loans and defaulted loans purchased underlying Farmer Mac I
Guaranteed Securities and LTSPCs.
Three Months Ended Nine Months Ended
-------------------------------- ---------------------------------
Sept. 30, 2005 Sept. 30, 2004 Sept. 30, 2005 Sept. 30, 2004
---------------- --------------- --------------- ----------------
(in thousands)
Farmer Mac I newly originated
and current seasoned loan purchases $ 39,821 $ 23,229 $ 78,743 $ 76,193
Defaulted loans purchased from
off-balance sheet Farmer Mac I
Guaranteed Securities 913 393 2,508 2,826
Defaulted loans transferred from
on-balance sheet Farmer Mac I
Guaranteed Securities 6,103 2,222 7,277 8,115
Defaulted loans purchased
from LTSPCs 202 911 1,237 1,584
---------------- --------------- --------------- ----------------
Total loan purchases $ 47,039 $ 26,755 $ 89,765 $ 88,718
---------------- --------------- --------------- ----------------
The weighted-average age of the Farmer Mac I newly originated and current
seasoned loans purchased during third quarter 2005 and third quarter 2004 was
less than one month. Of the Farmer Mac I newly originated and current seasoned
loans purchased during third quarter 2005 and third quarter 2004, 50 percent and
45 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 14.6 years and 15.2 years,
respectively. The weighted-average age of delinquent loans purchased out of
securitized pools and LTSPCs during third quarter 2005 and third quarter 2004
was 5.7 years and 4.7 years, respectively.
As of September 30, 2005, more than 300 lenders were participating,
directly or indirectly, in one or both of the Farmer Mac I or Farmer Mac II
programs, including 116 approved loan sellers in the Farmer Mac I program
ranging from single-office to multi-branch institutions, spanning community
banks, Farm Credit System institutions, mortgage companies, commercial banks and
insurance companies. The reduction in the number of approved loan sellers from
157 as of December 31, 2004 is principally the result of decertification by
Farmer Mac of inactive sellers during second quarter 2005. In addition to
participating directly in the Farmer Mac I program, some of the approved loan
sellers enable other lenders to participate indirectly in the Farmer Mac I
program by managing correspondent networks of lenders from which they purchase
loans to sell to Farmer Mac. As of September 30, 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 September 30, 2005, there were
137 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.
USDA's most recent publications (as available on USDA's website as of
October 24, 2005) forecast:
o 2005 net cash farm income to be $85.2 billion, declining less than one
percent following a record year of $85.5 billion in 2004 and exceeding
the 2003 level of $71.6 billion;
o 2005 net farm income to be $71.8 billion, which is a decrease of $10.7
billion from the record $82.5 billion income for 2004 but still $19.4
million higher than the 10-year average net farm income;
o Total direct government payments to be $21.4 billion in 2005, an
increase from the 2004 payments of $13.3 billion. Market prices for
crops affect payment rates for countercyclical government programs.
Under countercyclical programs the level of payments varies inversely
with market prices; USDA anticipates program crop prices to be lower
in 2005, due in part to large inventories from 2003 and 2004 bumper
crops;
o The value of U.S. farm real estate to increase 7.3 percent in 2005 to
$1.32 trillion, a smaller increase as compared to the 2004 increase of
10.4 percent. USDA is anticipating improvement in the general economy
to support further growth in farmland values; and
o The amount of farm real estate debt to increase by 4.3 percent in 2005
to $119.2 billion, compared to $114.3 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 nine months ended September 30, 2005, there were $131.7 million
of net principal paydowns in program assets (Farmer Mac Guaranteed Securities
and loans) and a $544.8 million increase in the portfolio of investment
securities and cash and cash equivalents. Consistent with the net increase in
assets during the period, total liabilities increased $409.7 million from
December 31, 2004 to September 30, 2005. The increase in assets and liabilities
was due principally to the purchase and funding of $500 million of three-year
CFC secured notes. For further information regarding off-balance sheet program
activities, see "--Off-Balance Sheet Program Activities" below.
During the nine months ended September 30, 2005, accumulated other
comprehensive income/(loss) decreased $1.8 million, which is the net effect of a
$17.1 million decrease in after-tax unrealized gains on securities available for
sale and a $15.2 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 September 30, 2005, Farmer Mac's core capital totaled $240.2 million,
compared to $237.7 million as of December 31, 2004. As of September 30, 2005,
core capital exceeded Farmer Mac's statutory minimum capital requirement of
$139.1 million by $101.1 million.
Farmer Mac was in compliance with its risk-based capital standards as of
September 30, 2005. As of September 30, 2005, the risk-based capital stress test
generated a regulatory capital requirement of $45.6 million. Farmer Mac's
regulatory capital of $251.1 million as of September 30, 2005 exceeded that
amount by approximately $205.5 million. The increase in the risk-based capital
requirement from December 31, 2004 ($37.1 million) to September 30, 2005 ($45.6
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.
At its October 13, 2005 meeting, the FCA Board approved a proposed rule
that would revise certain FCA regulations governing the risk-based capital
stress test applicable to Farmer Mac. FCA announced that the proposed rule will
be published in the Federal Register for a 90-day comment period. As of November
9, 2005, that publication had not occurred. FCA's announcement of the proposed
rule stated that it "is designed to update Farmer Mac's risk-based capital
stress test to reflect the evolution of the Corporation's loan portfolio and the
practices of other leading financial institutions. The FCA Board is currently
scheduled to consider a final rule for the Farmer Mac risk-based capital stress
test in September 2006." See "Regulatory Matters" for additional information
regarding the proposed rule.
Off-Balance Sheet Program Activities
Farmer Mac offers approved agricultural and rural residential mortgage
lenders two off-balance sheet alternatives to increase their liquidity or
lending capacity while retaining the cash flow benefits of their loans: (1)
Farmer Mac Guaranteed Securities, which are available through either the Farmer
Mac I program or the Farmer Mac II program, and (2) LTSPCs, which are available
only through the Farmer Mac I program. Both of these alternatives result in
off-balance sheet transactions for Farmer Mac. See Note 3 to the condensed
consolidated financial statements for further information regarding Farmer Mac's
off-balance sheet program activities.
Quantitative and Qualitative Disclosures About Market Risk Management
Interest Rate Risk. Farmer Mac is subject to interest rate risk on all
assets held for investment because of possible timing differences in the cash
flows of the assets and related liabilities. This risk is primarily related to
loans held and on-balance sheet Farmer Mac Guaranteed Securities because of the
ability of borrowers to prepay their mortgages before the scheduled maturities,
thereby increasing the risk of asset and liability cash flow mismatches. Cash
flow mismatches in a changing interest rate environment can reduce the earnings
of the Corporation if assets repay sooner than expected and the resulting cash
flows must be reinvested in lower-yielding investments when Farmer Mac's funding
costs cannot be correspondingly reduced, or if assets repay more slowly than
expected and the associated debt must be replaced by higher-cost debt.
Yield maintenance provisions and other prepayment penalties contained in
many agricultural mortgage loans reduce, but do not eliminate, this prepayment
risk, particularly in the case of a defaulted loan where yield maintenance may
not be collected. Those provisions require borrowers to make an additional
payment when they prepay their loans so that, when reinvested with the prepaid
principal, yield maintenance payments generate substantially the same cash flows
that would have been generated had the loan not prepaid. Those provisions create
a disincentive to prepayment and compensate the Corporation for its interest
rate risks to a large degree. As of September 30, 2005, 57 percent of the
outstanding balance of all loans held and loans underlying on-balance sheet
Farmer Mac I Guaranteed Securities (including 81 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 fixed rate loans
purchased in third quarter 2005, none had yield maintenance or another form of
prepayment protection. As of September 30, 2005, none of the USDA-guaranteed
portions underlying Farmer Mac II Guaranteed Securities had yield maintenance
provisions; however, 16 percent contained prepayment penalties. Of the
USDA-guaranteed portions purchased in third quarter 2005, 24 percent contained
prepayment penalties.
As of September 30, 2005, Farmer Mac had $437.6 million of cash and cash
equivalents and $1.6 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
September 30, 2005, Farmer Mac's investment securities consisted of $760.2
million 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 September
30, 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 September 30, December 31,
Scenario 2005 2004
----------------- ----------------- -----------------
+ 300 bp -10.8% -5.8%
+ 200 bp -6.5% -3.3%
+ 100 bp -2.7% -1.2%
- 100 bp 0.9% 0.0%
- 200 bp 0.8% -1.3%
- 300 bp 0.5% N/A*
<FN>
* As of December 31, 2004, a parallel shift of the U. S.
Treasury yield curve produced negative interest rates for
maturities of 2 years and shorter.
</FN>
During third quarter 2005, Farmer Mac maintained a low level of interest
rate sensitivity through ongoing asset and liability management activities. As
of September 30, 2005, a uniform or "parallel" increase of 100 basis points
would have increased NII, a shorter-term measure of interest rate risk, by 1.4
percent, while a parallel decrease of 100 basis points would have decreased NII
by 0.4 percent. Farmer Mac also measures the sensitivity of both MVE and NII to
a variety of non-parallel interest rate shocks, including flattening and
steepening yield curve scenarios. As of September 30, 2005, both MVE and NII
showed similar or lesser sensitivity to non-parallel shocks as to the parallel
shocks. As of September 30, 2005, Farmer Mac's effective duration gap, another
standard measure of interest rate risk that measures the difference between the
sensitivities of assets compared to that of liabilities, was plus 1.3 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 September 30, 2005, Farmer Mac had $1.3 billion combined notional
amount of interest rate swaps with terms ranging from 1 to 15 years. Of those
interest rate swaps, $629.6 million were floating-to-fixed rate interest rate
swaps, $205.0 million were fixed-to-floating interest rate swaps and $506.2
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 September 30, 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 Farmer Mac I
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 three components on its
consolidated balance sheet:
o an "Allowance for loan losses" on loans held for investment;
o a valuation allowance on real estate owned, which is included in the
balance sheet under "Real estate owned, net of valuation allowance";
o an allowance for losses on loans underlying post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs, 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.
Historically, Farmer Mac estimated probable losses using a systematic
process that began with management's evaluation of the results of a proprietary
loan pool simulation and guarantee fee model. That model drew upon historical
information from a data set of agricultural mortgage loans screened to include
only those loans with credit characteristics similar to those eligible for
Farmer Mac's programs. The results generated by that model were then modified,
as necessary, by the application of management's judgment.
During third quarter 2005, Farmer Mac completed the planned migration of
its methodology for determining its allowance for losses away from one based on
its loan pool simulation and guarantee fee model to one based on its own
historical portfolio loss experience and credit trends. Farmer Mac recorded the
effects of that change as a change in accounting estimate as of September 30,
2005.
Farmer Mac's new methodology for determining its allowance for losses
incorporates the Corporation's proprietary automated loan classification system.
That system scores loans based on criteria such as historical repayment
performance, loan seasoning, loan size and loan-to-value ratio. For the purposes
of the loss allowance methodology, the loans in Farmer Mac's portfolio of loans
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs
have been scored and classified for each calendar quarter since first quarter
2000. The new allowance methodology captures the migration of loan scores across
concurrent and overlapping 3-year time horizons and calculates loss rates
separately within each loan classification for loans underlying LTSPCs and loans
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities. The
calculated loss rates are applied to the current classification distribution of
Farmer Mac's portfolio to estimate inherent losses, on the assumption that the
historical credit losses and trends used to calculate loss rates will continue
in the future. Management evaluates this assumption by taking into consideration
several factors, including:
o economic conditions;
o geographic and agricultural commodity/product concentrations in the
portfolio;
o the credit profile of the portfolio;
o delinquency trends of the portfolio; and
o historical charge-off and recovery activities of the portfolio.
If, based on that evaluation, management concludes that the assumption is not
valid, the loss allowance calculation is modified by the addition of further
assumptions to capture current portfolio trends and characteristics that differ
from historical experience.
As of September 30, 2005, Farmer Mac concluded that the credit profile of
the portfolio was consistent with Farmer Mac's historical credit profile and
trends.
In establishing its allowance for losses as of September 30, 2005, Farmer
Mac assessed the impact of hurricanes Katrina and Rita on its loans in the
affected regions of Texas, Louisiana and Mississippi. Farmer Mac modeled various
stress tests on the performance and collateral values of those assets and
determined that any effect on its allowance for losses as of September 30, 2005
was nominal. Farmer Mac will continue to monitor the loans in its portfolio in
that region, as well as loans in its portfolio in the regions affected by
hurricane Wilma, and assess any impact on the allowance for losses as new
information becomes available.
Management believes that the allowance for losses adequately covers
probable losses inherent in its portfolio under 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 following table summarizes the changes in the components of Farmer
Mac's allowance for losses for the three and nine months ended September 30,
2005 and 2004:
September 30, 2005
----------------------------------------------------------
Allowance REO Total
for Loan Valuation Reserve Allowance
Losses Allowance for Losses for Losses
-------------- -------------- ------------- --------------
(in thousands)
Three Months Ended:
Beginning balance $ 3,670 $ - $12,394 $ 16,064
Provision/(recovery) for losses (816) 85 (96) (827)
Net (charge-offs)/recoveries 533 (85) - 448
Change in accounting estimate 3,281 - (8,070) (4,789)
-------------- -------------- ------------- --------------
Ending balance $ 6,668 $ - $ 4,228 $ 10,896
-------------- -------------- ------------- --------------
Nine Months Ended:
Beginning balance $ 4,395 $ - $12,706 $ 17,101
Provision/(recovery) for losses (1,603) 205 (408) (1,806)
Net (charge-offs)/recoveries 595 (205) - 390
Change in accounting estimate 3,281 - (8,070) (4,789)
-------------- -------------- ------------- --------------
Ending balance $ 6,668 $ - $ 4,228 $ 10,896
-------------- -------------- ------------- --------------
September 30, 2004
----------------------------------------------------------
Allowance REO Total
for Loan Valuation Reserve Allowance
Losses Allowance for Losses for Losses
-------------- -------------- ------------- --------------
(in thousands)
Three Months Ended:
Beginning balance $ 5,565 $ 545 $15,688 $ 21,798
Provision/(recovery) for losses (144) 210 1,549 1,615
Net charge-offs (196) (755) - (951)
-------------- -------------- ------------- --------------
Ending balance $ 5,225 $ - $17,237 $ 22,462
-------------- -------------- ------------- --------------
Nine Months Ended:
Beginning balance $ 5,967 $ 238 $15,848 $ 22,053
Provision for losses 2,420 1,037 1,389 4,846
Net charge-offs (3,162) (1,275) - (4,437)
-------------- -------------- ------------- --------------
Ending balance $ 5,225 $ - $17,237 $ 22,462
-------------- -------------- ------------- --------------
During third quarter 2005, Farmer Mac released $5.6 million from the
allowance for losses. Of that amount, $4.8 million was to record a change in
accounting estimate. During third quarter 2004, Farmer Mac recorded provisions
for losses of $1.6 million. During third quarter 2005, Farmer Mac charged off
$0.1 million in losses against the allowance for losses and had $0.5 million in
recoveries for net recoveries of $0.4 million. During third quarter 2004, Farmer
Mac charged off $1.1 million in losses against the allowance for losses and had
$0.1 million in recoveries for net charge-offs of $1.0 million. There was no
previously accrued or advanced interest on loans or Farmer Mac I Guaranteed
Securities that was charged off in third quarter 2005 or third quarter 2004. As
of September 30, 2005, Farmer Mac's allowance for losses totaled $10.9 million,
or 25 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 September 30, 2005, Farmer Mac's 90-day delinquencies totaled $40.6
million and represented 0.95 percent of the principal balance of all loans held
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs, compared to $47.6 million (1.01 percent) as of September 30, 2004. As of
September 30, 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 $64.2 million and
represented 1.50 percent of the principal balance of all loans held and loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, compared
to $75.0 million (1.58 percent) as of September 30, 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:
September 30, 2005 $ 4,273,268 $ 64,186 1.50% $ 23,602 $ 40,584 0.95%
June 30, 2005 4,360,670 60,696 1.39% 23,925 36,771 0.85%
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%
As of September 30, 2005, approximately $1.2 billion (28.4 percent) of
Farmer Mac's outstanding loans held and loans underlying post-1996 Act Farmer
Mac I Guaranteed Securities and LTSPCs were in their peak delinquency and
default years (approximately years three through five after origination),
compared to $1.8 billion (31.0 percent) of such loans as of September 30, 2004.
As of September 30, 2005, Farmer Mac individually analyzed $47.3 million of
its $94.8 million of impaired assets for collateral shortfalls against updated
appraised values, other updated collateral valuations or discounted values.
Farmer Mac evaluated the remaining $47.5 million of impaired assets for which
updated valuations were not available in the aggregate in consideration of their
similar risk characteristics and historical statistics. Of the $47.3 million of
assets analyzed, $42.5 million were adequately collateralized. For the $4.8
million of assets that were not adequately collateralized, individual collateral
shortfalls totaled $0.5 million. Accordingly, Farmer Mac recorded specific
allowances of $0.5 million for those under-collateralized assets as of September
30, 2005. As of September 30, 2005, in addition to the specific allowances
provided, Farmer Mac recorded non-specific or general allowances of $10.4
million, bringing the total allowance for losses to $10.9 million.
As of September 30, 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 57 percent.
The following table summarizes the post-1996 Act non-performing assets by
original LTV ratio:
Distribution of Post-1996 Act Non-performing
Assets by Original LTV Ratio
as of September 30, 2005
- -----------------------------------------------------
(dollars in thousands)
Post-1996 Act
Non-performing
Original LTV Ratio Assets Percentage
- -------------------- ---------------- ------------
0.00% to 40.00% $ 3,337 5%
40.01% to 50.00% 9,674 15%
50.01% to 60.00% 31,161 48%
60.01% to 70.00% 18,955 30%
70.01% to 80.00% 977 2%
80.01% + 82 0%
---------------- ------------
Total $ 64,186 100%
---------------- ------------
The following table presents outstanding loans held and loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, post-1996 Act
non-performing assets and specific allowances for losses as of September 30,
2005 by year of origination, geographic region and commodity/collateral type.
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% $ 454,723 $ 2,105 0.46% $ -
1994 3% 106,850 82 0.08% -
1995 2% 106,238 2,887 2.72% 26
1996 6% 254,471 7,768 3.05% 43
1997 7% 310,662 7,357 2.37% 66
1998 12% 506,549 10,775 2.13% 271
1999 12% 498,589 10,190 2.04% 84
2000 7% 283,097 10,988 3.88% -
2001 10% 445,759 10,689 2.40% -
2002 12% 515,949 504 0.10% -
2003 10% 438,926 841 0.19% -
2004 4% 185,865 - 0.00% -
2005 4% 165,590 - 0.00% -
---------------- ------------------ ----------------- ---------------- --------------
Total 100% $ 4,273,268 $ 64,186 1.50% $ 490
---------------- ------------------ ----------------- ---------------- --------------
By geographic region (2):
Northwest 21% $ 898,622 $ 33,846 3.77% $ 466
Southwest 44% 1,913,018 18,469 0.97% -
Mid-North 14% 583,315 3,495 0.60% 24
Mid-South 7% 287,829 2,875 1.00% -
Northeast 8% 345,938 1,214 0.35% -
Southeast 6% 244,546 4,287 1.75% -
---------------- ------------------ ----------------- ---------------- --------------
Total 100% $ 4,273,268 $ 64,186 1.50% $ 490
---------------- ------------------ ----------------- ---------------- --------------
By commodity/collateral type:
Crops 43% $ 1,842,510 $ 24,402 1.32% $ -
Permanent plantings 26% 1,099,752 31,204 2.84% 490
Livestock 22% 937,523 5,887 0.63% -
Part-time farm 7% 280,971 2,693 0.96% -
Ag storage and processing 1% 50,986 - 0.00% -
Other 1% 61,526 - 0.00% -
---------------- ------------------ ----------------- ---------------- --------------
Total 100% $ 4,273,268 $ 64,186 1.50% $ 490
---------------- ------------------ ----------------- ---------------- --------------
<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 September 30, 2005. 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 $ 2,025,262 $ - 0.00% $ - 0.00%
1994 374,500 - 0.00% - 0.00%
1995 326,168 401 0.12% 26 0.13%
1996 642,243 1,503 0.23% 43 0.24%
1997 729,535 2,797 0.38% 66 0.39%
1998 1,084,749 4,155 0.38% 271 0.41%
1999 1,071,142 1,173 0.11% 84 0.12%
2000 672,576 1,553 0.23% - 0.23%
2001 898,206 727 0.08% - 0.08%
2002 864,135 - 0.00% - 0.00%
2003 615,927 - 0.00% - 0.00%
2004 228,466 - 0.00% - 0.00%
2005 201,080 0.00% 0.00%
---------------- ---------------- ----------------- ----------------- -----------------
Total $ 9,733,989 $ 12,309 0.13% $ 490 0.13%
---------------- ---------------- -----------------
By geographic region (1):
Northwest $ 2,113,111 $ 6,888 0.33% $ 466 0.35%
Southwest 4,188,162 4,727 0.11% - 0.11%
Mid-North 1,239,837 18 0.00% 24 0.00%
Mid-South 535,902 336 0.06% - 0.06%
Northeast 831,989 122 0.01% - 0.01%
Southeast 824,988 218 0.03% - 0.03%
---------------- ---------------- ----------------- ----------------- -----------------
Total $ 9,733,989 $ 12,309 0.13% $ 490 0.13%
---------------- ---------------- -----------------
By commodity/collateral type:
Crops $ 4,120,534 $ 265 0.01% $ - 0.01%
Permanent plantings 2,455,770 9,029 0.37% 490 0.39%
Livestock 2,220,305 2,559 0.12% - 0.12%
Part-time farm 708,438 456 0.06% - 0.06%
Ag storage and processing 88,757 (2) - 0.00% - 0.00%
Other 140,185 - 0.00% - 0.00%
---------------- ---------------- ----------------- ----------------- -----------------
Total $ 9,733,989 $ 12,309 0.13% $ 490 0.13%
---------------- ---------------- -----------------
<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).
(2) Several of the loans underlying agricultural storage and processing LTSPCs
are for facilities under construction, and as of September 30, 2005,
approximately $35.8 million of the loans were not yet disbursed by the
lender.
</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.
Farmer Mac's board of directors has authorized the issuance of up to $5.0
billion of discount notes and medium-term notes (of which $3.9 billion was
outstanding as of September 30, 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 in compliance with the liquidity and
investment regulation recently adopted by FCA. See "Regulatory Matters."
In third quarter 2005, Farmer Mac conducted a global debt offering to
facilitate the funding of business growth opportunities and issued $500 million
of three-year fixed rate notes under the program. That issue of notes is listed
on the New York Stock Exchange. Farmer Mac is applying to list notes issued
under its global debt program on the London Stock Exchange.
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 maintains cash and liquidity investments in cash equivalents
(including commercial paper and other short-term money market instruments) and
investment securities that can be drawn upon for liquidity needs. As of
September 30, 2005, Farmer Mac's cash and cash equivalents and liquidity
investment securities were $437.6 million and $1.1 billion, respectively. In
addition, as of September 30, 2005, Farmer Mac held: 1) $500.0 million of
mission-related non-program investments issued by the National Rural Utilities
Cooperative Finance Corporation, and 2) $769.6 million 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 September 30, 2005, the aggregate
of the Farmer Mac II Guaranteed Securities, mission-related non-program
investments, cash and liquidity investments represented 70 percent of total
liabilities. Farmer Mac has a policy of maintaining a minimum of 60 days of
liquidity and a target of 90 days of liquidity. For third quarter 2005, Farmer
Mac maintained an average of greater than 90 days of liquidity.
Capital. During third quarter 2005, Farmer Mac repurchased 191,810 shares
of its Class C Non-Voting Common Stock at an average price of $24.56 per share
pursuant to the Corporation's previously announced stock repurchase program.
These repurchases reduced the Corporation's capital by approximately $4.7
million. During the nine months ended September 30, 2005, Farmer Mac repurchased
756,252 shares of its Class C Non-Voting Common Stock at an average price of
$20.70, which reduced the Corporation's capital by approximately $15.7 million.
Regulatory Matters
On September 30, 2005, the final regulation relating to Farmer Mac's
investments and liquidity became effective. FCA included several of the
revisions to the proposed regulation suggested by Farmer Mac in comments to the
proposal and Farmer Mac expects to be able to comply with the regulation in
accordance with the timeframes established in the regulation. Farmer Mac is
required to comply with the liquidity provisions of the regulation by September
30, 2007.
At its October 13, 2005 meeting, the FCA Board approved a proposed rule
that would revise certain FCA regulations governing the risk-based capital test
applicable to Farmer Mac. FCA announced that the proposed rule will be published
in the Federal Register for a 90-day comment period. As of November 9, 2005,
that publication had not occurred. FCA's announcement of the proposed rule
stated that it "is designed to update Farmer Mac's risk-based capital stress
test to reflect the evolution of the Corporation's loan portfolio and the
practices of other leading financial institutions. The FCA Board is currently
scheduled to consider a final rule for the Farmer Mac risk-based capital stress
test in September 2006." Farmer Mac has not completed its analysis of the
proposed rule, but believes that the proposal, if adopted in its proposed form
and under current economic conditions and the state of the Corporation's
portfolio, would increase the Corporation's risk-based capital requirement from
the current level to a higher level that would be close to the statutory minimum
capital requirement. In that regard, FCA has estimated that, had the proposed
rule been effective at the time, the risk-based capital requirement as of June
30, 2005 would have been $123.5 million, compared to the $49.6 million
risk-based capital requirement under the current risk-based capital stress test.
As of that date, Farmer Mac's regulatory capital was $254.3 million. As part of
the formal rule-making process, Farmer Mac will provide written comments on the
proposed regulation to FCA within the public comment period.
Other Matters
In fourth quarter 2004 and each of the first three quarters of 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. On October 6, 2005, Farmer Mac's board of directors
declared a quarterly dividend of $0.10 per share on the Corporation's three
classes of common stock payable on December 30, 2005 to holders of record as of
December 15, 2005. 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.
Farmer Mac announced in August 2004 that its board of directors had
authorized a program to repurchase up to 10 percent, or 1,055,500 shares, of the
Corporation's outstanding Class C Non-Voting Common Stock. During third quarter
2005, the aggregate number of shares repurchased by Farmer Mac reached the
maximum number authorized under the program, thereby terminating the program
according to its terms. Farmer Mac's board has authorized the board finance
committee to evaluate and implement a new program to repurchase additional
shares of Class C Non-Voting Common 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:
September 30, 2005 $ 39,821 $ 91,783 (1) $ 52,181 $ 183,785
June 30, 2005 20,382 96,419 (2) 45,123 161,924
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
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
<FN>
(1) $32.0 million of the LTSPCs during third quarter were for agricultural
storage and processing facilities. Several of the loans underlying those
LTSPCs are for facilities under construction, and as of September 30, 2005,
approximately $7.4 million of the loans were not yet disbursed by the
lender.
(2) $56.8 million of the LTSPCs during second quarter were for agricultural
storage and processing facilities. Several of the loans underlying those
LTSPCs are for facilities under construction, and as of September 30, 2005,
approximately $28.4 million of the loans were not yet disbursed by the
lender.
</FN>
Outstanding Balance of Farmer Mac Loans,
Guarantees and LTSPCs (1)
- -------------------------------------------------------------------------------------------------------------
Farmer Mac I
--------------------------------------------------
Post-1996 Act
---------------------------------
Loans and
Guaranteed
Securities (2) LTSPCs Pre-1996 Act Farmer Mac II Total
---------------- ---------------- ---------------- ---------------- ----------------
(in thousands)
As of:
September 30, 2005 $ 2,118,510 $ 2,183,058 $ 14,209 $ 810,686 $ 5,126,463
June 30, 2005 2,203,074 2,181,896 16,333 786,671 5,187,974
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 2,721,775 2,174,182 25,588 720,584 5,642,129
<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) Includes the balance of real estate owned.
</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:
September 30, 2005 $ 840,330 $ 785,387 $ 477,345 $ 2,103,062
June 30, 2005 838,872 803,377 488,555 2,130,804
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
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 September 30,
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 September 30, 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 July 6, 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 669 shares of its Class C
Non-Voting Common Stock, at an issue price of $22.05 per share,
to the eight directors who elected to receive such stock in lieu
of their cash retainers.
On September 30, 2005, Farmer Mac granted options under its 1997
Stock Option Plan to purchase an aggregate of 46,000 shares of
Class C Non-Voting Common Stock, an exercise price of $24.34 per
share, to twenty-one non-officer employees as incentive
compensation.
(b) Not applicable.
(c) As shown in the table below, Farmer Mac repurchased 191,810
shares of its Class C Non-Voting Common Stock during third
quarter 2005 at an average price of $24.56 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
- ----------------------------------------- ---------------- ------------ -------------------- ---------------------
July 1, 2005 - July 31, 2005 53,512 $ 24.49 53,512 138,298
August 1, 2005 - August 31, 2005 80,056 24.48 80,056 58,242
September 1, 2005 - September 30, 2005 58,242 24.74 58,242 -
---------------- ------------ --------------------
Total 191,810 $ 24.56 191,810
---------------- ------------ --------------------
<FN>
* On August 9, 2004, Farmer Mac publicly announced that its board of
directors had authorized a program to repurchase up to 10 percent, or
1,055,500 shares, of the Corporation's outstanding Class C Non-Voting
Common Stock. During third quarter 2005, the aggregate number of shares
repurchased by Farmer Mac reached the maximum number authorized under the
program, thereby terminating the program according to its terms.
</FN>
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).
* 4.5.1 - Master Terms Agreement for Farmer Mac's Universal Debt Facility
dated as of July 28, 2005 (Previously filed as Exhibit 4.3 to
Form 8-A filed August 4, 2005).
* 4.5.2 - Supplemental Agreement for 4.25% Fixed Rate Global Notes Due
July 29, 2008 (Previously filed as Exhibit 4.4 to Form 8-A
filed August 4, 2005).
+* 10.1 - Stock Option Plan (Previously filed as Exhibit 19.1 to Form
10-Q filed August 14, 1992).
+* 10.1.1 - Amendment No. 1 to Stock Option Plan (Previously filed as Exhibit
10.2 to Form 10-Q filed August 16, 1993).
+* 10.1.2 - 1996 Stock Option Plan (Form 10-Q filed August 14, 1996).
+* 10.1.3 - Amended and Restated 1997 Incentive Plan (Form 10-Q filed
November 14, 2003).
+* 10.1.4 - Form of stock option award agreement under 1997 Incentive Plan
(Form 10-K filed March 16, 2005).
_________________
* 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 - 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).
+* 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).
_________________
* 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.
+* 10.2.11 - 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).
+* 10.2.14 - Amendment No. 14 dated as of June 16, 2005 to Employment
Contract between Henry D. Edelman and the Registrant (Form 10-Q
filed August 9, 2005).
+* 10.3 - Employment Agreement dated May 11, 1989 between Nancy E.
Corsiglia and the Registrant (Previously filed as Exhibit 10.5 to
Form 10-K filed February 14, 1990).
+* 10.3.1 - Amendment dated December 14, 1989 to Employment Agreement
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.5 to Form 10-K filed February 14, 1990).
+* 10.3.2 - Amendment No. 2 dated February 14, 1991 to Employment Agreement
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.7 to Form 10-K filed April 1, 1991).
+* 10.3.3 - Amendment to Employment Contract dated as of June 1, 1993
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.9 to Form 10-Q filed November 15, 1993).
+* 10.3.4 - Amendment No. 4 dated June 1, 1993 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.10 to Form 10-K filed March 31, 1994).
+* 10.3.5 - Amendment No. 5 dated as of June 1, 1994 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.12 to Form 10-Q filed August 15, 1994).
_________________
* 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.
+* 10.3.6 - 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).
+* 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).
_________________
* 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.
+* 10.3.17 - Amendment No. 17 dated as of June 16, 2005 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q
filed August 9, 2005).
+* 10.4 - Employment Contract dated as of September 1, 1997 between Tom D.
Stenson and the Registrant (Previously filed as Exhibit 10.8 to
Form 10-Q filed November 14, 1997).
+* 10.4.1 - Amendment No. 1 dated as of June 4, 1998 to Employment Contract
between Tom D. Stenson and the Registrant (Previously filed as
Exhibit 10.8.1 to Form 10-Q filed August 14, 1998).
+* 10.4.2 - Amendment No. 2 dated as of June 3, 1999 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed
August 12, 1999).
+* 10.4.3 - Amendment No. 3 dated as of June 1, 2000 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed
August 14, 2000).
+* 10.4.4 - Amendment No. 4 dated as of June 7, 2001 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed
August 14, 2001).
+* 10.4.5 - Amendment No. 5 dated as of June 6, 2002 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed
August 14, 2002).
+* 10.4.6 - 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).
+* 10.4.8 - Amendment No. 8 dated as of June 16, 2005 to Employment Contract
between Tom D. Stenson and the Registrant (Form 10-Q filed
August 9, 2005).
_________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
+* 10.5 - 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).
+* 10.5.5 - Amendment No. 5 dated as of June 16, 2005 to Employment Contract
between Jerome G. Oslick and the Registrant (Form 10-Q filed
August 9, 2005).
+* 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).
+* 10.6.2 - Amendment No. 2 dated as of June 16, 2005 to Employment Contract
between Timothy L. Buzby and the Registrant (Form 10-Q filed
August 9, 2005).
* 10.7 - Farmer Mac I Seller/Servicer Agreement dated as of August 7, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
* 10.8 - Medium-Term Notes U.S. Selling Agency Agreement dated as of
October 1, 1998 between Zions First National Bank and the
Registrant (Form 10-Q filed November 14, 2002).
_________________
* 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.
* 10.9 - 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 Closing File Review Agreement dated as of August 2, 2005
between Zions First National Bank and the Registrant.
*# 10.13 - Long Term Standby Commitment to Purchase dated as of August 1,
1998 between AgFirst Farm Credit Bank and the Registrant (Form
10-Q filed November 14, 2002).
*# 10.13.1 - Amendment No. 1 dated as of January 1, 2000 to Long Term Standby
Commitment to Purchase dated as of August 1, 1998 between AgFirst
Farm Credit Bank and the Registrant (Form 10-Q filed November 14,
2002).
* 10.13.2 - Amendment No. 2 dated as of September 1, 2002 to Long Term
Standby Commitment to Purchase dated as of August 1, 1998, as
amended by Amendment No. 1 dated as of January 1, 2000, between
AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed
November 14, 2002).
* 10.14 - Lease Agreement, dated June 28, 2001 between EOP - Two
Lafayette, L.L.C. and the Registrant (Previously filed as Exhibit
10.10 to Form 10-K filed March 27, 2002).
+* 10.15 - Employment Contract dated October 31, 2003 between Michael P.
Morris and the Registrant (Form 10-K filed March 15, 2004).
_________________
* 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.
+* 10.15.1 - Amendment No. 1 dated August 3, 2004 to Employment Contract
between Michael P. Morris and the Registrant (Form 10-Q filed
November 9, 2004).
+* 10.15.2 - Amendment No. 2 dated June 16, 2005 to Employment Contract
between Michael P. Morris and the Registrant (Form 10-Q filed
August 9, 2005).
*# 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).
+* 10.18 - Employment Contract dated June 20, 2005 between Mary K. Waters
and the Registrant (Form 10-Q filed August 9, 2005).
* 10.19 - Lease Agreement dated May 26, 2005 between Zions First National
Bank and the Registrant (Form 10-Q filed August 9, 2005).
** 31.1 - Certification of Chief Executive Officer relating to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 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
September 30, 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 September 30, 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
November 9, 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)