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)
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(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.
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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.
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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.
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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
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(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
-------------- -------------- ------------- --------------
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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
---------------- -----------------
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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
-------------- ----------- ------------ ------------ ------------- ------------
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(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)
------------- ------------ ------------- ------------ ------------- ------------ -------------- -------------
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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)
------------ ------------- ------------ ------------ ------------- ------------ --------------- ------------
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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
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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
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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
--------------- --------------
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(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
--------------- ---------------- --------------- ---------------- --------------- ---------------
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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
-------------- --------------
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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
--------------- -------------- ------------- ---------------
(1) Includes loans and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs that are 90 days or more past due, in foreclosure,
restructured after delinquency, and in bankruptcy, excluding loans
performing under either their original loan terms or a court-approved
bankruptcy plan.
|
Note 3. Off-Balance Sheet Guarantees and Long-Term Standby Purchase Commitments
Overview
Farmer Mac offers approved agricultural and rural residential mortgage lenders two off-balance sheet alternatives to increase their liquidity or lending capacity while retaining the cash flow benefits of their loans: (1) Farmer Mac Guaranteed Securities, which are available through either the Farmer Mac I program or the Farmer Mac II program, and (2) LTSPCs, which are available only through the Farmer Mac I program. Both of these alternatives result in off-balance sheet transactions for Farmer Mac.
Off-Balance Sheet Farmer Mac Guaranteed Securities
Periodically Farmer Mac transfers agricultural mortgage loans into trusts that are used as vehicles for the securitization of the transferred assets and the beneficial interests in the trusts are sold to third party investors. The table below summarizes certain cash flows received from and paid to these trusts.
Nine Months Ended
---------------------------------------------
September 30, 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
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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
----------------- ---------------
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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
---------------- ---------------- ---------------- ----------------
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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
----------------- -----------------
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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
------------ ------------ ------------ ------------- ----------- ------------ ----------- -----------
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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%
---------------- ------------ -------------
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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)
--------------- -------------- -------------
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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
------------------ ------------------ ------------------ -----------------
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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
--------------- --------------- --------------- ---------------
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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
---------------- --------------- --------------- ----------------
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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*
* 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.
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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
-------------- -------------- ------------- --------------
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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%
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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%
---------------- ------------
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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
---------------- ------------------ ----------------- ---------------- --------------
(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).
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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%
---------------- ---------------- -----------------
(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.
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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
(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.
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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
(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.
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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
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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
---------------- ------------ --------------------
* 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.
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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).
+* 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).
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+* 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).
+* 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).
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+* 10.3.1 - Amendment dated December 14, 1989 to Employment Agreement between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.5 to Form 10-K filed February 14, 1990).
+* 10.3.2 - Amendment No. 2 dated February 14, 1991 to Employment Agreement between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.7 to Form 10-K filed April 1, 1991).
+* 10.3.3 - Amendment to Employment Contract dated as of June 1, 1993 between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.9 to Form 10-Q filed November 15, 1993).
+* 10.3.4 - Amendment No. 4 dated June 1, 1993 to Employment Contract between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.10 to Form 10-K filed March 31, 1994).
+* 10.3.5 - Amendment No. 5 dated as of June 1, 1994 to Employment Contract between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.12 to Form 10-Q filed August 15, 1994).
+* 10.3.6 - Amendment No. 6 dated as of June 1, 1995 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14, 1995).
+* 10.3.7 - Amendment No. 7 dated as of February 8, 1996 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-K filed March 29, 1996).
+* 10.3.8 - Amendment No. 8 dated as of June 13, 1996 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14, 1996).
+* 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).
+* 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).
+* 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).
* 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).
+* 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.
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)
|
Exhibit 10.12
LOAN CLOSING FILE REVIEW AGREEMENT
This Loan Closing File Review Agreement (the "Agreement"), effective as of August 2, 2005, between the FEDERAL AGRICULTURAL MORTGAGE CORPORATION, an instrumentality of the United States (together with its permitted successors and assigns, "Farmer Mac") and ZIONS FIRST NATIONAL BANK, a national banking association, (together with its permitted successors and assigns, "Zions").
RECITALS
WHEREAS, Farmer Mac intends to underwrite certain agricultural mortgage
loans from time to time from approved sellers (each, a "Seller") of such loans;
and
WHEREAS, Farmer Mac desires to engage Zions to review and close certain
submitted loan files (the "Loan Files") on a non-exclusive basis and Zions
desires to undertake to review and close such loan files in accordance with the
terms of this Agreement. The parties understand that the term "close loan files"
refers to the closing of the purchase of a loan identified in the Loan Files by
Farmer Mac, not the closing of the loan.
NOW THEREFORE, in consideration of the mutual agreements herein contained,
the parties agree as follows:
1. Farmer Mac and Zions agree that this Agreement terminates and replaces
that Loan File Review and Underwriting Agreement between Farmer Mac and Zions
effective December 17, 1996. Farmer Mac and Zions hereby agree to waive any
notice of termination requirements set forth in such Loan File Review and
Underwriting Agreement.
2. Farmer Mac agrees to underwrite such Loan Files, which underwriting
shall include Farmer Mac's communication of an affirmative credit decision
(Preliminary Loan Purchase Approval) to the Seller, obtaining and reviewing the
final appraisal, environmental form, and the preliminary title report (with
respect to the preliminary title report, Farmer Mac's review shall only relate
to the legal description of the real estate and any necessary obligors on the
loan).
3. After Farmer Mac's performance of the items set forth in paragraph 2
herein, Farmer Mac will issue an Instruction Letter to Zions which describes the
duties and obligations of Zions with respect to Zions' review and closing of the
Loan File. The Instruction Letter shall state that Zions will receive and review
the Seller's proposed and final documentation for such Farmer Mac loans (the
"Loans" or a "Loan").
4. Prior to the closing of a Loan, Zions shall receive from the Seller the
closing documents required in the Selling Guide and the Instruction Letter.
Zions shall review such closing documents in accordance with the following
guidelines and shall determine whether the Loan satisfies the requirements of
the Selling Guide and the Farmer Mac Instruction Letter.
5. Zions and Farmer Mac agree that with each review and closing, it will
perform the following duties with respect to the loan documents listed in the
Instruction Letter, prior to closing or the purchase of loan by Farmer Mac.
A. Promissory note with signer(s)
1. Farmer Mac will supply the legal names of individuals and entities to sign the Promissory Note and any Rate Lock agreement.
2. Zions shall review the form of the Promissory Note and determine whether the Note includes the individuals and entities as identified by Farmer Mac in the Instruction Letter, whether the Seller has included entity documents indicating who should sign the documents and whether such individuals or entities have executed the documents and whether the terms of the Note correctly conform to the Rate Lock agreement, loan product terms and provisions of the Seller Guide.
B. Mortgage or Deed of Trust with signer(s)
1. Farmer Mac will supply the legal names of individuals and entities to sign Mortgage or Deed of Trust.
2. Zions shall review the Mortgage or Deed of Trust and determine whether the Mortgage or Deed of Trust contains the individuals and entities as identified by Farmer Mac in the Instruction Letter, whether the Seller has included entity documents indicating who should sign the documents and whether such individuals or entities have executed the documents and whether the Mortgage or Deed of Trust conforms to the provisions of the Seller Guide.
C. Legal description to be included in Mortgage or Deed of Trust
1. Farmer Mac will attach a legal description to the Instruction Letter.
2. Zions shall review the Mortgage or Deed of Trust and determine whether the legal description provided by Farmer Mac is included in the proposed Mortgage or Deed of Trust.
D. Description of any fixtures or non real property to serve as collateral to be included in Mortgage or Deed of Trust or any other Farmer Mac identified security documents.
Fixtures and non real property collateral shall include, but shall not be limited to the following, if applicable, water rights, certificates, or assignments in form, number and acreage conforming to the underwriter's requirements to be assigned, grazing rights, state grazing leases, BLM permits, certificates, or assignments in form, number and acreages.
1. Farmer Mac will identify in the Instruction Letter, the specific appraisal and the location in such appraisal of a complete description of all fixtures and non real property to serve as collateral to the Instruction Letter.
2. Zions shall review the Mortgage or Deed of Trust or other security documents as identified by Farmer Mac to determine that the documents contain a complete description of all fixtures and non real property as identified by the Instruction Letter and the Seller.
3. The parties understand and agree that the Seller is responsible for determining the documents necessary to perfect such liens.
E. Preliminary Title Policy submitted by Seller
1. Farmer Mac will review the preliminary title policy to determine if information is needed on additional obligors and compare the legal description with that in the appraisal.
2. Zions shall review the preliminary title report along with any Seller proposed modifications to such report, and determine whether (i) any liens or encumbrances must be removed from title prior to Farmer Mac's purchase of the loan, and (ii) any other requirements must be met in order for Farmer Mac to have a first lien (or other lien position, as specified in the Instruction Letter) on the real property being pledged as collateral, standard exceptions to such title policy excluded. Notwithstanding the foregoing, Farmer Mac agrees that Zions does not in any way guarantee the lien position of Farmer Mac and that the issuer of the Title Insurance Policy will be solely responsible for any claims regarding the priority of Farmer Mac's lien against the real property.
F. UCC-1 Financing Statements
1. Zions shall review any UCC-1 financing statements provided by the Seller to determine whether the general property description set forth in the UCC-1 includes the collateral set forth in the Instruction Letter.
2. Farmer Mac agrees that Zions is responsible only for a review of the documents provided by the Seller to determine whether the documents contain a general description of the non real property and that the Seller is responsible for determining the documents necessary to perfect such liens and the jurisdiction where such documents should be filed or such liens otherwise perfected.
G. Required dairy assignments
1. Zions shall review any dairy assignment identified in the Instruction Letter and determine whether the dairy assignment is identified in the applicable documents provided by Seller.
2. It is understood and agreed that it is the Sellers' responsibility to perfect the dairy assignment and ensure all appropriate documents are obtained.
J. Hazard Insurance Requirements.
1. Zions shall determine whether the Hazard Insurance requirements are in accordance with the Instruction Letter that will state the amount of the required coverage (not applicable for land-only transactions).
K. HUD 1
1. Zions shall determine whether the proposed disbursements as per the HUD 1 are in accordance with the items and amounts as listed in the Instructions Letter.
L. Closing Instructions
1. Zions shall review the Seller's closing instructions to the person closing the loan and determine whether such closing instructions are in accordance with the Instruction Letter.
M. Closing Protection Letter
1. Zions shall review and determine if a Closing Protection Letter has been issued by the company providing title insurance for the Loan.
6. Upon the review of the documents listed in paragraph 4 herein, and
Zions' determination that each of the above is in accordance with the
Instruction Letter and contains provisions required by the appropriate mortgage
purchase program listed in the Instruction Letter, Zions shall notify the Seller
of Farmer Mac's agreement to purchase the Loan. In the event Zions determines
that any of the documents or items listed in paragraph 4 herein are not in
accordance with the Instruction Letter or do not contain provisions required by
the appropriate mortgage purchase program listed in the Instruction Letter,
Zions shall notify the Seller of all such deficiencies. Zions shall not notify
the Seller of Farmer Mac's agreement to purchase the Loan until all such
deficiencies are remedied.
7. Upon notification to Zions by the Seller of Seller's intent to sell the
Loan to Farmer Mac, Zions shall notify Farmer Mac of the loan purchase through
the Farmer Mac form entitled Notice to Purchase.
8. Subsequent to Farmer Mac's funding of the Loan purchase, the Seller
shall remit a file to Zions containing all documents relating to a consummated
mortgage (the "Final Loan File"). Upon receipt of the Final Loan File, Zions
shall review such Final Loan File to determine whether each required document,
as provided for in the Instruction Letter and the closing instructions, is
included in such Final Loan File and is complete and executed in accordance with
all applicable requirements.
9. In the event that Zions discovers a deficiency in the Final Loan File,
Zions shall promptly notify the Seller of the deficiency. At that time Zions
shall inform the Seller that the Final Loan File will not be considered complete
until the missing or corrected documentation is provided to Zions.
10. Zions hereby agrees to act as custodian of any documents delivered to
it hereunder from the date of delivery thereof by the Seller to the date of
disposition thereof in accordance with the terms of this Agreement and the
Selling Guide. With respect to any documents held by Zions which have been
delivered by the Seller but as to which Farmer Mac has not made payment, Zions
shall hold such documents as custodian for the Seller. With respect to any
documents held by Zions as to which either (i) the Seller has acknowledged
receipt of the purchase price or (ii) in the absence of such confirmation, Zions
has received confirmation from Farmer Mac's bank that it has wired the funds in
the amount of the purchase price to the account specified by the Seller, Zions
shall hold such documents as custodian for Farmer Mac in accordance with the
terms hereof and of the Selling Guide. Upon receipt of confirmation that a Loan
has been purchased by Farmer Mac, Zions shall ship the Final Loan File (to the
extent Zions has the documents) to U. S. Bank National Association, in its
capacity as Custodian under the Custodial Agreement, or its successor in
interest or any successor Custodian.
Zions agrees to accept and hold all such documents as agent for and on
behalf of the Seller or Farmer Mac, as applicable, pursuant to the terms of this
Agreement and the Selling Guide, and shall at all times make such documents
available to Farmer Mac for the purpose of inspecting such documents. Zions
shall neither have nor acquire any liens, rights of ownership or other claims in
or to such documents or the related loans except as provided herein.
11. Zions shall, at all times during the term of this Agreement, hold any
documents delivered to it in safekeeping and shall be responsible for their
safety. Zions shall segregate such documents and shall not commingle such
documents with property of Zions or of other customers of Zions.
12. Zions shall return any or all of such documents to the Seller as they
relate to a loan which has been rejected by Zions or by Farmer Mac, or, with
respect to any loan not yet purchased by Farmer Mac, upon the Seller's request.
13. In the event any property held by Zions hereunder shall be attached,
garnished or levied upon under any court order, or if the delivery of such
property shall be stayed or enjoined by any court order, or if any court, writ,
judgment or decree shall be made or entered affecting such property or affecting
any act by Zions, Zions shall obey and comply with all orders, writs, judgments
or decrees so entered or issued unless such order, writ, judgment or decrees are
being contested in an appropriate judicial proceeding), notwithstanding any
provisions of this Agreement to the contrary. If Zions obeys and complies with
any such orders, writs, judgments or decrees, it shall not be liable to any of
the parties hereto or to any other person or entity by reason of such
compliance, notwithstanding that such orders, writs, judgments or decrees may be
subsequently reversed, modified, annulled, set aside or vacated.
14. The parties agree that Farmer Mac will pay Zions, for each completed
Loan Closing File Review [material omitted pursuant to a request for
confidential treatment and filed separately with the SEC]. Zions shall remit an
invoice to Farmer Mac monthly for all Loan Closing File Reviews and Farmer Mac
shall promptly pay all amounts set forth on such invoice. Farmer Mac will not
pay to Zions any fees or costs relating to the origination, underwriting,
closing and approval of any "Zions Proprietary Qualified Loan", as such term is
defined in certain letter agreements between Zions and Farmer Mac, or of any
loan sold into the Farmer Mac I program by Zions. In addition, in the event that
Farmer Mac pays more than [material omitted pursuant to a request for
confidential treatment and filed separately with the SEC] on any full-time farm
loan to any other person who performs similar duties and obligations for Farmer
Mac to those set forth for Zions herein, Farmer Mac shall increase the amount of
compensation hereunder to be equal to than the amounts paid to such other person
if Zions agrees to accept and perform such additional duties and obligations
under this contract as such other person performs under its agreement with
Farmer Mac.
15. Zions shall be liable to Farmer Mac under this Agreement only to the
extent of the obligations specifically imposed and undertaken herein. In
addition, in the event the Loan File documents contain any errors or omissions
that cause any damages or claims to occur, Farmer Mac agrees to pursue the
Seller of such Loan File for such damages or claims and shall not pursue or
otherwise bring such claims against Zions, unless such claims are the result of
Zions' gross negligence, willful malfeasance or bad faith.
16. Zions will keep in full effect its existence, rights and franchises
under the laws of its jurisdiction of organization, and will obtain and preserve
its qualification to do business as a foreign corporation in each jurisdiction
in which such qualification is or shall be necessary to protect the validity and
enforceability of this Agreement and to perform its duties under this Agreement.
17. Zions may assign its rights and delegate its duties and obligations
under this Agreement, provided that the person accepting such assignment or
delegation shall be satisfactory to Farmer Mac, is willing to service the Loans
and executes and delivers to Farmer Mac an agreement, in form and substance
satisfactory to Farmer Mac, which contains an assumption by such Person of the
due and punctual performance and observance of each covenant and condition to be
performed or observed by Zions under this Agreement. In the case of any such
assignment and delegation, Zions shall be released from its obligations under
this Agreement, except that Zions shall remain liable for all liabilities and
obligations incurred by it hereunder prior to the satisfaction of the conditions
to such assignment and delegation set forth herein.
18. Nothing herein shall relieve Zions of any liability it may have to
Farmer Mac as the Seller of any loan.
19. Neither Zions nor any of its directors, officers, employees or agents
shall be under any liability to Farmer Mac for any action taken or for
refraining from the taking of any action in good faith pursuant to this
Agreement or the Selling Guide, or for errors in judgment. However, this
provision shall not protect Zions or any such Person against any liability which
would otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of disregard of obligations
and duties hereunder. Zions and any director, officer, employee or agent may
reasonably rely in good faith on any document of any kind prima facie properly,
executed and submitted by any Person respecting any matters arising hereunder.
20. This Agreement may be amended from time to time only by written
instrument executed by both parties hereto.
21. Either party hereto may terminate the provisions of this Agreement
relating to Loan File review duties upon 3 months' written notice to the other
party hereto.
22. This Agreement shall be governed by and construed in accordance with
federal law. To the extent federal law incorporates state law, that law shall be
the laws of the State of New York.
23. All demands and notices hereunder shall be in writing and shall be
deemed to have been duly given if personally delivered at or mailed by
registered mail, postage prepaid, to (a) in the case of Zions, One Main Street,
Suite 1610, Salt Lake City, Utah, 84111, or such other address as may be
hereafter furnished to Farmer Mac by Zions in writing, and (b) in the case of
Farmer Mac, 1133 21st Street, NW, Suite 600, Washington, DC, 20036, Attention:
Vice President - Agricultural Credit, with a copy to the Vice President -
General Counsel at the same address or such other address as may be hereafter
furnished to Zions by Farmer Mac in writing.
24. If any one or more of the covenants, agreements provisions or terms of
this Agreement shall be for any reason whatsoever held invalid, then such
covenants, agreements, provisions or terms shall be seemed severable from the
remaining, agreements, provisions or terms of this Agreement and shall in no way
affect the validity or enforceability of the other provisions of this Agreement
or of the Certificates or the rights of the holders thereof.
25. Zions shall not use the information received in connection with its
duties under this Agreement with respect to any loan Zions reviews (or the
related Borrower) for any purpose other than fulfilling its obligations under
this Agreement or as the servicer of such loan after purchase by Farmer Mac.
26. Arbitration.
Arbitration Disclosures.
1. ARBITRATION IS FINAL AND BINDING ON THE PARTIES AND SUBJECT TO ONLY VERY
LIMITED REVIEW BY A COURT.
2. IN ARBITRATION THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT,
INCLUDING THEIR RIGHT TO A JURY TRIAL.
3. DISCOVERY IN ARBITRATION IS MORE LIMITED THAN DISCOVERY IN COURT.
4. ARBITRATORS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL REASONING
IN THEIR AWARDS. THE RIGHT TO APPEAL OR SEEK MODIFICATION OF ARBITRATORS'
RULINGS IS VERY LIMITED.
5. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS AFFILIATED
WITH THE BANKING INDUSTRY.
6. ARBITRATION WILL APPLY TO ALL DISPUTES BETWEEN THE PARTIES, NOT JUST THOSE
CONCERNING THIS AGREEMENT.
7. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR THE
AMERICAN ARBITRATION ASSOCIATION.
(a) Any claim or controversy ("Dispute") between or among the parties and their employees, agents, affiliates, and assigns, including, but not limited to, Disputes arising out of or relating to this agreement, this arbitration provision ("arbitration clause"), or any related agreements or instruments relating hereto or delivered in connection herewith ("Related Agreements"), and including, but not limited to, a Dispute based on or arising from an alleged tort, shall at the request of any party be resolved by binding arbitration in accordance with the applicable arbitration rules of the American Arbitration Association (the "Administrator"). The provisions of this arbitration clause shall survive any termination, amendment, or expiration of this agreement or Related Agreements. The provisions of this arbitration clause shall supersede any prior arbitration agreement between or among the parties.
(b) The arbitration proceedings shall be conducted in a city mutually agreed by the parties. Absent such an agreement, arbitration will be conducted in Salt Lake City, Utah or such other place as may be determined by the Administrator. The Administrator and the arbitrator(s) shall have the authority to the extent practicable to take any action to require the arbitration proceeding to be completed and the arbitrator(s)' award issued within 150 days of the filing of the Dispute with the Administrator. The arbitrator(s) shall have the authority to impose sanctions on any party that fails to comply with time periods imposed by the Administrator or the arbitrator(s), including the sanction of summarily dismissing any Dispute or defense with prejudice. The arbitrator(s) shall have the authority to resolve any Dispute regarding the terms of this agreement, this arbitration clause, or Related Agreements, including any claim or controversy regarding the arbitrability of any Dispute. All limitations periods applicable to any Dispute or defense, whether by statute or agreement, shall apply to any arbitration proceeding hereunder and the arbitrator(s) shall have the authority to decide whether any Dispute or defense is barred by a limitations period and, if so, to summarily enter an award dismissing any Dispute or defense on that basis. The doctrines of compulsory counterclaim, res judicata, and collateral estoppel shall apply to any arbitration proceeding hereunder so that a party must state as a counterclaim in the arbitration proceeding any claim or controversy which arises out of the transaction or occurrence that is the subject matter of the Dispute. The arbitrator(s) may in the arbitrator(s)' discretion and at the request of any party: (1) consolidate in a single arbitration proceeding any other claim arising out of the same transaction involving another party to that transaction that is bound by an arbitration clause with Lender, such as borrowers, guarantors, sureties, and owners of collateral; and (2) consolidate or administer multiple arbitration claims or controversies as a class action in accordance with the provisions of Rule 23 of the Federal Rules of Civil Procedure.
(c) The arbitrator(s) shall be selected in accordance with the rules of the Administrator from panels maintained by the Administrator. A single arbitrator shall have expertise in the subject matter of the Dispute. Where three arbitrators conduct an arbitration proceeding, the Dispute shall be decided by a majority vote of the three arbitrators, at least one of whom must have expertise in the subject matter of the Dispute and at least one of whom must be a practicing attorney. The arbitrator(s) shall award to the prevailing party recovery of all costs and fees (including attorneys' fees and costs, arbitration administration fees and costs, and arbitrator(s)' fees). The arbitrator(s), either during the pendency of the arbitration proceeding or as part of the arbitration award, also may grant provisional or ancillary remedies including but not limited to an award of injunctive relief, foreclosure, sequestration, attachment, replevin, garnishment, or the appointment of a receiver.
(d) Judgement upon an arbitration award may be entered in any court having jurisdiction, subject to the following limitation: the arbitration award is binding upon the parties only if the amount does not exceed Four Million Dollars ($4,000,000.00); if the award exceeds that limit, either party may demand the right to a court trial. Such a demand must be filed with the Administrator within 30 days following the date of the arbitration award; if such a demand is not made within that time period, the amount of the arbitration award shall be binding. The computation of the total amount of an arbitration award shall include amounts awarded for attorneys' fees and costs, arbitration administration fees and costs, and arbitrator(s)' fees.
(e) No provision of this arbitration clause, nor the exercise of any rights hereunder, shall limit the right of any party to: (1) judicially or non-judicially foreclose against any real or personal property collateral or other security; (2) exercise self-help remedies, including but not limited to repossession and setoff rights; or (3) obtain from a court having jurisdiction thereover any provisional or ancillary remedies including but not limited to injunctive relief, foreclosure, sequestration, attachment, replevin, garnishment, or the appointment of a receiver. Such rights can be exercised at any time, before or after initiation of an arbitration proceeding, except to the extent such action is contrary to the arbitration award. The exercise of such rights shall not constitute a waiver of the right to submit any Dispute to arbitration, and any claim or controversy related to the exercise of such rights shall be a Dispute to be resolved under the provisions of this arbitration clause. Any party may initiate arbitration with the Administrator. If any party desires to arbitrate a Dispute asserted against such party in a complaint, counterclaim, cross-claim, or third-party complaint thereto, or in an answer or other reply to any such pleading, such party must make an appropriate motion to the trial court seeking to compel arbitration, which motion must be filed with the court within 45 days of service of the pleading, or amendment thereto, setting forth such Dispute. If arbitration is compelled after commencement of litigation of a Dispute, the party obtaining an order compelling arbitration shall commence arbitration and pay the Administrator's filing fees and costs within 45 days of entry of such order. Failure to do so shall constitute an agreement to proceed with litigation and waiver of the right to arbitrate. In any arbitration commenced by a consumer regarding a consumer Dispute, Lender shall pay one half of the Administrator's filing fee, up to $250.
(f) Notwithstanding the applicability of any other law to this agreement, the arbitration clause, or Related Agreements between or among the parties, the Federal Arbitration Act, 9 U.S.C. Section 1 et seq., shall apply to the construction and interpretation of this arbitration clause. If any provision of this arbitration clause should be determined to be unenforceable, all other provisions of this arbitration clause shall remain in full force and effect.
IN WITNESS WHEREOF, Farmer Mac and Zions have caused their names to be signed hereto by their respective officers thereunto duly authorized as of the day and year above written.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
By: /s/ Michael P. Morris Its: Vice President - Agricultural Credit |
ZIONS FIRST NATIONAL BANK
By: /s/ Patrick M. Floyd Its: Senior Vice President |
Exhibit 31.1
CERTIFICATION
I, Henry D. Edelman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Federal
Agricultural Mortgage Corporation for the fiscal quarter ended September
30, 2005;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 9, 2005
/s/ Henry D. Edelman
-------------------------
Henry D. Edelman
Chief Executive Officer
|
Exhibit 31.2
CERTIFICATION
I, Nancy E. Corsiglia, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Federal
Agricultural Mortgage Corporation for the fiscal quarter ended September
30, 2005;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 9, 2005
/s/ Nancy E. Corsiglia
--------------------------
Nancy E. Corsiglia
Chief Financial Officer
|
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of the Federal Agricultural Mortgage Corporation (the "Corporation") for the quarterly period ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Henry D. Edelman, Chief Executive Officer of the Corporation, and Nancy E. Corsiglia, Chief Financial Officer of the Corporation, each hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his or her knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
/s/ Henry D. Edelman ------------------------ Henry D. Edelman Chief Executive Officer /s/ Nancy E. Corsiglia ------------------------ Nancy E. Corsiglia Chief Financial Officer Date: November 9, 2005 |