As filed with the Securities and Exchange Commission on November 9, 2005 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005 Commission File Number 0-17440 FEDERAL AGRICULTURAL MORTGAGE CORPORATION (Exact name of registrant as specified in its charter) Federally chartered instrumentality of the United States 52-1578738 (State or other jurisdiction of (I.R.S. employer identification number) incorporation or organization) 1133 Twenty-First Street, N.W., Suite 600 Washington, D.C. 20036 (Address of principal executive offices) (Zip code) (202) 872-7700 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of November 1, 2005, there were 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock and 9,586,325 shares of Class C Non-Voting Common Stock outstanding.
PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements The following interim unaudited condensed consolidated financial statements of the Federal Agricultural Mortgage Corporation ("Farmer Mac" or the "Corporation") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). These interim unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial condition and the results of operations and cash flows of Farmer Mac for the interim periods presented. Certain information and footnote disclosures normally included in annual consolidated financial statements have been condensed or omitted as permitted by such rules and regulations. Management believes that the disclosures are adequate to present fairly the condensed consolidated financial position, condensed consolidated results of operations and condensed consolidated cash flows as of the dates and for the periods presented. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited 2004 consolidated financial statements of Farmer Mac included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2004. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year. The following information concerning Farmer Mac's interim unaudited condensed consolidated financial statements is included in this report beginning on the pages listed below: Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004..............................................3 Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004.............4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004......................5 Notes to Condensed Consolidated Financial Statements.............6 FEDERAL AGRICULTURAL MORTGAGE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) <TABLE> <CAPTION> September 30, December 31, ----------------- ----------------- 2005 2004 ----------------- ----------------- (in thousands) Assets: <S> <C> <C> 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. </TABLE> FEDERAL AGRICULTURAL MORTGAGE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands, except per share amounts) <TABLE> <CAPTION> Three Months Ended Nine Months Ended --------------------------------- ---------------------------------- Sept. 30, 2005 Sept. 30, 2004 Sept. 30, 2005 Sept. 30, 2004 ---------------- ---------------- ---------------- ---------------- Interest income: <S> <C> <C> <C> <C> 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. </TABLE> FEDERAL AGRICULTURAL MORTGAGE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) <TABLE> <CAPTION> Nine Months Ended ------------------------------------ Sept. 30, 2005 Sept. 30, 2004 ----------------- ------------------ Cash flows from operating activities: <S> <C> <C> 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. </TABLE> 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. <TABLE> <CAPTION> Nine Months Ended ---------------------------------------------- September 30, 2005 September 30, 2004 ---------------------- ----------------------- (in thousands) Cash paid for: <S> <C> <C> 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 </TABLE> (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: <TABLE> <CAPTION> September 30, 2005 ---------------------------------------------------------- Allowance REO Total for Loan Valuation Reserve Allowance Losses Allowance for Losses for Losses -------------- -------------- ------------- -------------- (in thousands) Three Months Ended: <S> <C> <C> <C> <C> 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 -------------- -------------- ------------- -------------- </TABLE> The table below summarizes the components of Farmer Mac's allowance for losses as of September 30, 2005 and December 31, 2004. <TABLE> <CAPTION> September 30, December 31, 2005 2004 ---------------- ----------------- (in thousands) <S> <C> <C> 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 ---------------- ----------------- </TABLE> 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: <TABLE> <CAPTION> September 30, 2005 December 31, 2004 ---------------------------------------- ---------------------------------------- Specific Net Specific Net Balance Allowance Balance Balance Allowance Balance -------------- ----------- ------------ ------------ ------------- ------------- (in thousands) <S> <C> <C> <C> <C> <C> <C> 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 -------------- ----------- ------------ ------------ ------------- ------------ </TABLE> (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: <TABLE> <CAPTION> 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) <S> <C> <C> <C> <C> <C> <C> <C> <C> 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) ------------- ------------ ------------- ------------ ------------- ------------ -------------- ------------- </TABLE> <TABLE> <CAPTION> 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) <S> <C> <C> <C> <C> <C> <C> <C> <C> 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) ------------ ------------- ------------ ------------ ------------- ------------ --------------- ------------ </TABLE> 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: <TABLE> <CAPTION> 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) <S> <C> <C> <C> <C> <C> <C> 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 </TABLE> 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: <TABLE> <CAPTION> Three Months Ended Nine Months Ended --------------------------------- -------------------------------- Sept. 30, 2005 Sept. 30, 2004 Sept. 30, 2005 Sept. 30, 2004 ---------------- ---------------- ---------------- ---------------- (in thousands, except per share amounts) <S> <C> <C> <C> <C> 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 </TABLE> The following table summarizes stock option activity for the three and nine months ended September 30, 2005 and 2004: <TABLE> <CAPTION> September 30, 2005 September 30, 2004 -------------------------------- ----------------------------- Weighted- Weighted- Average Average Exercise Exercise Shares Price Shares Price --------------- ---------------- -------------- ------------- Three Months Ended: <S> <C> <C> <C> <C> 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 --------------- -------------- </TABLE> (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. <TABLE> <CAPTION> September 30, 2005 December 31, 2004 ------------------------------------------------ ------------------------------------------------- Available- Held-to- Available- Held-to- for-Sale Maturity Total for-Sale Maturity Total --------------- ---------------- --------------- ---------------- --------------- --------------- (in thousands) <S> <C> <C> <C> <C> <C> <C> 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 --------------- ---------------- --------------- ---------------- --------------- --------------- </TABLE> The table below presents a sensitivity analysis for Farmer Mac's retained Farmer Mac Guaranteed Securities as of September 30, 2005. <TABLE> <CAPTION> September 30, 2005 ---------------------- (dollars in thousands) <S> <C> 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) </TABLE> 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. <TABLE> <CAPTION> September 30, December 31, 2005 2004 -------------- -------------- (in thousands) On-balance sheet assets: Farmer Mac I: <S> <C> <C> 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 -------------- -------------- </TABLE> 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. <TABLE> <CAPTION> 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 --------------- -------------- ------------- --------------- <S> <C> <C> <C> <C> On-balance sheet assets: Farmer Mac I: Loans $ 34,731 $ 24,800 $ (595) $ 3,161 Guaranteed Securities - - - - --------------- -------------- ------------- --------------- Total on-balance sheet $ 34,731 $ 24,800 $ (595) $ 3,161 --------------- -------------- ------------- --------------- Off-balance sheet assets: Farmer Mac I: LTSPCs $ 5,853 $ 483 $ - $ - Guaranteed Securities - - - - --------------- -------------- ------------- --------------- Total off-balance sheet $ 5,853 $ 483 $ - $ - --------------- -------------- ------------- --------------- Total $ 40,584 $ 25,283 $ (595) $ 3,161 --------------- -------------- ------------- --------------- <FN> (1) Includes loans and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs that are 90 days or more past due, in foreclosure, restructured after delinquency, and in bankruptcy, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan. </FN> </TABLE> 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. <TABLE> <CAPTION> Nine Months Ended --------------------------------------------- September 30, 2005 September 30, 2004 --------------------- --------------------- (in thousands) <S> <C> <C> 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 </TABLE> 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. <TABLE> <CAPTION> Outstanding Balance of Off-Balance Sheet Farmer Mac Guaranteed Securities - ------------------------------------------------------------------------- September 30, December 31, 2005 2004 ----------------- --------------- (in thousands) <S> <C> <C> 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 ----------------- --------------- </TABLE> 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. <TABLE> <CAPTION> Three Months Ended Nine Months Ended --------------------------------- --------------------------------- Sept. 30, 2005 Sept. 30, 2004 Sept. 30, 2005 Sept. 30, 2004 ---------------- ---------------- ---------------- ---------------- (in thousands) (in thousands) <S> <C> <C> <C> <C> 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 ---------------- ---------------- ---------------- ---------------- </TABLE> Note 5. Investments As of the dates indicated below, Farmer Mac's investment portfolio was comprised of the following: <TABLE> <CAPTION> September 30, December 31, 2005 2004 ----------------- ----------------- (in thousands) <S> <C> <C> 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 ----------------- ----------------- </TABLE> The amortized cost and estimated fair values of investments as of September 30, 2005 and December 31, 2004 were as follows. <TABLE> <CAPTION> 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) <S> <C> <C> <C> <C> <C> <C> <C> <C> 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 ------------ ------------ ------------ ------------- ----------- ------------ ----------- ----------- </TABLE> 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. <TABLE> <CAPTION> Investment Securities Available-for-Sale -------------------------------------------- Amortized Cost Fair Value Yield ---------------- ------------ ------------- (dollars in thousands) <S> <C> <C> <C> 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% ---------------- ------------ ------------- </TABLE> 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. <TABLE> <CAPTION> Nine Months Ended September 30, 2005 September 30, 2004 ------------------------------------ ------------------------------------ Average Income/ Average Average Income/ Average Balance Expense Rate Balance Expense Rate ------------ ---------- ----------- ------------- ----------- ---------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> 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% ---------- ---------- ----------- ---------- </TABLE> 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. <TABLE> <CAPTION> 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 <S> <C> <C> <C> 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) --------------- -------------- ------------- </TABLE> 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: <TABLE> <CAPTION> 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) <S> <C> <C> <C> <C> 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 ------------------ ------------------ ------------------ ----------------- </TABLE> 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. <TABLE> <CAPTION> Three Months Ended Nine Months Ended --------------------------------- --------------------------------- Sept. 30, 2005 Sept. 30, 2004 Sept. 30, 2005 Sept. 30, 2004 --------------- --------------- --------------- --------------- (in thousands) <S> <C> <C> <C> <C> 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 --------------- --------------- --------------- --------------- </TABLE> 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. <TABLE> <CAPTION> Three Months Ended Nine Months Ended -------------------------------- --------------------------------- Sept. 30, 2005 Sept. 30, 2004 Sept. 30, 2005 Sept. 30, 2004 ---------------- --------------- --------------- ---------------- (in thousands) <S> <C> <C> <C> <C> 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 ---------------- --------------- --------------- ---------------- </TABLE> 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. <TABLE> <CAPTION> Percentage Change in MVE from Base Case --------------------------------------- Interest Rate September 30, December 31, Scenario 2005 2004 ----------------- ----------------- ----------------- <S> <C> <C> <C> + 300 bp -10.8% -5.8% + 200 bp -6.5% -3.3% + 100 bp -2.7% -1.2% - 100 bp 0.9% 0.0% - 200 bp 0.8% -1.3% - 300 bp 0.5% N/A* <FN> * As of December 31, 2004, a parallel shift of the U. S. Treasury yield curve produced negative interest rates for maturities of 2 years and shorter. </FN> </TABLE> 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: <TABLE> <CAPTION> September 30, 2005 ---------------------------------------------------------- Allowance REO Total for Loan Valuation Reserve Allowance Losses Allowance for Losses for Losses -------------- -------------- ------------- -------------- (in thousands) Three Months Ended: <S> <C> <C> <C> <C> 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 -------------- -------------- ------------- -------------- </TABLE> 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: <TABLE> <CAPTION> 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: <S> <C> <C> <C> <C> <C> <C> <C> <C> 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% </TABLE> 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: <TABLE> <CAPTION> 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 - -------------------- ---------------- ------------ <S> <C> <C> <C> <C> 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% ---------------- ------------ </TABLE> 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. <TABLE> <CAPTION> 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: <S> <C> <C> <C> <C> <C> <C> Before 1994 11% $ 454,723 $ 2,105 0.46% $ - 1994 3% 106,850 82 0.08% - 1995 2% 106,238 2,887 2.72% 26 1996 6% 254,471 7,768 3.05% 43 1997 7% 310,662 7,357 2.37% 66 1998 12% 506,549 10,775 2.13% 271 1999 12% 498,589 10,190 2.04% 84 2000 7% 283,097 10,988 3.88% - 2001 10% 445,759 10,689 2.40% - 2002 12% 515,949 504 0.10% - 2003 10% 438,926 841 0.19% - 2004 4% 185,865 - 0.00% - 2005 4% 165,590 - 0.00% - ---------------- ------------------ ----------------- ---------------- -------------- Total 100% $ 4,273,268 $ 64,186 1.50% $ 490 ---------------- ------------------ ----------------- ---------------- -------------- By geographic region (2): Northwest 21% $ 898,622 $ 33,846 3.77% $ 466 Southwest 44% 1,913,018 18,469 0.97% - Mid-North 14% 583,315 3,495 0.60% 24 Mid-South 7% 287,829 2,875 1.00% - Northeast 8% 345,938 1,214 0.35% - Southeast 6% 244,546 4,287 1.75% - ---------------- ------------------ ----------------- ---------------- -------------- Total 100% $ 4,273,268 $ 64,186 1.50% $ 490 ---------------- ------------------ ----------------- ---------------- -------------- By commodity/collateral type: Crops 43% $ 1,842,510 $ 24,402 1.32% $ - Permanent plantings 26% 1,099,752 31,204 2.84% 490 Livestock 22% 937,523 5,887 0.63% - Part-time farm 7% 280,971 2,693 0.96% - Ag storage and processing 1% 50,986 - 0.00% - Other 1% 61,526 - 0.00% - ---------------- ------------------ ----------------- ---------------- -------------- Total 100% $ 4,273,268 $ 64,186 1.50% $ 490 ---------------- ------------------ ----------------- ---------------- -------------- <FN> (1) Includes loans 90 days or more past due, in foreclosure, restructured after delinquency, in bankruptcy (including loans performing under either their original loan terms or a court-approved bankruptcy plan), and real estate owned. (2) Geographic regions - Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South (KS, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA, RI, TN, VA, VT, WV); and Southeast (AL, AR, FL, GA, LA, MS, SC). </FN> </TABLE> 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. <TABLE> <CAPTION> 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 <S> <C> <C> <C> <C> <C> <C> Before 1994 $ 2,025,262 $ - 0.00% $ - 0.00% 1994 374,500 - 0.00% - 0.00% 1995 326,168 401 0.12% 26 0.13% 1996 642,243 1,503 0.23% 43 0.24% 1997 729,535 2,797 0.38% 66 0.39% 1998 1,084,749 4,155 0.38% 271 0.41% 1999 1,071,142 1,173 0.11% 84 0.12% 2000 672,576 1,553 0.23% - 0.23% 2001 898,206 727 0.08% - 0.08% 2002 864,135 - 0.00% - 0.00% 2003 615,927 - 0.00% - 0.00% 2004 228,466 - 0.00% - 0.00% 2005 201,080 0.00% 0.00% ---------------- ---------------- ----------------- ----------------- ----------------- Total $ 9,733,989 $ 12,309 0.13% $ 490 0.13% ---------------- ---------------- ----------------- By geographic region (1): Northwest $ 2,113,111 $ 6,888 0.33% $ 466 0.35% Southwest 4,188,162 4,727 0.11% - 0.11% Mid-North 1,239,837 18 0.00% 24 0.00% Mid-South 535,902 336 0.06% - 0.06% Northeast 831,989 122 0.01% - 0.01% Southeast 824,988 218 0.03% - 0.03% ---------------- ---------------- ----------------- ----------------- ----------------- Total $ 9,733,989 $ 12,309 0.13% $ 490 0.13% ---------------- ---------------- ----------------- By commodity/collateral type: Crops $ 4,120,534 $ 265 0.01% $ - 0.01% Permanent plantings 2,455,770 9,029 0.37% 490 0.39% Livestock 2,220,305 2,559 0.12% - 0.12% Part-time farm 708,438 456 0.06% - 0.06% Ag storage and processing 88,757 (2) - 0.00% - 0.00% Other 140,185 - 0.00% - 0.00% ---------------- ---------------- ----------------- ----------------- ----------------- Total $ 9,733,989 $ 12,309 0.13% $ 490 0.13% ---------------- ---------------- ----------------- <FN> (1) Geographic regions - Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South (KS, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA, RI, TN, VA, VT, WV); and Southeast (AL, AR, FL, GA, LA, MS, SC). (2) Several of the loans underlying agricultural storage and processing LTSPCs are for facilities under construction, and as of September 30, 2005, approximately $35.8 million of the loans were not yet disbursed by the lender. </FN> </TABLE> 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. <TABLE> <CAPTION> Farmer Mac Purchases, Guarantees and LTSPCs - ---------------------------------------------------------------------------------------------------------- Farmer Mac I -------------------------------------- Loans and Guaranteed Securities LTSPCs Farmer Mac II Total ---------------- ----------------- ----------------- ----------------- (in thousands) For the quarter ended: <S> <C> <C> <C> <C> <C> <C> <C> September 30, 2005 $ 39,821 $ 91,783 (1) $ 52,181 $ 183,785 June 30, 2005 20,382 96,419 (2) 45,123 161,924 March 31, 2005 18,540 33,282 43,634 95,456 December 31, 2004 28,211 34,091 55,122 117,424 September 30, 2004 23,229 84,097 49,798 157,124 June 30, 2004 27,520 127,098 34,671 189,289 March 31, 2004 25,444 147,273 34,483 207,200 December 31, 2003 25,148 218,097 44,971 288,216 September 30, 2003 42,760 199,646 106,729 349,135 For the year ended: December 31, 2004 104,404 392,559 174,074 671,037 December 31, 2003 192,577 763,342 271,229 1,227,148 <FN> (1) $32.0 million of the LTSPCs during third quarter were for agricultural storage and processing facilities. Several of the loans underlying those LTSPCs are for facilities under construction, and as of September 30, 2005, approximately $7.4 million of the loans were not yet disbursed by the lender. (2) $56.8 million of the LTSPCs during second quarter were for agricultural storage and processing facilities. Several of the loans underlying those LTSPCs are for facilities under construction, and as of September 30, 2005, approximately $28.4 million of the loans were not yet disbursed by the lender. </FN> </TABLE> <TABLE> <CAPTION> 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: <S> <C> <C> <C> <C> <C> <C> <C> September 30, 2005 $ 2,118,510 $ 2,183,058 $ 14,209 $ 810,686 $ 5,126,463 June 30, 2005 2,203,074 2,181,896 16,333 786,671 5,187,974 March 31, 2005 2,247,595 2,209,792 17,236 777,465 5,252,088 December 31, 2004 2,371,405 2,295,103 18,639 768,542 5,453,689 September 30, 2004 2,406,133 2,381,006 18,909 742,474 5,548,522 June 30, 2004 2,521,026 2,390,779 22,155 715,750 5,649,710 March 31, 2004 2,566,412 2,382,648 22,261 722,978 5,694,299 December 31, 2003 2,696,530 2,348,702 24,734 729,470 5,799,436 September 30, 2003 2,721,775 2,174,182 25,588 720,584 5,642,129 <FN> (1) Farmer Mac assumes 100 percent of the credit risk on post-1996 Act loans. Pre-1996 Act loans back securities that are supported by unguaranteed first loss subordinated interests representing approximately 10 percent of the balance of the loans. Farmer Mac II guaranteed portions are guaranteed by the USDA. (2) Includes the balance of real estate owned. </FN> </TABLE> <TABLE> <CAPTION> 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: <S> <C> <C> <C> <C> <C> <C> 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 </TABLE> 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. <TABLE> <CAPTION> 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 - ----------------------------------------- ---------------- ------------ -------------------- --------------------- <S> <C> <C> <C> <C> <C> <C> <C> July 1, 2005 - July 31, 2005 53,512 $ 24.49 53,512 138,298 August 1, 2005 - August 31, 2005 80,056 24.48 80,056 58,242 September 1, 2005 - September 30, 2005 58,242 24.74 58,242 - ---------------- ------------ -------------------- Total 191,810 $ 24.56 191,810 ---------------- ------------ -------------------- <FN> * On August 9, 2004, Farmer Mac publicly announced that its board of directors had authorized a program to repurchase up to 10 percent, or 1,055,500 shares, of the Corporation's outstanding Class C Non-Voting Common Stock. During third quarter 2005, the aggregate number of shares repurchased by Farmer Mac reached the maximum number authorized under the program, thereby terminating the program according to its terms. </FN> </TABLE> Item 3. Defaults Upon Senior Securities (a) Not applicable. (b) Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information (a) None. (b) Not applicable.
Item 6. Exhibits * 3.1 - Title VIII of the Farm Credit Act of 1971, as most recently amended by the Farm Credit System Reform Act of 1996, P.L. 104-105 (Form 10-K filed March 29, 1996). * 3.2 - Amended and restated By-Laws of the Registrant (Form 10-Q filed August 9, 2004). * 4.1 - Specimen Certificate for Farmer Mac Class A Voting Common Stock (Form 10-Q filed May 15, 2003). * 4.2 - Specimen Certificate for Farmer Mac Class B Voting Common Stock (Form 10-Q filed May 15, 2003). * 4.3 - Specimen Certificate for Farmer Mac Class C Non-Voting Common Stock (Form 10-Q filed May 15, 2003). * 4.4 - Certificate of Designation of Terms and Conditions of Farmer Mac 6.40% Cumulative Preferred Stock, Series A (Form 10-Q filed May 15, 2003). * 4.5.1 - Master Terms Agreement for Farmer Mac's Universal Debt Facility dated as of July 28, 2005 (Previously filed as Exhibit 4.3 to Form 8-A filed August 4, 2005). * 4.5.2 - Supplemental Agreement for 4.25% Fixed Rate Global Notes Due July 29, 2008 (Previously filed as Exhibit 4.4 to Form 8-A filed August 4, 2005). +* 10.1 - Stock Option Plan (Previously filed as Exhibit 19.1 to Form 10-Q filed August 14, 1992). +* 10.1.1 - Amendment No. 1 to Stock Option Plan (Previously filed as Exhibit 10.2 to Form 10-Q filed August 16, 1993). +* 10.1.2 - 1996 Stock Option Plan (Form 10-Q filed August 14, 1996). +* 10.1.3 - Amended and Restated 1997 Incentive Plan (Form 10-Q filed November 14, 2003). +* 10.1.4 - Form of stock option award agreement under 1997 Incentive Plan (Form 10-K filed March 16, 2005). _________________ * Incorporated by reference to the indicated prior filing. ** Filed herewith. + Management contract or compensatory plan. # Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
+* 10.2 - Employment Agreement dated May 5, 1989 between Henry D. Edelman and the Registrant (Previously filed as Exhibit 10.4 to Form 10-K filed February 14, 1990). +* 10.2.1 - Amendment No. 1 dated as of January 10, 1991 to Employment Contract between Henry D. Edelman and the Registrant (Previously filed as Exhibit 10.4 to Form 10-K filed April 1, 1991). +* 10.2.2 - Amendment to Employment Contract dated as of June 1, 1993 between Henry D. Edelman and the Registrant (Previously filed as Exhibit 10.5 to Form 10-Q filed November 15, 1993). +* 10.2.3 - Amendment No. 3 dated as of June 1, 1994 to Employment Contract between Henry D. Edelman and the Registrant (Previously filed as Exhibit 10.6 to Form 10-Q filed August 15, 1994). +* 10.2.4 - Amendment No. 4 dated as of February 8, 1996 to Employment Contract between Henry D. Edelman and the Registrant Form 10-K (filed March 29, 1996). +* 10.2.5 - Amendment No. 5 dated as of June 13, 1996 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed August 14, 1996). +* 10.2.6 - Amendment No. 6 dated as of August 7, 1997 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed November 14, 1997). +* 10.2.7 - Amendment No. 7 dated as of June 4, 1998 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed August 14, 1998). +* 10.2.8 - Amendment No. 8 dated as of June 3, 1999 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed August 12, 1999). +* 10.2.9 - Amendment No. 9 dated as of June 1, 2000 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed August 14, 2000). +* 10.2.10 - Amendment No. 10 dated as of June 7, 2001 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed August 14, 2001). _________________ * Incorporated by reference to the indicated prior filing. ** Filed herewith. + Management contract or compensatory plan. # Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
+* 10.2.11 - Amendment No. 11 dated as of June 6, 2002 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed August 14, 2002). +* 10.2.12 - Amendment No. 12 dated as of June 5, 2003 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed August 14, 2003). +* 10.2.13 - Amendment No. 13 dated as of August 3, 2004 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed November 9, 2004). +* 10.2.14 - Amendment No. 14 dated as of June 16, 2005 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed August 9, 2005). +* 10.3 - Employment Agreement dated May 11, 1989 between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.5 to Form 10-K filed February 14, 1990). +* 10.3.1 - Amendment dated December 14, 1989 to Employment Agreement between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.5 to Form 10-K filed February 14, 1990). +* 10.3.2 - Amendment No. 2 dated February 14, 1991 to Employment Agreement between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.7 to Form 10-K filed April 1, 1991). +* 10.3.3 - Amendment to Employment Contract dated as of June 1, 1993 between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.9 to Form 10-Q filed November 15, 1993). +* 10.3.4 - Amendment No. 4 dated June 1, 1993 to Employment Contract between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.10 to Form 10-K filed March 31, 1994). +* 10.3.5 - Amendment No. 5 dated as of June 1, 1994 to Employment Contract between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.12 to Form 10-Q filed August 15, 1994). _________________ * Incorporated by reference to the indicated prior filing. ** Filed herewith. + Management contract or compensatory plan. # Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
+* 10.3.6 - Amendment No. 6 dated as of June 1, 1995 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14, 1995). +* 10.3.7 - Amendment No. 7 dated as of February 8, 1996 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-K filed March 29, 1996). +* 10.3.8 - Amendment No. 8 dated as of June 13, 1996 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14, 1996). +* 10.3.9 - Amendment No. 9 dated as of August 7, 1997 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed November 14, 1997). +* 10.3.10 - Amendment No. 10 dated as of June 4, 1998 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14, 1998). +* 10.3.11 - Amendment No. 11 dated as of June 3, 1999 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 12, 1999). +* 10.3.12 - Amendment No. 12 dated as of June 1, 2000 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14, 2000). +* 10.3.13 - Amendment No. 13 dated as of June 7, 2001 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14, 2001). +* 10.3.14 - Amendment No. 14 dated as of June 6, 2002 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14, 2002). +* 10.3.15 - Amendment No. 15 dated as of June 5, 2003 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14, 2003). +* 10.3.16 - Amendment No. 16 dated as of August 3, 2004 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed November 9, 2004). _________________ * Incorporated by reference to the indicated prior filing. ** Filed herewith. + Management contract or compensatory plan. # Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
+* 10.3.17 - Amendment No. 17 dated as of June 16, 2005 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 9, 2005). +* 10.4 - Employment Contract dated as of September 1, 1997 between Tom D. Stenson and the Registrant (Previously filed as Exhibit 10.8 to Form 10-Q filed November 14, 1997). +* 10.4.1 - Amendment No. 1 dated as of June 4, 1998 to Employment Contract between Tom D. Stenson and the Registrant (Previously filed as Exhibit 10.8.1 to Form 10-Q filed August 14, 1998). +* 10.4.2 - Amendment No. 2 dated as of June 3, 1999 to Employment Contract between Tom D. Stenson and the Registrant (Form 10-Q filed August 12, 1999). +* 10.4.3 - Amendment No. 3 dated as of June 1, 2000 to Employment Contract between Tom D. Stenson and the Registrant (Form 10-Q filed August 14, 2000). +* 10.4.4 - Amendment No. 4 dated as of June 7, 2001 to Employment Contract between Tom D. Stenson and the Registrant (Form 10-Q filed August 14, 2001). +* 10.4.5 - Amendment No. 5 dated as of June 6, 2002 to Employment Contract between Tom D. Stenson and the Registrant (Form 10-Q filed August 14, 2002). +* 10.4.6 - Amendment No. 6 dated as of June 5, 2003 to Employment Contract between Tom D. Stenson and the Registrant (Form 10-Q filed August 14, 2003). +* 10.4.7 - Amendment No. 7 dated as of August 3, 2004 to Employment Contract between Tom D. Stenson and the Registrant (Form 10-Q filed November 9, 2004). +* 10.4.8 - Amendment No. 8 dated as of June 16, 2005 to Employment Contract between Tom D. Stenson and the Registrant (Form 10-Q filed August 9, 2005). _________________ * Incorporated by reference to the indicated prior filing. ** Filed herewith. + Management contract or compensatory plan. # Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
+* 10.5 - Employment Contract dated February 1, 2000 between Jerome G. Oslick and the Registrant (Previously filed as Exhibit 10.6 to Form 10-Q filed May 11, 2000). +* 10.5.1 - Amendment No. 1 dated as of June 1, 2000 to Employment Contract between Jerome G. Oslick and the Registrant (Previously filed as Exhibit 10.6.1 to Form 10-Q filed August 14, 2000). +* 10.5.2 - Amendment No. 2 dated as of June 7, 2001 to Employment Contract between Jerome G. Oslick and the Registrant (Previously filed as Exhibit 10.6.2 to Form 10-Q filed August 14, 2001). +* 10.5.3 - Amendment No. 3 dated as of June 6, 2002 to Employment Contract between Jerome G. Oslick and the Registrant (Form 10-Q filed August 14, 2002). +* 10.5.4 - Amendment No. 4 dated as of June 5, 2003 to Employment Contract between Jerome G. Oslick and the Registrant (Form 10-Q filed August 14, 2003). +* 10.5.5 - Amendment No. 5 dated as of June 16, 2005 to Employment Contract between Jerome G. Oslick and the Registrant (Form 10-Q filed August 9, 2005). +* 10.6 - Employment Contract dated June 5, 2003 between Timothy L. Buzby and the Registrant (Form 10-Q filed August 14, 2003). +* 10.6.1 - Amendment No. 1 dated as of August 3, 2004 to Employment Contract between Timothy L. Buzby and the Registrant (Form 10-Q filed November 9, 2004). +* 10.6.2 - Amendment No. 2 dated as of June 16, 2005 to Employment Contract between Timothy L. Buzby and the Registrant (Form 10-Q filed August 9, 2005). * 10.7 - Farmer Mac I Seller/Servicer Agreement dated as of August 7, 1996 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002). * 10.8 - Medium-Term Notes U.S. Selling Agency Agreement dated as of October 1, 1998 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002). _________________ * Incorporated by reference to the indicated prior filing. ** Filed herewith. + Management contract or compensatory plan. # Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
* 10.9 - Discount Note Dealer Agreement dated as of September 18, 1996 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002). *# 10.10 - ISDA Master Agreement and Credit Support Annex dated as of June 26, 1997 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002). *# 10.11 - Master Central Servicing Agreement dated as of December 17, 1996 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002). *# 10.11.1 - Amendment No. 1 dated as of February 26, 1997 to Master Central Servicing Agreement dated as of December 17, 1996 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002). *# 10.11.2 - Amended and Restated Master Central Servicing Agreement dated as of May 1, 2004 between Zions First National Bank and the Registrant (Form 10-Q filed August 9, 2004). **# 10.12 - Loan Closing File Review Agreement dated as of August 2, 2005 between Zions First National Bank and the Registrant. *# 10.13 - Long Term Standby Commitment to Purchase dated as of August 1, 1998 between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed November 14, 2002). *# 10.13.1 - Amendment No. 1 dated as of January 1, 2000 to Long Term Standby Commitment to Purchase dated as of August 1, 1998 between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed November 14, 2002). * 10.13.2 - Amendment No. 2 dated as of September 1, 2002 to Long Term Standby Commitment to Purchase dated as of August 1, 1998, as amended by Amendment No. 1 dated as of January 1, 2000, between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed November 14, 2002). * 10.14 - Lease Agreement, dated June 28, 2001 between EOP - Two Lafayette, L.L.C. and the Registrant (Previously filed as Exhibit 10.10 to Form 10-K filed March 27, 2002). +* 10.15 - Employment Contract dated October 31, 2003 between Michael P. Morris and the Registrant (Form 10-K filed March 15, 2004). _________________ * Incorporated by reference to the indicated prior filing. ** Filed herewith. + Management contract or compensatory plan. # Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
+* 10.15.1 - Amendment No. 1 dated August 3, 2004 to Employment Contract between Michael P. Morris and the Registrant (Form 10-Q filed November 9, 2004). +* 10.15.2 - Amendment No. 2 dated June 16, 2005 to Employment Contract between Michael P. Morris and the Registrant (Form 10-Q filed August 9, 2005). *# 10.16 - Long Term Standby Commitment to Purchase dated as of June 1, 2003 between Farm Credit Bank of Texas and the Registrant (Form 10-Q filed November 9, 2004). *# 10.17 - Central Servicer Delinquent Loan Servicing Transfer Agreement dated as of July 1, 2004 between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed November 9, 2004). +* 10.18 - Employment Contract dated June 20, 2005 between Mary K. Waters and the Registrant (Form 10-Q filed August 9, 2005). * 10.19 - Lease Agreement dated May 26, 2005 between Zions First National Bank and the Registrant (Form 10-Q filed August 9, 2005). ** 31.1 - Certification of Chief Executive Officer relating to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. ** 31.2 - Certification of Chief Financial Officer relating to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. ** 32 - Certification of Chief Executive Officer and Chief Financial Officer relating to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. _________________ * Incorporated by reference to the indicated prior filing. ** Filed herewith. + Management contract or compensatory plan. # Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FEDERAL AGRICULTURAL MORTGAGE CORPORATION November 9, 2005 By: /s/ Henry D. Edelman ---------------------------------------- Henry D. Edelman President and Chief Executive Officer (Principal Executive Officer) /s/ Nancy E. Corsiglia ---------------------------------------- Nancy E. Corsiglia Vice President - Finance (Principal Financial Officer)