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As filed with the Securities and Exchange Commission
on May 15, 2003
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003 Commission File Number 0-17440
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
Federally chartered instrumentality
of the United States 52-1578738
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1133 Twenty-First Street, N.W.,
Suite 600
Washington, D.C. 20036
(Address of principal executive offices) (Zip code)
(202) 872-7700
(Registrant's telephone number, including area code)
-----------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of May 1, 2003, there were 1,030,780 shares of Class A Voting Common
Stock, 500,301 shares of Class B Voting Common Stock and 10,108,270 shares of
Class C Non-Voting Common Stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
The following interim condensed consolidated financial statements of the
Federal Agricultural Mortgage Corporation ("Farmer Mac" or the "Corporation")
have been prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. These condensed consolidated financial
statements reflect all normal and recurring adjustments that are, in the opinion
of management, necessary to present a fair statement of the financial condition
and the results of operations and cash flows of Farmer Mac for the interim
periods presented. Certain information and footnote disclosures normally
included in annual consolidated financial statements have been condensed or
omitted as permitted by such rules and regulations. Management believes that the
disclosures are adequate to present fairly the condensed consolidated financial
position, condensed consolidated results of operations and condensed
consolidated cash flows as of the dates and for the periods presented. These
condensed consolidated financial statements should be read in conjunction with
the audited 2002 consolidated financial statements of Farmer Mac included in the
Corporation's Form 10-K for the year ended December 31, 2002. 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 condensed consolidated
financial statements is included in this Form 10-Q beginning on the pages listed
below:
Condensed Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002.............................................. 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2003 and 2002.................................. 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002................................. 5
Notes to Condensed Consolidated Financial Statements............. 6
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2003 2002
------------------ ------------------
(unaudited) (audited)
Assets:
Cash and cash equivalents $ 685,841 $ 723,800
Investment securities 887,280 830,409
Farmer Mac Guaranteed Securities 1,527,338 1,608,507
Loans 1,010,857 966,123
Allowance for loan losses (3,028) (2,662)
------------------ ------------------
Loans, net 1,007,829 963,461
Real estate owned, net of valuation allowance of
$0.6 million and $0.6 million 8,173 5,031
Financial derivatives 1,134 317
Interest receivable 39,720 65,276
Guarantee and commitment fees receivable 3,653 5,938
Deferred tax asset 9,911 9,666
Prepaid expenses and other assets 23,548 10,510
------------------ ------------------
Total Assets $ 4,194,427 $ 4,222,915
------------------ ------------------
Liabilities and Stockholders' Equity:
Liabilities:
Notes payable:
Due within one year $ 2,799,364 $ 2,895,746
Due after one year 1,032,348 985,318
------------------ ------------------
Total notes payable 3,831,712 3,881,064
Financial derivatives 89,875 94,314
Accrued interest payable 30,772 29,756
Accounts payable and accrued expenses 34,603 17,453
Reserve for losses 17,472 16,757
------------------ ------------------
Total Liabilities 4,004,434 4,039,344
Stockholders' Equity:
Preferred Stock:
Series A, stated at redemption/liquidation value,
$50 per share, 700,000 shares authorized,
issued and outstanding 35,000 35,000
Common Stock:
Class A Voting, $1 par value, no maximum authorization,
1,030,780 shares issued and outstanding 1,031 1,031
Class B Voting, $1 par value, no maximum authorization,
500,301 shares issued and outstanding 500 500
Class C Non-Voting, $1 par value, no maximum authorization,
10,107,470 and 10,106,903 shares issued and outstanding
as of March 31, 2003 and December 31, 2002 10,107 10,107
Additional paid-in capital 82,537 82,527
Accumulated other comprehensive income (loss) (2,418) (407)
Retained earnings 63,236 54,813
------------------ ------------------
Total Stockholders' Equity 189,993 183,571
------------------ ------------------
Total Liabilities and Stockholders' Equity $ 4,194,427 $ 4,222,915
------------------ ------------------
See accompanying notes to condensed consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended
----------------------------------------
March 31, 2003 March 31, 2002
------------------- -------------------
(unaudited)
Interest income:
Investments and cash equivalents $ 9,177 $ 10,327
Farmer Mac Guaranteed Securities 19,512 23,018
Loans 12,849 3,799
------------------- -------------------
Total interest income 41,538 37,144
Interest expense 32,086 29,674
------------------- -------------------
Net interest income 9,452 7,470
Provision for loan losses (1,208) -
------------------- -------------------
Net interest income after provision
for loan losses 8,244 7,470
Guarantee and commitment fees 5,094 4,567
Gains/(Losses) on financial derivatives
and trading assets 3,756 224
Gain on the repurchase of debt - 2,490
Miscellaneous income 251 391
------------------- -------------------
Total revenues 17,345 15,142
------------------- -------------------
Expenses:
Compensation and employee benefits 1,440 1,255
General and administrative 1,192 1,097
Regulatory fees 383 196
Provision for losses 895 2,016
------------------- -------------------
Total operating expenses 3,910 4,564
Income before income taxes 13,435 10,578
Income tax expense 4,452 3,376
------------------- -------------------
Net income 8,983 7,202
------------------- -------------------
Preferred stock dividends (560) -
------------------- -------------------
Net income available to common stockholders $ 8,423 $ 7,202
------------------- -------------------
Earnings per common share:
Basic earnings per common share $ 0.72 $ 0.62
Diluted earnings per common share $ 0.70 $ 0.59
See accompanying notes to condensed consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
-------------------------------------
March 31, 2003 March 31, 2002
------------------ ------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 8,983 $ 7,202
Adjustments to reconcile net income to net cash provided by
operating activities:
Net amortization of investment premiums and discounts 95 1,167
Purchases of trading investment securities (2,720) (3,503)
Mark to market on trading securities and derivatives (3,756) (224)
Amortization of settled financial derivatives contracts 298 202
Gain on the repurchase of debt - (2,490)
Total provision for losses 2,103 2,016
Decrease in interest receivable 25,556 20,137
Decrease in guarantee and commitment fees receivable 2,285 2,285
Increase in other assets (16,405) (1,782)
Amortization of debt premiums, discounts and issuance costs 9,681 10,245
Increase (decrease) in accrued interest payable 1,016 (3,657)
Increase (decrease) in accounts payable and accrued expenses 17,150 (4,894)
------------------ ------------------
Net cash provided by operating activities 44,286 26,704
Cash flows from investing activities:
Purchases of available-for-sale investment securities (191,508) (67,500)
Purchases of Farmer Mac II Guaranteed Securities and
AgVantage bonds (46,936) (61,273)
Purchases of loans (103,410) (101,491)
Proceeds from repayment of investment securities 140,471 112,925
Proceeds from repayment of Farmer Mac Guaranteed Securities 114,944 116,803
Proceeds from repayment of loans 51,640 2,516
Proceeds from sale of loans and
Farmer Mac Guaranteed Securities 13,261 -
Settlement of financial derivatives (1,165) (831)
Purchases of office equipment (5) (52)
------------------ ------------------
Net cash (used in) provided by investing activities (22,708) 1,097
Cash flows from financing activities:
Proceeds from issuance of discount notes 10,148,517 25,948,602
Proceeds from issuance of medium-term notes 53,700 11,300
Payments to redeem discount notes (10,185,804) (25,884,949)
Payments to redeem medium-term notes (75,401) (72,680)
Proceeds from common stock issuance 11 759
Preferred stock dividends (560) -
------------------ ------------------
Net cash (used in) provided by financing activities (59,537) 3,032
------------------ ------------------
Net increase (decrease) in cash and cash equivalents (37,959) 30,833
Cash and cash equivalents at beginning of period 723,800 437,831
------------------ ------------------
Cash and cash equivalents at end of period $ 685,841 $ 468,664
------------------ ------------------
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Accounting Policies
(a) Cash and Cash Equivalents
Farmer Mac considers highly liquid investment securities with remaining
maturities of three months or less at the time of purchase to be cash
equivalents. Changes in the balance of cash and cash equivalents are reported in
the Condensed Consolidated Statements of Cash Flows. The following table sets
forth information regarding certain cash and non-cash transactions for the three
months ended March 31, 2003 and 2002.
Three Months Ended
March 31,
--------------------------
2003 2002
------------ -----------
(in thousands)
Cash paid for:
Interest $13,854 $ 15,318
Income taxes - -
Non-cash activity:
Real estate owned acquired through foreclosure 5,794 1,662
Loans acquired and securitized as Farmer Mac
Guaranteed Securities 13,261 -
Loans acquired from on-balance sheet Farmer Mac
Guaranteed Securities 20,019 6,554
(b) Loans
As of March 31, 2003, loans held by Farmer Mac included $34.6 million held
for sale and $976.3 million held for investment. As of December 31, 2002, loans
held by Farmer Mac included $37.0 million held for sale and $929.1 million held
for investment. Detailed information regarding the allowance for loan losses is
presented in Note 1(c).
(c) Allowance for Losses
As of March 31, 2003, Farmer Mac maintained a $21.1 million allowance for
losses to cover estimated probable losses on loans held, real estate owned, and
loans underlying Long-Term Standby Purchase Commitments ("LTSPCs") and
securities guaranteed by Farmer Mac under the Farmer Mac I program after the
1996 revision to its charter ("Post-1996 Act Farmer Mac I Guaranteed
Securities"). (See Note 2 for a description of LTSPCs.) The allowance 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 reduced by charge-offs for actual losses, net of recoveries.
Farmer Mac's allowance for losses is estimated using a systematic process
that begins with management's evaluation of the results of its proprietary loan
pool simulation and guarantee fee model (the "Model"); those results may be
modified by the application of management's judgment that takes into account
factors including:
o economic conditions;
o geographic and agricultural commodity concentrations of Farmer Mac's
portfolio;
o the credit profile of Farmer Mac's portfolio;
o delinquency trends of Farmer Mac's portfolio; and
o historical charge-offs and recovery activities of Farmer Mac's
portfolio.
The Model offers historical loss experience on agricultural mortgage loans
similar to those on which Farmer Mac has assumed credit risk, but over a longer
period of time than Farmer Mac's own experience to date. Farmer Mac's systematic
methodology for determining its allowance for losses is expected to migrate over
time, away from the Model and toward the increased use of Farmer Mac's own
historical portfolio loss experience, as that experience continues to develop.
During this migration, Farmer Mac will continue to use the results from the
Model, augmented by the application of management's judgment, to develop its
loan loss allowance.
Management believes that its use of this methodology produces a reliable
estimate of total probable losses, as of the balance sheet date, for all loans
included in Farmer Mac's portfolio, including loans held and loans underlying
Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs.
The table below summarizes the three components of the allowance for losses
as of March 31, 2003 and December 31, 2002.
March 31, December 31,
2003 2002
---------------- ----------------
(in thousands)
Allowance for loan losses $ 3,028 $ 2,662
Real estate owned valuation allowance 592 592
Reserve for losses:
On-balance sheet Farmer Mac I Guaranteed Securities 3,800 4,036
Off-balance sheet Farmer Mac I Guaranteed Securities 1,237 1,280
LTSPCs 12,435 11,441
---------------- ----------------
Total allowance for losses $ 21,092 $ 20,011
---------------- ----------------
Farmer Mac's total provision for losses was $2.1 million for first quarter
2003, compared to $2.0 million for first quarter 2002. During first quarter
2003, Farmer Mac charged off $1.2 million in losses against the allowance for
losses and recovered $0.2 million from previously charged off losses, for net
charge-offs of $1.0 million. During first quarter 2002, Farmer Mac charged off
$0.9 million in losses against the allowance for losses and recorded no
recoveries from previously charged off losses, for net charge-offs of $0.9
million. The net charge-offs for first quarter 2003 and 2002 included $0.2
million and $0.1 million, respectively, related to previously accrued or
advanced interest on Farmer Mac I Guaranteed Securities.
No allowance for losses has been made for loans underlying Farmer Mac I
Guaranteed Securities issued prior to the Farm Credit System Reform Act of 1996
(the "1996 Act") or securities issued under the Farmer Mac II program ("Farmer
Mac II Guaranteed Securities"). Farmer Mac I Guaranteed Securities issued prior
to the 1996 Act are supported by unguaranteed first loss subordinated interests,
which are expected to exceed the estimated credit losses on those loans. The
guaranteed portions of loans collateralizing Farmer Mac II Guaranteed Securities
are guaranteed by the United States Department of Agriculture ("USDA"). Each
USDA guarantee is an obligation backed by the full faith and credit of the
United States. To date, Farmer Mac has experienced no 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.
(d) Financial Derivatives
Farmer Mac enters into financial derivative transactions principally to
protect against the risk from the effects of market price or interest rate
movements on the value of certain assets and future cash flows, 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
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 in income or
expense.
The net after-tax increase to earnings under SFAS 133 during first quarter
2003 totaled $2.5 million, and the net after-tax increase to other comprehensive
income (loss) totaled $1.1 million. Substantially all of the increase to other
comprehensive income (loss) represented changes in the fair values of forward
sale contracts, interest rate swap contracts and settled forward sale contracts
using fair values as of March 31, 2003. As of March 31, 2003, Farmer Mac had
approximately $61.6 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. During the next twelve months,
Farmer Mac estimates that $6.9 million of the amount currently reported in
accumulated other comprehensive income (loss) will be reclassified into
earnings. For the quarter ended March 31, 2003, the ineffectiveness related to
Farmer Mac's designated hedges was insignificant.
SFAS 133 also required, as the change in the fair value of a hedged item, a
$1.5 million increase in the line item "loans" on the consolidated balance sheet
for first quarter 2003. For first quarter 2002, the recorded change in the fair
value of a hedged item was a $0.6 million decrease in "loans."
(e) Earnings Per Common Share
Basic earnings per common share are based on the weighted-average number of
common shares outstanding. Diluted earnings per common share are based on the
weighted-average number of common shares outstanding adjusted to include all
potentially dilutive common stock options. The following schedule reconciles
basic and diluted earnings per common share for the three months ended March 31,
2003 and 2002:
Three Months Ended
-----------------------------------------------------------------
March 31, 2003 March 31, 2002
-------------------------------- -------------------------------
Dilutive Dilutive
Basic stock Diluted Basic stock Diluted
EPS options EPS EPS options EPS
---------- ----------- --------- --------- ---------- ----------
(in thousands, except per share amounts)
Net income available to $ 8,423 $ 8,423 $ 7,202 $ 7,202
common stockholders
Weighted average shares 11,638 325 11,963 11,580 540 12,120
Earnings per common share $ 0.72 $ 0.70 $ 0.62 $ 0.59
(f) Preferred Stock
On May 6, 2002, the Corporation issued 700,000 shares of 6.40% Cumulative
Preferred Stock, Series A ("Series A Preferred Stock"), which has a redemption
price and liquidation preference of $50.00 per share, plus accrued and unpaid
dividends, if any. The Series A Preferred Stock does not have a maturity date.
Beginning on June 30, 2012, Farmer Mac has the option to redeem the Series A
Preferred Stock at any time, in whole or in part, at the redemption price of
$50.00 per share, plus accrued and unpaid dividends through and including the
redemption date, if any. Farmer Mac will pay cumulative dividends on the Series
A Preferred Stock quarterly in arrears, when and if declared by the Board of
Directors. The costs of issuing the Series A Preferred Stock were charged to
additional paid-in capital.
On February 6, 2003, Farmer Mac's Board of Directors declared a dividend of
$0.80 per share on the Series A Preferred Stock for the period from January 1,
2003 to March 31, 2003, which was paid on March 31, 2003.
(g) Stock-Based Compensation
Farmer Mac accounts for its stock-based employee compensation plans using
the intrinsic value method of accounting for employee stock options pursuant to
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123"), as amended by Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure ("SFAS 148").
Accordingly, no compensation expense was recognized in first quarter 2003 or
first quarter 2002 for employee stock option plans. Had Farmer Mac elected to
use the fair value method of accounting for employee stock options, there would
have been no effect on net income available to common stockholders and earnings
per share for the three months ended March 31, 2003 and 2002, as no stock
options were granted during either period.
The following table summarizes stock option activity for the three months
ended March 31, 2003 and 2002:
Three Months Ended March 31,
-------------------------------------------------------------
2003 2002
------------------------------ -----------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------------- --------------- --------------- ------------
Outstanding, beginning of period 1,637,111 $ 19.45 1,416,426 $ 17.61
Granted - - - -
Exercised - - (26,541) 17.40
Canceled - - - -
------------- --------------- --------------- ------------
Outstanding, end of period 1,637,111 $ 19.45 1,389,885 $ 17.62
------------- --------------- --------------- ------------
Options exercisable at end of period 1,373,949 1,065,881
------------- ---------------
(h) Reclassifications
Certain reclassifications of prior period information were made to conform
to the current period presentation.
(i) New Accounting Standards
On January 1, 2003, Farmer Mac adopted Statement of Financial Accounting
Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13 and Technical Corrections ("SFAS 145") which requires
gains and losses from the extinguishment or repurchase of debt to be classified
as extraordinary items only if they meet the criteria for such classification in
Accounting Principles Board Opinion No. 30, Reporting the Results of Operations,
Reporting the Effects of Disposal of a Segment of a Business and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions ("APB 30"). Prior to
the adoption of this standard, gains and losses from the extinguishment or
repurchase of debt were classified as extraordinary items. This standard
eliminates that classification for most debt extinguishments and requires the
reclassification of certain gains and losses that were previously categorized as
extraordinary. Such a reclassification was reflected in Farmer Mac's condensed
consolidated financial statements as of and for the three months ended March 31,
2002.
On January 1, 2003, Farmer Mac adopted the liability recognition provisions
of the Financial Accounting Standards Board Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). These provisions require Farmer
Mac to recognize, at the inception of a guarantee, a liability for the fair
value of its obligation to stand ready to perform under the terms of each
guarantee agreement and an asset that is equal to the fair value of the fees
that will be received over the life of each guarantee. Subsequently, both the
asset and the liability are measured and recorded at their fair value. These
provisions have been applied on a prospective basis to guarantees and
commitments that were issued or modified on or after January 1, 2003. See Note 2
for additional information on Farmer Mac's guarantee obligations and LTSPCs and
the manner in which the obligations to "stand ready" has been reflected in
Farmer Mac's condensed consolidated financial statements.
Note 2. Off-Balance Sheet Guarantees and Long-Term Standby Purchase Commitments
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. To be eligible for Farmer Mac I secondary
market transactions, a loan must meet Farmer Mac's credit underwriting,
appraisal and documentation standards. Accordingly, Farmer Mac believes the
credit risk it assumes in each of the two Farmer Mac I transaction alternatives
is the same.
For all guarantees and commitments that were executed on or before December
31, 2002, Farmer Mac's policy for the recognition of guarantee fees on Farmer
Mac Guaranteed Securities and commitment fees on LTSPCs is to recognize them on
an accrual basis over the life of the underlying loans. Because these fees are
paid monthly in arrears, no guarantee fees or commitment fees are unearned at
the end of any reporting period. If Farmer Mac purchases a delinquent loan
underlying a Farmer Mac Guaranteed Security or an LTSPC, Farmer Mac stops
accruing the guarantee or commitment fee upon the purchase of the loan. If the
loan becomes current and is repurchased by the seller under the terms of the
LTSPC, Farmer Mac resumes accrual of the fee.
For all guarantees and commitments issued or modified on or after January
1, 2003, Farmer Mac recognizes, at the inception of the guarantee or commitment,
an asset that is equal to the fair value of the fees that will be received over
the life of each guarantee or commitment and a liability for the fair value of
its obligation to stand ready to perform under the guarantee or commitment. Both
the asset and the liability are subsequently measured and recorded at their fair
value in Farmer Mac's condensed consolidated financial statements.
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 as
Farmer Mac Guaranteed Securities. Farmer Mac guarantees the timely payment of
principal and interest on the certificates issued by the trusts, regardless of
whether the trusts actually receive scheduled payments on the related underlying
loans. As consideration for Farmer Mac's assumption of the credit risk on these
mortgage pass-through certificates, Farmer Mac receives an annual guarantee fee
that is based upon the outstanding balance of the Farmer Mac Guaranteed
Security.
Farmer Mac is required to perform under its obligation when the loans
underlying Farmer Mac Guaranteed Securities do not make their scheduled
installment payments. When a loan underlying a Farmer Mac I Guaranteed Security
becomes 90 days or more past due, Farmer Mac has the option to repurchase the
loan from the trust and generally does repurchase such loans thereby reducing
the principal balance of the outstanding Farmer Mac Guaranteed Securities.
The following table presents the maximum principal amount of potential
undiscounted future payments that Farmer Mac could be required to make under
off-balance sheet Farmer Mac Guaranteed Securities as of March 31, 2003 and
December 31, 2002, not including offsets provided by any recourse provisions,
recoveries from third parties or collateral for the underlying loans.
Outstanding Balance of
Off-Balance Sheet Farmer Mac Guaranteed Securities
- --------------------------------------------------------------------------------
March 31, December 31,
2003 2002
----------------- ---------------
(in thousands)
Farmer Mac I Guaranteed Securities:
Post-1996 Act $ 271,746 $ 299,940
Pre-1996 Act - -
----------------- ---------------
Total Farmer Mac I 271,746 299,940
Farmer Mac II Guaranteed Securities 65,952 67,109
----------------- ---------------
Total Farmer Mac I and II $ 337,698 $ 367,049
----------------- ---------------
If Farmer Mac exercises its option to purchase a loan that is collateral
for a Farmer Mac I Guaranteed Security, Farmer Mac would have the right to
enforce the terms of the loan, and in the event of a default, would have the
right to foreclose upon the underlying collateral. Farmer Mac typically recovers
a significant portion of the value of defaulted loans purchased either through
borrower payments, loan payoffs, payments by third parties or foreclosure and
sale of the collateral.
Farmer Mac has recourse to the USDA for any amounts advanced for the timely
payment of principal and interest on Farmer Mac II Guaranteed Securities. That
recourse is the USDA guarantee, a full faith and credit obligation of the United
States that becomes enforceable if a lender fails to repurchase the
USDA-guaranteed portion from its owner within 30 days after written demand from
the owner when (a) the borrower under the guaranteed loan is in default not less
than 60 days in the payment of any principal or interest due on the
USDA-guaranteed portion, or (b) the lender has failed to remit to the owner the
payment made by the borrower on the USDA-guaranteed portion or any related loan
subsidy within 30 days after the lender's receipt of the payment.
As of March 31, 2003, the weighted-average remaining maturity of all loans
underlying off-balance sheet Farmer Mac Guaranteed Securities was 13.4 years.
For the off-balance sheet Farmer Mac I Guaranteed Securities that were executed
on or before December 31, 2002, Farmer Mac has recorded an allowance for
probable losses that was $1.2 million as of March 31, 2003 and $1.3 million as
of December 31, 2002. For those securities that were issued or modified on or
after January 1, 2003, Farmer Mac has recorded the fair value of its obligation
to stand ready under the guarantee as a liability. As of March 31, 2003, this
liability approximated $0.2 million and was included in other liabilities on the
condensed consolidated balance sheet.
Long-Term Standby Purchase Commitments
An LTSPC is a commitment by Farmer Mac to purchase eligible loans on one or
more undetermined future dates. In consideration for Farmer Mac's assumption of
the credit risk on loans underlying an LTSPC, Farmer Mac receives an annual
commitment fee on the outstanding balance of those loans in monthly installments
based on the outstanding balance of those loans.
An LTSPC permits a seller to nominate from its portfolio a segregated pool
of loans, which are retained in the seller's portfolio. Upon nomination, Farmer
Mac reviews the loan portfolio to confirm that it is in compliance with Farmer
Mac's underwriting standards. Upon Farmer Mac's acceptance of the conforming
loans, the seller effectively transfers the credit risk on those loans to Farmer
Mac, thereby reducing the seller's credit and concentration exposures and,
consequently, its regulatory capital requirements and loss reserve requirements.
Credit risk is transferred via Farmer Mac's commitment to purchase some or all
of the segregated loans from the counterparty based upon Farmer Mac's original
credit review and acceptance of the credit risk on the loans.
The specific events or circumstances that would require Farmer Mac to
perform under its LTSPCs include (1) the determination by the holder of the
LTSPC to sell some or all of the loans under the LTSPC to Farmer Mac or (2) the
failure of the borrower under any loan to make installment payments under that
loan for a period of 120 days.
The LTSPC commits Farmer Mac to purchase these loans:
o At par, if the loans become four months delinquent, with accrued and
unpaid interest payable out of any future loan payments or liquidation
proceeds received;
o At a mark-to-market price, if the loans are not delinquent and are
standard Farmer Mac loan products;
o At a mark-to-market negotiated price for all (but not some) loans in
the pool, if they are not four months delinquent; or
o In exchange for Farmer Mac Guaranteed Securities.
As of March 31, 2003 and December 31, 2002, 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 $2.7
billion and $2.7 billion, respectively.
If requested to purchase the underlying loans, Farmer Mac would have the
right to enforce the terms of the loans, and in the event of loan default, would
have the right to foreclose upon the underlying collateral. To date, Farmer Mac
has not incurred any charge-offs on LTSPCs. However, Farmer Mac believes that
the credit risk assumed in LTSPC transactions is the same as the credit risk
assumed on Post-1996 Act Farmer Mac I Guaranteed Securities. Farmer Mac believes
that it will generally recover a significant portion of the value of the
defaulted loans purchased either through borrower payments, loan payoffs,
payments by third parties or foreclosure and sale of the collateral.
As of March 31, 2003, the weighted-average remaining maturity of all loans
underlying LTSPCs was 15.5 years. For the LTSPCs that were executed on or before
December 31, 2002, Farmer Mac has recorded an allowance for probable losses that
was $12.4 million as of March 31, 2003 and $11.4 million as of December 31,
2002. For those LTSPCs that were issued or modified on or after January 1, 2003,
Farmer Mac has recorded the fair value of its obligation to stand ready under
the commitment as a liability. As of March 31, 2003, this liability approximated
$2.0 million and was included in other liabilities on the condensed consolidated
balance sheet.
Note 3. Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income plus other changes
in stockholders' equity not resulting from investments by or distributions to
stockholders. The following table sets forth comprehensive income (loss) for the
three months ended March 31, 2003 and 2002. For the three months ended March 31,
2003 and 2002, the changes in unrealized gains on securities available-for-sale
are net of the related deferred taxes of $1.7 million and $4.5 million,
respectively. The changes in the fair value of the financial derivatives
classified as cash flow hedges for the three months ended March 31, 2003 and
2002 are net of deferred taxes of $0.6 million and $1.7 million, respectively.
Three Months Ended
March 31,
-------------------------
2003 2002
------------ ------------
(in thousands)
Net income $ 8,983 $ 7,202
Change in unrealized gain on securities
available-for-sale, net of taxes (3,157) (8,327)
Change in the fair value of financial derivatives
classified as cash flow hedges, net of taxes and
reclassification adjustments 1,146 3,250
------------ ------------
Comprehensive income (loss) $ 6,972 $ 2,125
------------ ------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Special Note Regarding Forward-Looking Statements
Certain statements made in this Form 10-Q 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 prospects for earnings and growth in loan purchase,
guarantee, LTSPC and securitization volume; trends in net interest income and
provision for losses; changes in capital position; and other business and
financial matters.
Management's expectations for Farmer Mac's future necessarily involve a
number of assumptions, 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 regulatory restrictions or
requirements on Farmer Mac by the Farm Credit Administration ("FCA")
or other government agencies;
o legislative or regulatory developments or interpretations of Farmer
Mac's statutory charter that could adversely affect Farmer Mac or the
ability of certain lenders to participate in its programs or the terms
of any such participation;
o substantial changes in interest rates, agricultural land values,
commodity prices, export demand for U.S. agricultural products and the
general economy;
o protracted adverse weather, market or other conditions affecting
particular geographic regions or particular commodities related to
agricultural mortgage loans backing Farmer Mac I Guaranteed Securities
or under LTSPCs;
o Farmer Mac's continuing 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 level;
o the outcome of the pending review of Farmer Mac by the General
Accounting Office;
o the rate of growth in agricultural mortgage indebtedness;
o borrower preferences for fixed-rate agricultural mortgage
indebtedness;
o competition in the origination or purchase of agricultural mortgage
loans and the sale of agricultural mortgage-backed and debt
securities; or
o the effects on the agricultural economy of any changes in federal
assistance for agriculture.
The foregoing factors are not exhaustive. Other sections of this report may
include additional factors that could adversely affect Farmer Mac's business and
its financial performance. Furthermore, new risk factors emerge from time to
time and it is not possible for management to predict all such risk factors, nor
assess the effects of such factors on Farmer Mac's business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from the expectations expressed or implied by the forward-looking
statements. In light of these potential risks and uncertainties, no undue
reliance should be placed on any forward-looking statements expressed in this
report. Furthermore, Farmer Mac undertakes no obligation to release publicly the
results of revisions to any forward-looking statements that may be made to
reflect any future events or circumstances except as otherwise mandated by the
Securities and Exchange Commission.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires the
use of estimates and assumptions that affect the amounts reported in the
consolidated financial statements and related notes for the periods presented.
Actual results could differ from those 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. The allowance for losses is
presented in three components on the 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)";
and
o an allowance for losses on loans underlying Post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs, which is included in the balance
sheet under "Reserve for losses."
The purpose of the allowance for losses is to provide for estimated losses
that are probable to have occurred as of the balance sheet date, and not to
predict or account for future potential losses. The determination of the
allowance for losses requires management to make significant estimates based on
information available as of the balance sheet date, including the amounts and
timing of losses and current market and economic conditions. These estimates are
subject to change in future reporting periods if such conditions and information
change. For example, a continued decline in the national or agricultural
economies could result in an increase in delinquencies or foreclosures, which
may require additional allowances for losses in future periods.
Farmer Mac maintains an allowance for losses to cover estimated probable
losses on its loans held, real estate owned and loans underlying Post-1996 Act
Farmer Mac I Guaranteed Securities and LTSPCs. In estimating probable losses,
management considers the results of its proprietary loan pool simulation and
guarantee fee model. Those results may be modified by the application of
management's judgment that takes into account factors such as economic
conditions, geographic and agricultural commodity concentrations of Farmer Mac's
portfolio, the credit profile of the portfolio, delinquency trends of the
portfolio and historical charge-offs and recovery activities of the portfolio.
The allowance 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 reduced by charge-offs for actual losses, net of
recoveries.
No allowance for losses has been made for loans underlying Farmer Mac I
Guaranteed Securities issued prior to the 1996 Act or 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. USDA-guaranteed portions
collateralizing Farmer Mac II Guaranteed Securities are obligations backed by
the full faith and credit of the United States. To date, Farmer Mac has
experienced no 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.
Further information regarding the allowance for losses is included in
"--Quantitative and Qualitative Disclosures About Market Risk Management--Credit
Risk."
Results of Operations
Overview. Net income available to common stockholders for first quarter
2003, was $8.4 million or $0.70 per diluted common share, compared to $7.2
million or $0.59 per diluted common share for first quarter 2002.
Farmer Mac's revenue growth continued in first quarter 2003, reflecting the
effects of outstanding guarantee and commitment volume as of March 31, 2003 that
was more than $1.1 billion higher than at the close of first quarter 2002 and
increased net interest income. During first quarter 2003, Farmer Mac:
o added $166.6 million of Farmer Mac I eligible loans under LTSPCs;
o purchased $59.1 million of newly originated Farmer Mac I eligible
loans; and
o purchased $41.9 million of Farmer Mac II guaranteed portions of loans
guaranteed by USDA.
USDA is currently forecasting net cash income on farms for 2003 to be $51.3
billion, up 11 percent from 2002 forecasted levels of $46.3 billion. The
forecasted net cash income on farms for 2003 includes government payments of
$17.6 billion, as compared to $13.1 billion in 2002, and increases in total crop
and livestock receipts. USDA forecasts farm real estate values to rise by
approximately 1.5 percent in 2003, slowing slightly from their growth of 4.0
percent in 2002, 5.2 percent in 2001, and 6.8 percent in 2000. On average, farm
real estate values grew nearly 4.0 percent annually during the 1990s.
Regionally, farm real estate values may vary with differing rates of increase,
or even decrease, depending on differences in land quality and location,
commodities grown, credit conditions, non-farm investment opportunities,
government farm policies, and production risks and weather uncertainties unique
to each region's agriculture.
Set forth below is a more detailed discussion of Farmer Mac's results of
operations.
Net Interest Income. Net interest income was $9.5 million for first quarter
2003, compared to $7.5 million for first quarter 2002. The net interest yield,
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 95 basis points for first quarter 2003,
compared to 89 basis points for first quarter 2002. The net interest yields for
first quarter 2003 and 2002 included the benefits of yield maintenance payments
of 14 basis points and 7 basis points, respectively. The income realized from
yield maintenance payments is, in effect, the accelerated present value of an
expected future interest income stream, which, in turn, leads to slightly
reduced net interest income in future reporting periods. Because the timing and
size of these payments vary greatly, variations should not be considered
indicative of positive or negative trends to gauge future financial results. The
effect of the adoption of SFAS 140 was a reclassification of approximately $1.1
million (11 basis points) of guarantee fee income as interest income for first
quarter 2003, compared to an immaterial amount for first quarter 2002.
The following table provides information regarding the average balances and
rates of interest-earning assets and funding for the three months ended March
31, 2003 and 2002. The balance of non-accruing loans is included in the average
balance of interest earning loans presented, though no related income is
included in the income figures presented. The decreases in the average rates for
cash and cash equivalents reflect their short-term nature. The decreases in the
average rates for investments and loans and Farmer Mac Guaranteed Securities
reflect the relatively large proportion of adjustable rates in those asset
categories (78.0 percent of investments and 64.1 percent of loans and Farmer Mac
Guaranteed Securities). The decrease in the average rate for discount notes also
reflects their short-term nature. The decreases in all of these rates track the
general decrease in market rates between the two periods.
Three Months Ended March 31,
------------------------------------------------------------------------------------------
2003 2002
-------------------------------------------- ------------------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
-------------- -------------- -------------- -------------- -------------- ------------
(dollars in thousands)
Interest-earning assets:
Cash and cash equivalents $ 727,265 $ 2,789 1.53% $ 497,461 $ 2,585 2.08%
Investments 815,501 6,388 3.13% 944,130 7,742 3.28%
Loans & Farmer Mac Guaranteed Securities 2,444,857 32,361 5.29% 1,904,420 26,817 5.63%
--------------- -------------- ------------- --------------- -------------- -----------
Total interest earning assets 3,987,623 41,538 4.17% 3,346,011 37,144 4.44%
--------------- -------------- --------------- --------------
Funding
Discount notes 2,738,155 16,467 2.41% 2,217,218 14,161 2.55%
Medium-term notes 1,085,048 15,619 5.76% 997,003 15,513 6.22%
--------------- -------------- ------------- --------------- -------------- -----------
Total interest-bearing liabilities 3,823,203 32,086 3.36% 3,214,221 29,674 3.69%
Net non-interest-bearing funding 164,420 - - 131,790 - -
--------------- -------------- ------------- --------------- -------------- -----------
Total funding $3,987,623 32,086 3.22% $3,346,011 29,674 3.55%
--------------- -------------- ------------- --------------- -------------- -----------
Net interest income/yield $ 9,452 0.95% $ 7,470 0.89%
-------------- ------------- -------------- -----------
The following table sets forth information regarding the changes in the
components of Farmer Mac's net interest income for the periods indicated. For
each category, information is provided on changes attributable to changes in
volume (change in volume multiplied by old rate) and changes in rate (change in
rate multiplied by old volume). Combined rate/volume variances, the third
element of the calculation, are allocated based on their relative size. The
decreases due to rate reflect the short-term or adjustable-rate nature of the
assets or liabilities and the general decreases in market rates described above.
Three Months Ended March 31, 2003
Compared to Three Months Ended
March 31, 2002
--------------------------------------------
Increase/(Decrease) Due to
--------------------------------------------
Rate Volume Total
--------------- -------------- -------------
(in thousands)
Income from interest-earning assets
Cash and cash equivalents $ (267) $ 471 $ 204
Investments (335) (1,019) (1,354)
Loans & Farmer Mac Guaranteed Securities (1,594) 7,138 5,544
--------------- -------------- -------------
Total (2,196) 6,590 4,394
Expense from interest-bearing liabilities (480) 2,892 2,412
--------------- -------------- -------------
Change in net interest income $ (1,716) $ 3,698 $ 1,982
--------------- -------------- -------------
Guarantee and Commitment Fees. Guarantee and commitment fees were $5.1
million for first quarter 2003, compared to $4.6 million for first quarter 2002.
The increase in guarantee and commitment fees reflects an increase in the
average balance of outstanding guarantees and LTSPCs. Excluding the effects of
the adoption of SFAS 140 that reclassified $1.1 million of guarantee fee income
as interest income, guarantee and commitment fees for first quarter 2003 would
have been $6.2 million. The difference or "spread" between the cost of Farmer
Mac's debt funding for loans and Post-1996 Act Farmer Mac I Guaranteed
Securities held on its books and the yield on those assets is composed of one
component that compensates for credit risk, which would continue to be received
by Farmer Mac as a guarantee fee if the assets were sold, and another component
that compensates for interest rate risk, which would not typically continue to
be received by Farmer Mac (except to the extent attributable to any retained
interest-only strip) if the asset were sold.
Miscellaneous income was $0.3 million for first quarter 2003, compared to
$0.4 million for first quarter 2002.
Expenses. Compensation and employee benefits for first quarter 2003 were
$1.4 million, compared to $1.3 million for first quarter 2002. Regulatory fees
assessed by FCA for first quarter 2003 were $0.4 million, compared to $0.2
million for first quarter 2002. General and administrative expenses for first
quarter 2003 were $1.2 million, compared to $1.1 million for first quarter 2002.
Farmer Mac expects that general and administrative costs, including professional
fees, will remain at higher than historical levels as a result of increased
costs to ensure compliance with the new statutory and regulatory requirements
relating to corporate governance.
Farmer Mac's provision for losses was $0.9 million for first quarter 2003,
compared to $2.0 million for first quarter 2002. (See "--Quantitative and
Qualitative Disclosures About Market Risk Management--Credit Risk" for
additional information regarding Farmer Mac's provision for losses and provision
for loan losses.) As of March 31, 2003, Farmer Mac's total allowance for losses
totaled $21.1 million, or 0.44 percent of outstanding loans held or loans
underlying Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, compared
to $20.0 million (0.42 percent) as of December 31, 2002.
Gain on the Repurchase of Debt. For first quarter 2002, Farmer Mac
recognized a gain of $2.5 million on the repurchase of $43.8 million of
outstanding Farmer Mac debt that had a maturity date of October 14, 2011 and an
annual interest rate of 5.4 percent. Prior to the adoption of SFAS 145 on
January 1, 2003, this gain was presented as a net after-tax extraordinary gain
of $1.6 million. These debt securities were replaced with new fixed-rate funding
to the same maturity dates at more attractive interest rates, which preserves
Farmer Mac's asset-liability match and reduces future interest expense. There
were no gains or losses on the repurchase of debt during first quarter 2003.
Gains on Financial Derivatives and Trading Assets. For first quarter 2003,
the gain on financial derivatives and trading assets resulting from the effects
of SFAS 133 was $3.8 million, compared to $0.2 million for first quarter 2002.
The gains resulted primarily from increases in the fair values of interest rate
contracts.
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. These non-GAAP performance measures are used by
Farmer Mac to develop financial plans, to measure Corporate performance, and to
set incentive compensation. In management's view, the non-GAAP measures provide
relatively less volatile financial information, and are a more accurate
representation of Farmer Mac's financial 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 disclosures are not intended to replace GAAP information but, rather, to
supplement it.
One such measure is core earnings, which Farmer Mac developed to present
net income less the after-tax effects of SFAS 133, and less the after-tax net
gains and losses on the repurchase of debt that, prior to January 1, 2003, were
reported as extraordinary items. Core earnings for first quarter 2003 were $5.9
million, compared to $5.3 million for first quarter 2002. The reconciliation of
GAAP net income available to common stockholders to core earnings is presented
in the following table:
Reconciliation of GAAP Results to Core Earnings
- ---------------------------------------------------------------------------------
Three Months Ended
-------------------------------------------
March 31, 2003 March 31, 2002
------------------- ---------------------
(in thousands)
GAAP net income available
to common stockholders $ 8,423 $ 7,202
Less the effects of FAS 133:
Gains/(Losses) on financial
derivatives and trading
assets, net of tax 2,441 146
Benefit from non-amortization
of premium payments
on financial derivatives,
net of tax 81 101
Less gains/(losses) on the
repurchase of debt previously
reported as extraordinary items - 1,619
------------------- -------------------
Core earnings $ 5,901 $ 5,336
------------------- -------------------
Business Volume. Farmer Mac purchases eligible loans or USDA-guaranteed
portions of loans, securitizes those loans and guarantees timely payments of
principal and interest on securities backed by those loans. Farmer Mac may
retain those securities in its portfolio or sell them to third parties through
the capital markets. Farmer Mac also enters into LTSPCs for eligible loans and
exchanges of Farmer Mac Guaranteed Securities for eligible loans or
USDA-guaranteed portions of loans ("swaps"). Loans are brought into the Farmer
Mac I and Farmer Mac II programs as follows:
o Farmer Mac's purchases of eligible loans and guarantees of securities
backed by those loans are part of the Farmer Mac I program (whether
the securities are retained by Farmer Mac or sold);
o Farmer Mac's purchases of USDA-guaranteed portions of loans and
guarantees of securities backed by those guaranteed portions are part
of the Farmer Mac II program (whether the securities are retained by
Farmer Mac or sold);
o Farmer Mac's commitments through LTSPCs, which may include either
newly originated or seasoned eligible loans, are part of the Farmer
Mac I program; and
o Farmer Mac's swaps of Farmer Mac Guaranteed Securities for
USDA-guaranteed portions of loans are part of the Farmer Mac II
program and Farmer Mac swaps of Farmer Mac Guaranteed Securities for
any other eligible loans are included in the Farmer Mac I program.
The following table sets forth the amount of all Farmer Mac I and Farmer
Mac II loan purchase and guarantee activities for newly originated and current
seasoned loans during the periods indicated.
Three Months Ended
March 31,
-----------------------------
2003 2002
-------------- -------------
(in thousands)
Loan purchase and guarantee and
commitment activity:
Farmer Mac I
Loans $ 59,054 $ 74,875
LTSPCs 166,574 338,821
Farmer Mac II Guaranteed Securities 41,893 39,154
-------------- -------------
Total purchases, guarantees
and commitments $ 267,521 $452,850
-------------- -------------
Farmer Mac I Guaranteed Securities issuances:
Retained $ - $ -
Sold 13,261 -
-------------- -------------
Total $ 13,261 $ -
-------------- -------------
The purchase price of newly originated and seasoned eligible loans and
portfolios purchased by Farmer Mac (none of which were delinquent at the time of
purchase) is the fair value based on current market interest rates and Farmer
Mac's target net yield, which includes an amount to compensate Farmer Mac for
credit risk that is similar to the guarantee or commitment fee it receives for
accepting credit risk on loans underlying Post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs. As part of fulfilling its guarantee obligations for
Farmer Mac I Guaranteed Securities and assumption of credit risk on commitments
to purchase eligible loans underlying LTSPCs, Farmer Mac purchases defaulted
loans (all of which are at least 90 days delinquent at the time of purchase) out
of those securities and pools. The purchase price for defaulted loans purchased
out of Farmer Mac I Guaranteed Securities is the current outstanding principal
balance of the loan plus accrued and unpaid interest. The purchase price for
defaulted loans purchased under an LTSPC is the current outstanding principal
balance of the loan, with accrued and unpaid interest on the defaulted loans
payable out of any future loan payments or liquidation proceeds received. The
following table presents Farmer Mac's loan purchases of newly originated and
current seasoned loans and defaulted loans purchased underlying Farmer Mac I
Guaranteed Securities and LTSPCs.
Three Months Ended
March 31,
-----------------------------
2003 2002
-------------- -------------
(in thousands)
Farmer Mac I newly originated
and current seasoned loan purchases $ 59,054 $ 74,875
Defaulted loans purchased underlying
off-balance sheet Farmer Mac I
Guaranteed Securities 23,478 19,865
Defaulted loans underlying
on-balance sheet Farmer Mac I
Guaranteed Securities transferred
to loans 20,019 6,554
Defaulted loans purchased
underlying LTSPCs 859 197
The decrease in newly originated and current seasoned loan purchases was
attributable to a decrease in newly originated Farmer Mac I loan purchases. The
combined increase in defaulted loans purchased and in defaulted loans
transferred to loans reflect:
o Farmer Mac's practice of purchasing 90-day delinquent loans out of
Farmer Mac I Guaranteed Securities; and
o recordation in the consolidated financial statements of other loans
over which Farmer Mac regained effective control during the period.
With respect to the second circumstance cited, when particular criteria are met,
such as the default of the borrower, Farmer Mac becomes entitled to exercise its
option to purchase the defaulted loans underlying Farmer Mac Guaranteed
Securities (these options are commonly referred to as "removal-of-account"
provisions). Farmer Mac records these loans in the consolidated financial
statements during the period in which Farmer Mac has the option to repurchase
the loans and therefore regains effective control over the transferred loans.
The weighted-average age of the Farmer Mac I newly originated and current
seasoned loans purchased during first quarter 2003 and first quarter 2002 was
1.8 months and 2.3 months, respectively. Of the Farmer Mac I newly originated
and current seasoned loans purchased during first quarter 2003 and first quarter
2002, 77 percent and 24 percent, respectively, had principal amortization
periods longer than the maturity date, resulting in balloon payments at
maturity, with a weighted-average remaining term to maturity of 15.3 years and
13.8 years, respectively. The weighted-average age of delinquent loans purchased
out of securitized pools and LTSPCs during first quarter 2003 and first quarter
2002 was 4.8 years and 4.1 years, respectively.
Indicators of future loan purchase and guarantee volume (but not of future
LTSPC, swap or portfolio purchase volume) in the immediately succeeding
reporting period include outstanding commitments to purchase loans (other than
under an LTSPC) and the total balance of loans submitted for approval or
approved but not yet purchased. Many purchase commitments entered into by Farmer
Mac are mandatory delivery commitments. If a seller obtains a mandatory
commitment and is unable to deliver the loans as required thereunder, Farmer Mac
requires the seller to pay a fee to modify, extend or cancel the commitment. As
of March 31, 2003, outstanding commitments to purchase Farmer Mac I loans
totaled $15.1 million, compared to $18.6 million as of March 31, 2002. Of the
total Farmer Mac I commitments outstanding as of March 31, 2003 and 2002, $5.8
million and $4.3 million, respectively, were mandatory commitments. Loans
submitted for approval or approved but not yet committed to purchase totaled
$67.3 million as of March 31, 2003, compared to $82.9 million as of March 31,
2002. Not all of these loans will be purchased, as some will ultimately be
denied for credit reasons or withdrawn by the seller.
While significant progress has been made in developing the secondary market
for agricultural mortgages, Farmer Mac continues to face the challenges of
establishing a market where none previously existed. Acceptance of Farmer Mac's
programs is increasing among lenders, reflecting the competitive rates, terms
and products offered and the advantages Farmer Mac believes its programs
provide. As of March 31, 2003, Farmer Mac's outstanding program volume was $5.5
billion, which represented approximately 12% of management's estimate of a $46
billion market of eligible agricultural mortgage loans. For Farmer Mac to
succeed in realizing its business development and profitability objectives over
the longer term, the use of Farmer Mac's programs and products by agricultural
mortgage lenders, whether traditional or non-traditional, must continue to
expand. New business volume was down in first quarter 2003. Farmer Mac believes
this is traceable to general conditions in the agricultural mortgage market
affecting all agricultural mortgage lenders, including the reduced interest of
borrowers in long-term fixed rate financing, diminished expansion in the capital
intensive livestock sector, and a slowdown in the capital intensive planting of
permanent crops, as well as to residual effects of adverse publicity based on
misinformation about Farmer Mac disseminated in 2002. Nonetheless, while lender
interest in Farmer Mac continues to recover, for 2003 Farmer Mac foresees a
continuation in the flow of new volume in the form of Farmer Mac I and II
individual loan purchases and additions to existing LTSPC arrangements at levels
approximating those of 2002. Farmer Mac believes that prospects for larger
portfolio transactions similar to those that have accounted for a significant
portion of growth in prior years continue to exist, but no assurance can be
given at this time as to the certainty of such transactions.
As of March 31, 2003, there were 71 approved loan sellers in the Farmer Mac
I program ranging from single-office to multi-branch institutions, spanning
community banks, Farm Credit System associations, mortgage companies, large
multi-state Farm Credit System banks, commercial banks and insurance companies.
During 2002, there were 79 approved loan sellers active in the Farmer Mac I
program.
To be considered for approval as a Farmer Mac I seller, a financial
institution must meet criteria established by Farmer Mac, including:
o own a requisite amount of Farmer Mac Class A or Class B voting common
stock according to a schedule prescribed for the size and type of
institution;
o have the ability and experience to make or purchase and sell
agricultural mortgage loans of the type that will qualify for purchase
by Farmer Mac and service such mortgage loans in accordance with the
Farmer Mac requirements either through its own staff or through
contractors and originators;
o maintain a minimum adjusted net worth of $1.0 million;
o maintain a fidelity bond and errors and omissions insurance coverage
(or acceptable substitute insurance coverage) in a prescribed amount
according to the size of the institution; and
o enter into a Seller/Servicer agreement to comply with the terms of the
Farmer Mac Seller/Servicer Guide, including representations and
warranties regarding the origination of eligible loans.
Any lender authorized by the USDA to obtain a USDA guarantee on a loan may
be a seller in the Farmer Mac II program. As of March 31, 2003, there were 132
active sellers in the Farmer Mac II program, compared to 143 as of December 31,
2002 and 130 as of March 31, 2002. Sellers in the Farmer Mac II program consist
mostly of community and regional banks.
Balance Sheet Review
During the three months ended March 31, 2003, total assets decreased by
$28.5 million from December 31, 2002, with decreases in program assets (Farmer
Mac Guaranteed Securities and loans) of $36.4 million (exclusive of real estate
owned) partially offset by increases in non-program assets. For further
information regarding on- and off-balance sheet program activities, see
"--Off-Balance Sheet Program Activities" below. Consistent with the decrease in
total assets during the period, total liabilities decreased by $34.9 million
from December 31, 2002 to March 31, 2003.
During the three months ended March 31, 2003, accumulated other
comprehensive income (loss) decreased $2.0 million, which is the net effect of a
$3.1 million decrease in unrealized gains on securities available for sale and a
$1.1 million increase in the fair value of financial derivatives classified as
cash flow hedges. Accumulated other comprehensive income (loss) is not a
component of Farmer Mac's core capital or regulatory capital.
As of March 31, 2003, Farmer Mac's core capital totaled $192.4 million,
compared to $184.0 million as of December 31, 2002. As of March 31, 2003, core
capital exceeded Farmer Mac's statutory minimum capital requirement of $136.5
million by $55.9 million.
FCA issued its final risk-based capital regulation for Farmer Mac on April
12, 2001 and the Corporation was required to meet the risk-based capital
standards beginning on May 23, 2002. The risk-based capital stress test
promulgated by FCA is intended to determine the amount of regulatory capital
(core capital plus allowance for losses) that Farmer Mac would need to maintain
positive capital during a ten-year period in which:
o annual losses occur at a rate of default and severity "reasonably
related" to the rates of the highest sequential two years in a limited
U.S. geographic area; and
o there is an initial interest rate shock at the lesser of 600 basis
points or 50 percent of the ten-year U.S. Treasury rate, and interest
rates remain at such level for the remainder of the period.
The risk-based capital stress test then adds an additional 30 percent to the
resulting capital requirement for management and operational risk.
Farmer Mac was in compliance with the risk-based capital standards under
the regulation as of March 31, 2003. As of March 31, 2003, the risk-based
capital stress test generated a regulatory capital requirement of $57.9 million.
Farmer Mac's regulatory capital of $213.5 million exceeded that amount by
approximately $155.6 million. The decrease in the risk-based capital requirement
from December 31, 2002 ($73.4 million) to March 31, 2003 ($57.9 million) was a
result of changes in the interest rate environment and the ageing of Farmer
Mac's loan portfolio. Farmer Mac is required to hold capital at the higher of
the statutory minimum capital requirement or the amount required by the
risk-based capital stress test.
Off-Balance Sheet Program Activities
Farmer Mac offers approved agricultural and rural residential mortgage
lenders two off-balance sheet alternatives to increase their liquidity or
lending capacity while retaining the cash flow benefits of their loans: (1)
Farmer Mac Guaranteed Securities, which are available through either the Farmer
Mac I program or the Farmer Mac II program, and (2) LTSPCs, which are available
only through the Farmer Mac I program. To be eligible for Farmer Mac I secondary
market transactions, a loan must meet Farmer Mac's credit underwriting,
appraisal and documentation standards. Accordingly, Farmer Mac believes the
credit risk it assumes in each of the two Farmer Mac I transaction alternatives
is the same and considers the effects of all on- and off-balance sheet
activities on its overall portfolio diversification and credit risk. See Note 2
to Farmer Mac's condensed consolidated financial statements above for more
detail on the Corporation'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 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 risk. 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 in the event of prepayment, compensate the Corporation for its
interest rate risks to a large degree. As of March 31, 2003, 55 percent of the
outstanding balance of all loans held and loans underlying on-balance sheet
Farmer Mac I Guaranteed Securities (including 90 percent of all loans with fixed
interest rates) were covered by yield maintenance provisions and other
prepayment penalties. Of the Farmer Mac I new and current loans purchased in
first quarter 2003, 10 percent had yield maintenance or another form of
prepayment protection (including 37 percent of all loans with fixed interest
rates). None of the USDA-guaranteed portions underlying Farmer Mac II Guaranteed
Securities had yield maintenance provisions.
The goal of interest rate risk management at Farmer Mac is to create a
portfolio that generates stable earnings and value across a variety of interest
rate environments. Farmer Mac's primary strategy for managing interest rate risk
is to fund asset purchases with liabilities that have similar durations so that
they will perform similarly as interest rates change. To achieve this match,
Farmer Mac issues discount notes and both callable and non-callable medium-term
notes across a spectrum of maturities and purchases financial derivatives to
alter the duration of its liabilities and so its interest rate sensitivities. By
using a blend of liabilities that includes callable debt, the interest rate
sensitivities of the liabilities tend to increase or decrease as interest rates
change in a manner similar to changes in the interest rate sensitivities of the
assets.
Farmer Mac's $685.8 million of cash and cash equivalents as of March 31,
2003 matures within three months and are match-funded with discount notes having
similar maturities. Investment securities of $887.3 million as of March 31, 2003
consist of $691.8 million (78.0 percent) of floating rate securities that all
have rates that adjust within one year. These floating rate investments are
funded using a series of discount note issuances. Each successive discount note
issuance matures on or about the corresponding repricing date of the related
investment.
Farmer Mac is also subject to interest rate risk on loans, including loans
that Farmer Mac has committed to acquire but has not yet purchased. When Farmer
Mac commits to purchase a loan, it is exposed to interest rate risk between the
time it commits to purchase the loan and the time it either:
o sells Farmer Mac Guaranteed Securities backed by the loan; or
o issues debt to retain the loan in its portfolio (although issuing debt
to fund the loan as an investment does not fully eliminate interest
rate risk due to the possible timing differences in the cash flows of
the assets and related liabilities, as discussed above).
Farmer Mac manages the interest rate risk related to such loans, and any related
Farmer Mac Guaranteed Securities or debt issuance, through the use of forward
sale contracts on the debt and mortgage-backed securities of other
government-sponsored enterprises and futures contracts involving U.S. Treasury
securities. Farmer Mac uses forward sale contracts on government-sponsored
enterprise securities to reduce its interest rate exposure to changes in both
Treasury rates and spreads on Farmer Mac debt and Farmer Mac I Guaranteed
Securities.
Since interest rate sensitivity may change with the passage of time and as
interest rates change, Farmer Mac assesses this exposure on a regular basis and
rebalances its portfolio of assets and liabilities as necessary through:
o purchasing mortgage assets in the ordinary course of business;
o refunding existing liabilities; or
o using derivatives to alter the characteristics of existing assets or
liabilities.
The most strenuous measure of Farmer Mac's interest rate risk is the
sensitivity of its Market Value of Equity ("MVE") to parallel yield curve
shocks. MVE represents the present value of all future cash flows from on- and
off-balance sheet assets, liabilities and financial derivatives, discounted at
current interest rates and spreads. The following schedule summarizes the
results of Farmer Mac's MVE sensitivity analysis as of March 31, 2003 and
December 31, 2002 to an immediate and instantaneous parallel shift in the yield
curve.
Percentage Change in MVE from
Base Case
---------------------------------
Interest Rate March 31, December 31,
Scenario 2003 2002
--------------- --------------- ----------------
+ 300 bp 11.6% 15.6%
+ 200 bp 8.1% 11.0%
+ 100 bp 4.4% 5.9%
- 100 bp -5.7% -7.1%
- 200 bp N/A* N/A*
- 300 bp N/A* N/A*
* As of the date indicated, a -200 bp parallel
shift of the U. S. Treasury yield curve produced
negative interest rates for maturities of 2 years
and shorter.
During 2002 and first quarter 2003, interest rates fell to historic lows
and interest rate volatility increased significantly. Despite the volatile
interest rate environment, Farmer Mac's interest rate sensitivity during first
quarter 2003 remained relatively stable and at relatively low levels. As of
March 31, 2003, Farmer Mac's effective duration gap, another standard measure of
interest rate risk, decreased to minus 3.0 months, compared to minus 3.6 months
as of December 31, 2002. As of both March 31, 2003 and December 31, 2002, Farmer
Mac's MVE and net interest income ("NII") showed positive sensitivity to
increasing interest rates and negative sensitivity to continued decreases in
interest rates.
As of March 31, 2003, a uniform or "parallel" increase of 100 basis points
would have increased NII, a shorter-term measure of interest rate risk, by 5.2
percent, while a parallel decrease of 100 basis points would have decreased NII
by 5.7 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. Both MVE and NII continue to be less sensitive
to non-parallel shocks than to the parallel shocks. The sensitivity 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.
The economic effects of financial derivatives, including interest rate
swaps, are included in the MVE, NII and duration gap analyses. Farmer Mac
generally enters into various interest rate swaps to reduce interest rate risk
as follows:
o "floating-to-fixed interest rate swaps" in which it pays fixed rates
of interest to, and receives floating rates of interest from,
counterparties; these swaps adjust the characteristics of short-term
debt to match more closely the cash flow and duration characteristics
of longer-term reset and fixed-rate mortgages and other assets and
provide an overall lower effective cost of borrowing than would
otherwise be available in the conventional debt market;
o "fixed-to-floating interest rate swaps" in which it receives fixed
rates of interest from, and pays floating rates of interest to,
counterparties; these swaps adjust the characteristics of long-term
debt to match more closely the cash flow and duration characteristics
of short-term assets; and
o "basis swaps" in which it pays variable rates of interest based on one
index to, and receives variable rates of interest based on another
index from, counterparties; these swaps alter interest rate indices of
liabilities to match those of assets, and vice versa.
As of March 31, 2003, Farmer Mac had $1.187 billion combined notional amount of
interest rate swaps with terms ranging from one month to 15 years. Of those
interest rate swaps, $726.6 million were floating-to-fixed rate interest rate
swaps, $360.5 million were basis swaps and $100.0 million were fixed-to-floating
interest rate swaps.
Farmer Mac uses financial derivatives as an end-user for hedging purposes,
not for trading or speculative purposes. When financial derivatives meet the
specific hedge criteria under SFAS 133, they are accounted for as either fair
value hedges or cash flow hedges. Financial derivatives that do not satisfy
those hedge criteria are not accounted for as hedges and changes in the fair
value of those financial derivatives are reported as a gain or loss on financial
derivatives and trading assets in the statement of operations. All of Farmer
Mac's financial derivative transactions are conducted under standard
collateralized agreements that limit Farmer Mac's potential credit exposure to
any counterparty. As of March 31, 2003, 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. Farmer
Mac is exposed to credit risk on:
o loans it holds;
o loans underlying Farmer Mac Guaranteed Securities; and
o loans underlying LTSPCs.
Loans held or loans underlying Farmer Mac Guaranteed Securities or LTSPCs can be
divided into four groups:
o loans held for investment;
o loans underlying pre-1996 Act Farmer Mac I Guaranteed Securities;
o loans underlying Post-1996 Act Farmer Mac I Guaranteed Securities or
LTSPCs; and
o USDA-guaranteed portions underlying Farmer Mac II Guaranteed
Securities.
For loans underlying pre-1996 Act Farmer Mac I Guaranteed Securities, ten
percent first-loss subordinated interests mitigate Farmer Mac's credit risk
exposure. Before Farmer Mac incurs a credit loss, full recourse must first be
taken against the subordinated interest. The 1996 Act eliminated the
subordinated interest requirement. As a result, Farmer Mac generally assumes 100
percent of the credit risk on loans held for investment and loans underlying
Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs. Farmer Mac's credit
exposure on USDA-guaranteed portions is covered by the full faith and credit of
the United States. Farmer Mac believes it has little or no credit risk exposure
to loans underlying pre-1996 Act Farmer Mac I Guaranteed Securities because of
the subordinated interests, or to USDA-guaranteed portions because of the USDA
guarantee. The outstanding principal balance of loans held and loans underlying
Farmer Mac Guaranteed Securities (including AgVantage bonds) or LTSPCs is
summarized in the table below.
March 31, December 31,
2003 2002
---------------- ---------------
(in thousands)
Farmer Mac I:
Post-1996 Act $ 4,844,487 $ 4,850,234
Pre-1996 Act 29,216 31,960
Farmer Mac II:
USDA-guaranteed portions 650,152 645,790
---------------- ---------------
$ 5,523,855 $ 5,527,984
---------------- ---------------
For several years, Farmer Mac has conducted guarantee fee adequacy
analyses, using stress-test models developed internally and with the assistance
of outside experts. These analyses have taken into account the diverse and
dissimilar characteristics of the various asset categories for which Farmer Mac
manages its risk exposures, and have evolved as the mix and character of assets
under management has shifted with growth in the business and the addition of new
asset categories. Based on current information, Farmer Mac believes that its
guarantee fee is adequate compensation for the credit risk that it assumes.
Farmer Mac has established underwriting and appraisal standards for
agricultural mortgage loans to mitigate the risk of loss from borrower defaults
and to provide guidance concerning the management, administration and conduct of
underwriting and appraisals to all participating sellers and potential sellers
in its programs. These standards were developed on the basis of industry norms
for agricultural mortgage loans and are designed to assess the creditworthiness
of the borrower, as well as the value of the mortgaged property relative to the
amount of the mortgage loan. Farmer Mac requires sellers to make representations
and warranties regarding the conformity of eligible mortgage loans to these
standards and other requirements it may impose from time to time.
Farmer Mac I credit underwriting standards require that the loan-to-value
("LTV") ratio for any loan not exceed 70 percent, except that a loan secured by
a livestock facility and supported by a contract with an integrator may have an
LTV ratio of up to 75 percent, a part-time farm loan supported by private
mortgage insurance may have an LTV ratio of up to 85 percent and a rural housing
loan supported by private mortgage insurance may have an LTV ratio of up to 97
percent. In the case of newly originated loans that are not part-time farm or
rural housing loans, borrowers on the loans must, among other criteria set out
in Farmer Mac's underwriting standards, also meet the following standard pro
forma (that is, giving effect to the new loan) credit ratios:
o debt-to-asset ratio of 50 percent or less;
o cash flow debt service coverage ratio on the mortgaged property of not
less than 1:1;
o total debt service coverage ratio, including farm and non-farm income,
of not less than 1.25:1; and
o ratio of current assets to current liabilities of not less than 1:1.
Farmer Mac's underwriting standards provide for acceptance of loans that do
not conform to one or more of the standard underwriting ratios, other than LTV
ratio, when:
o those loans exceed one or more of the underwriting standards to a
degree that compensates for noncompliance with one or more other
standards, referred to as compensating strengths; and
o those loans are made to producers of particular agricultural
commodities in a segment of agriculture in which such compensating
strengths are typical of the financial condition of sound borrowers in
that segment.
Farmer Mac's use of compensating strengths is not intended to provide a basis
for waiving or lessening the requirement that eligible mortgage loans under the
Farmer Mac I program be of consistently high quality. In fact, loans approved on
the basis of compensating strengths have historically demonstrated a lower rate
of default than that of loans that conformed to all of the standard credit
ratios. As of March 31, 2003, a total of $1.5 billion (30.5 percent) of the
outstanding balance of loans held and loans underlying LTSPCs and Post-1996 Act
Farmer Mac I Guaranteed Securities were approved based upon compensating
strengths ($32.6 million of which had original LTV ratios of greater than 70
percent). During first quarter 2003, $57.4 million (25.4 percent) of the loans
purchased or added under LTSPCs were approved based upon compensating strengths
($0.3 million of which had original LTV ratios of greater than 70 percent).
In the case of a seasoned loan, Farmer Mac considers sustained performance
to be a reliable alternative indicator of a borrower's ability to pay the loan
according to its terms. A seasoned loan generally will be deemed an eligible
loan if:
o it has been outstanding for at least five years and has a
loan-to-value ratio of 60 percent or less;
o there have been no payments more than 30 days past due during the
previous three years; and
o there have been no material restructurings or modifications for credit
reasons during the previous five years.
A seasoned loan that has been outstanding for more than one year but less
than five years must substantially comply with the underwriting standards for
newly originated loans as of the date the loan was originated by the lender. The
loan must also have a payment history that shows no payment more than 30 days
past due during the three-year period immediately prior to the date the loan is
either purchased by Farmer Mac or made subject to an LTSPC. As with the
secondary market for residential mortgages, there is no requirement that each
loan's compliance with the underwriting standards be re-evaluated after Farmer
Mac accepts the loan into its program.
The due diligence Farmer Mac performs before purchasing, guaranteeing
securities backed by or committing to purchase seasoned loans includes:
evaluation of loan database information to determine conformity to the criteria
set forth in the preceding paragraphs; confirmation that loan file data conform
to database information; validation of supporting credit information in the loan
files; and review of loan collateral appraisals. All of the foregoing are
performed through methods that give due regard to the size, age, leverage and
nature of the collateral for the loans.
In the case of rural housing and part-time farm loans, the borrower may
finance up to 97 percent and 85 percent, respectively, of the appraised value of
the property if the amount above 80 percent is covered by private mortgage
insurance. For newly originated part-time farm loans, the borrower must generate
sufficient income from all sources to repay all creditors. A borrower's capacity
to repay debt obligations is determined by two tests:
o the borrower's monthly mortgage payment-to-income ratio should be 28
percent or less; and
o the borrower's monthly debt payment-to-income ratio should be 36
percent or less.
Farmer Mac's appraisal standards for newly originated loans require, among
other things, that the appraisal function be performed independently of the
credit decision-making process and conform to the Uniform Standards of
Professional Appraisal Practice promulgated by the Appraisal Standards Board.
Farmer Mac's appraisal standards require the appraisal function to be conducted
or administered by an individual meeting specific qualification and competence
criteria and who:
o is not associated, except by the engagement for the appraisal, with
the credit underwriters making the loan decision, though both the
appraiser and the credit underwriter may be directly or indirectly
employed by a common employer;
o receives no financial or professional benefit of any kind by virtue of
the report content, valuation or credit decision made or based on the
appraisal product; and
o has no present or contemplated future direct or indirect interest in
the appraised property.
The appraisal standards also require uniform reporting of reliable and credible
opinions of the market value, market rent and property net income
characteristics of the mortgaged property and the relative market forces.
Farmer Mac requires current collateral valuations in conformance with the
Uniform Standards of Professional Appraisal Practice for newly originated loans
purchased or placed under a Farmer Mac I Guaranteed Security or LTSPC. For
seasoned loans, Farmer Mac obtains appraisal updates as considered necessary by
its assessment of collateral risk determined in the due diligence process.
Farmer Mac maintains an allowance for losses to cover estimated probable
losses on loans held, real estate owned and loans underlying Post-1996 Act
Farmer Mac I Guaranteed Securities and LTSPCs in accordance with Statement of
Financial Accounting Standard No. 5, Accounting for Contingencies, ("SFAS 5")
and Statement of Financial Accounting Standard No. 114, Accounting by Creditors
for Impairment of a Loan ("SFAS 114"). The methodology for determining the
allowance for losses is the same for loans held for investment and loans
underlying Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs because
Farmer Mac believes the ultimate credit risk is the same, i.e., the underlying
agricultural mortgage loans all meet the same credit underwriting and appraisal
standards. For accepting the credit risk on loans underlying Post-1996 Act
Farmer Mac I Guaranteed Securities and LTSPCs, Farmer Mac receives guarantee
fees and commitment fees, respectively. For loans held, Farmer Mac receives
interest income that includes a component that correlates to its guarantee fee,
which Farmer Mac views as compensation for accepting credit risk.
No allowance for losses has been made for loans underlying Farmer Mac I
Guaranteed Securities issued prior to the 1996 Act or 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. USDA-guaranteed portions
collateralizing Farmer Mac II Guaranteed Securities are obligations backed by
the full faith and credit of the United States. To date, Farmer Mac has
experienced no credit losses on any pre-1996 Act Farmer Mac I Guaranteed
Securities or on any Farmer Mac II Guaranteed Securities and does not expect to
incur any such losses in the future.
The allowance for losses is presented in three components on the
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)";
and
o an allowance for losses on loans underlying Post-1996 Act Farmer Mac I
Guaranteed Securities and LTSPCs, which is included in the balance
sheet under "Reserve for losses."
The provision for losses is presented in two components on the consolidated
statement of operations:
o a "Provision for loan losses," which represents losses on Farmer Mac's
loans held for investment; and
o a "Provision for losses," which represents losses on loans underlying
Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs and real
estate owned.
Farmer Mac's allowance for losses is estimated using a systematic process
that begins with management's evaluation of the results of its proprietary loan
pool simulation and guarantee fee model (the "Model"); those results may be
modified by the application of management's judgment that takes into account
factors including:
o economic conditions;
o geographic and agricultural commodity concentrations of Farmer Mac's
portfolio;
o the credit profile of Farmer Mac's portfolio;
o delinquency trends of Farmer Mac's portfolio; and
o historical charge-offs and recovery activities of Farmer Mac's
portfolio.
The Model offers historical loss experience on agricultural mortgage loans
similar to those on which Farmer Mac has assumed credit risk, but over a longer
period of time than Farmer Mac's own experience to date. Farmer Mac's systematic
methodology for determining its allowance for losses is expected to migrate over
time, away from the Model and toward the increased use of Farmer Mac's own
historical portfolio loss experience, as that experience continues to develop.
During this migration, Farmer Mac will continue to use the results from the
Model, augmented by the application of management's judgment, to develop its
loan loss allowance.
Management believes that its use of this methodology produces a reliable
estimate of total probable losses, as of the balance sheet date, for all loans
included in Farmer Mac's portfolio, including loans held and loans underlying
Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs.
In addition, Farmer Mac specifically analyzes its portfolio of
non-performing assets (loans 90 days or more past due, in foreclosure,
restructured, in bankruptcy - including loans performing under either their
original loan terms or a court-approved bankruptcy plan, and real estate owned)
on a loan-by-loan basis. This analysis measures impairment based on the fair
value of the underlying collateral for each individual loan relative to the
total amount due, including principal, interest and advances under SFAS 114. In
the event that the updated appraisal or management's estimate of discounted
collateral value does not support the total amount due, Farmer Mac specifically
determines an allowance for the loan for the difference between the recorded
investment and its fair value, less estimated costs to liquidate the collateral.
Management believes that the general allowance, which is the difference
between the total allowance for losses (generated through use of the Model) and
the specific allowances, adequately covers any probable losses inherent in the
portfolio of performing loans under SFAS 5.
Farmer Mac considers that the methodology described above produces a
reliable estimate of the total probable losses inherent in the Farmer Mac
portfolio. The Model:
o runs various configurations of loan types, terms, economic conditions
and borrower eligibility criteria to generate a distribution of loss
exposures over time for all loans in the portfolio;
o uses historical agricultural real estate loan origination and
servicing data that reflect varied economic conditions and stress
levels in the agricultural sector;
o contains features that allow variations for changes in loan portfolio
characteristics to make the data set more representative of Farmer
Mac's portfolio and credit underwriting standards; and
o considers the effects of the ageing of the loan portfolio along the
expected loss curves associated with individual cohort origination
years, including the segments that are entering into or coming out of
their peak default years.
Farmer Mac analyzes various iterations of the Model data to evaluate its
overall allowance for loss and back tests the results to validate the Model.
Such tests use prior period data to project losses expected in a current period
and compare those projections to actual losses incurred during the current
period.
The allowance for losses is increased through periodic provisions for
losses charged to expense and reduced by charge-offs for actual losses, net of
recoveries that are recognized if liquidation proceeds exceed previous
estimates. Charge-offs represent losses on the outstanding principal balance,
any interest payments previously accrued or advanced and expected costs of
liquidation.
The following table summarizes the changes in the components of the
allowance for losses for the three months ended March 31, 2003 and 2002:
Three Months Ended March 31, 2003 Three Months Ended March 31, 2002
-------------------------------------------------------------------------------------------------------
Allowance REO Total Allowance REO Total
for Loan Valuation Reserve Allowance for Loan Valuation Reserve Allowance
Losses Allowance for Losses for Losses Losses Allowance for Losses for Losses
------------ -------------- ------------ ----------- ----------- ----------- ------------ ---------------
(in thousands) (in thousands)
Beginning balance $ 2,662 $ 592 $ 16,757 $ 20,011 $ 1,352 $ - $ 14,532 $ 15,884
Provision for losses 1,208 - 895 2,103 - - 2,016 2,016
Net allocation of
allowance - - - - 1,900 - (1,900) -
Net charge-offs (842) - (180) (1,022) (816) - (67) (883)
------------ ------------- ------------ ------------ ----------- ----------- ------------ --------------
Ending balance $ 3,028 $ 592 $ 17,472 $ 21,092 $ 2,436 $ - $ 14,581 $ 17,017
------------ ------------- ------------ ------------ ----------- ----------- ------------ --------------
When certain criteria are met, such as the default of the borrower, Farmer Mac
has the option to purchase the defaulted loans underlying Farmer Mac Guaranteed
Securities and is obligated to purchase those underlying an LTSPC. These
acquisitions are recorded in the consolidated financial statements at their fair
value. Fair value is determined by appraisal or management's estimate of
discounted collateral value. In September 2002, Farmer Mac adopted EITF issue
02-9, Accounting for Changes That Result in a Transferor Regaining Control of
Financial Assets Sold ("the consensus" or "EITF 02-9"). The consensus requires
that Farmer Mac record, at acquisition, the difference between each loan's
acquisition cost and its fair value, if any, as a charge to the reserve for
losses. Prior to the adoption of the consensus, any specific allowance that had
been established for the off-balance sheet obligation would have been
transferred from the reserve for losses to the allowance for loan losses
(referred to as "net allocation of the allowance" in the table above). Upon the
receipt of each loan's updated appraisal or determination of management's
estimate of discounted collateral value, the difference between the acquisition
cost of the loan and its fair value, if any, was recorded as a charge to the
allowance for loan losses.
Farmer Mac's total provision for losses was $2.1 million for first quarter
2003, compared to $2.0 million for first quarter 2002. During first quarter
2003, Farmer Mac charged off $1.2 million in losses against the allowance for
losses and recovered $0.2 million from previously charged off losses, for net
charge-offs of $1.0 million. During first quarter 2002, Farmer Mac charged off
$0.9 million in losses against the allowance for losses and recorded no
recoveries from previously charged off losses, for net charge-offs of $0.9
million. As of March 31, 2003, Farmer Mac's allowance for losses totaled $21.1
million, or 44 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 $20.0 million (42 basis points) as of December 31, 2002.
As of March 31, 2003, loans held and loans underlying Post-1996 Act Farmer
Mac I Guaranteed Securities and LTSPCs that were 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 ("Post-1996 Act non-performing assets") totaled
$94.8 million and represented 1.97 percent of the principal balance of all loans
held and loans underlying Post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs, compared to $87.1 million (2.32 percent) as of March 31, 2002. Loans
that have been restructured after delinquency were insignificant and are
included within the reported 90-day delinquency and non-performing asset
disclosures. As of March 31, 2003, Farmer Mac's 90-day delinquencies totaled
$76.2 million and represented 1.58 percent of the principal balance of all loans
held and loans underlying Post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs, compared to $79.2 million (2.11 percent) as of March 31, 2002. From
quarter to quarter, Farmer Mac anticipates the 90-day delinquencies 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.
Outstanding
Post-1996 Act Less:
Loans, Non- REO and
Guarantees and performing Performing 90-Day
LTSPCs Assets Percentage Bankruptcies Delinquencies Percentage
------------------ ----------------- -------------- ---------------- ----------------- ----------------
(dollars in thousands)
As of:
March 31, 2003 $ 4,820,887 $ 94,822 1.97% $ 18,662 $ 76,160 1.58%
December 31, 2002 4,821,634 75,308 1.56% 17,094 58,214 1.21%
September 30, 2002 4,506,330 91,286 2.03% 11,460 79,826 1.77%
June 30, 2002 4,489,735 65,196 1.45% 14,931 50,265 1.12%
March 31, 2002 3,754,171 87,097 2.32% 7,903 79,194 2.11%
December 31, 2001 3,428,176 58,279 1.70% 3,743 54,536 1.59%
September 30, 2001 3,318,796 71,686 2.16% 5,183 66,503 2.00%
June 30, 2001 3,089,460 53,139 1.72% 4,274 48,865 1.58%
March 31, 2001 2,562,374 67,134 2.62% 2,154 64,980 2.54%
As of March 31, 2003, approximately $1.8 billion (37.4 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 compared to $1.4 billion (37.0 percent) of such loans as of March 31,
2002. The Model takes the portfolio age distribution and maturation into
consideration. Accordingly, those trends did not cause management to alter the
Model's projection for the provisions for losses.
As of March 31, 2003, Farmer Mac's loan-by-loan analysis of its $94.8
million of non-performing assets and their updated appraisals or management's
estimates of discounted values indicated that $81.6 million of non-performing
assets were adequately collateralized, based on updated appraisals or
management's estimates of discounted collateral values, and that the allocation
of specific allowances to those loans was not necessary. Farmer Mac's
loan-by-loan analyses indicated that the remaining $13.2 million had
insufficient collateral to cover the loan balance, accrued interest and
expenses. Farmer Mac has specifically allocated $2.6 million of allowances to
those under-collateralized loans. As of March 31, 2003, after the allocation of
specific allowances to under-collateralized loans, Farmer Mac had additional
non-specific or general allowances of $18.5 million relating to inherent
probable loss in the portfolio, bringing the total allowance for losses to $21.1
million. The following table summarizes the Farmer Mac's non-performing assets
and allowance for losses:
Farmer Mac I Post-1996 Act Non-performing Assets and Allowance for Losses
- ---------------------------------------------------------------------------------------------------------------
As of March 31, 2003 As of December 31, 2002
------------------------------------ -----------------------------------
(in thousands)
Specific Specific
Non-performing Allowance Non-performing Allowance
Assets for Losses Assets for Losses
------------------- --------------- ------------------- --------------
Loans 90 days or more past due $ 29,636 $ 172 $ 17,600 $ 238
Loans in foreclosure 20,254 992 16,856 519
Loans in bankruptcy * 36,167 864 35,229 687
Real estate owned 8,765 592 5,623 592
------------------- --------------- ------------------- --------------
Total $ 94,822 $ 2,620 $ 75,308 $ 2,036
------------------- --------------- ------------------- --------------
Allowance Allowance
for Losses for Losses
--------------- --------------
Specific allowance for losses $ 2,620 $ 2,036
General allowance for losses 18,472 17,975
--------------- --------------
Total allowance for losses $ 21,092 $ 20,011
--------------- --------------
* Includes loans that are performing under either their original loan terms
or a court-approved bankruptcy plan.
Based on Farmer Mac's loan-by-loan analyses, loan collection experience and
continuing provisions for the allowance for losses, Farmer Mac believes that
specific and inherent probable losses are covered adequately by the allowance
for losses.
Original loan-to-value ratios are one of many factors Farmer Mac considers
in evaluating loss severity. Other factors include, but are not limited to,
other underwriting standards, commodity and farming forecasts and regional
economic and agricultural conditions. Loans in the Farmer Mac I program are all
first mortgage agricultural real estate loans. Accordingly, Farmer Mac's
exposure on a loan is limited to the difference between the principal balance of
a loan and the value of the property. Measurement of that excess or shortfall is
the best predictor and determinant of loss compared to other measures that
evaluate the efficiency of a particular farm operator.
Loan-to-value ratios depend upon the economic value of a property with due
regard for its income-producing potential in the hands of a competent operator.
As required by Farmer Mac's collateral valuation standards, an appraisal of
agricultural real estate must include analysis of the income producing
capability of the property and address the income estimate in the market
analysis. Debt service ratios depend upon farm operator efficiency and leverage,
which can vary widely within a geographic region, commodity type or an
operator's business and farming skills.
As of March 31, 2003, the weighted-average original loan-to-value ratio for
all loans held and loans underlying Post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs was 49 percent, and the weighted-average original
loan-to-value ratio for all Post-1996 Act non-performing assets was 55 percent.
The following table summarizes the Post-1996 Act non-performing assets by
original loan-to-value ratio (calculated by dividing the loan principal balance
at the time of guarantee, purchase or commitment by the appraised value at the
date of loan origination or, when available, updated appraised value at the time
of guarantee, purchase or commitment):
Distribution of Post-1996 Act Non-performing
Assets by Original LTV Ratio
as of March 31, 2003
- ---------------------------------------------------
(dollars in thousands)
Post-1996 Act
Non-performing
Original LTV Ratio Assets Percentage
- -------------------- ------------- --------------
0.00% to 40.00% $ 10,107 11%
40.01% to 50.00% 14,812 15%
50.01% to 60.00% 32,044 34%
60.01% to 70.00% 34,994 37%
70.01% to 80.00% 2,314 2%
80.01% + 551 1%
------------- -------------
Total $ 94,822 100%
------------- -------------
The following table presents outstanding loans held and loans underlying
Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, Post-1996 Act
non-performing assets and specific allowances for losses as of March 31, 2003 by
year of origination, geographic region and commodity.
Farmer Mac I Post-1996 Act Non-performing Assets and Specific Allowance for Losses
- --------------------------------------------------------------------------------------------------------------------
Distribution of
Outstanding Outstanding
Loans, Loans Post-1996 Act Non- Specific
Guarantees and Guarantees and Non-performing Performing Allowance
LTSCPs LTSCPs Assets (1) Asset Rate for Losses
------------------- ----------------- ------------------ ------------ -------------
(dollars in thousands)
By year of origination:
Before 1994 14% 656,706 $ 5,615 0.86% $ -
1994 3% 161,094 525 0.33% -
1995 3% 152,784 5,523 3.61% 299
1996 7% 348,287 13,751 3.95% 107
1997 8% 379,679 15,874 4.18% 49
1998 14% 686,499 17,212 2.51% 1,171
1999 15% 733,962 17,089 2.33% 615
2000 9% 435,926 10,643 2.44% 350
2001 13% 611,339 7,274 1.19% 14
2002 12% 570,185 1,316 0.23% 15
2003 2% 84,426 - 0.00% -
------------------- ------------------ ---------------- ---------------- --------------
Total 100% $ 4,820,887 $ 94,822 1.97% $ 2,620
------------------- ------------------ ---------------- ---------------- --------------
By geographic region (2):
Northwest 23% $ 1,129,302 $ 48,776 4.32% $ 1,605
Southwest 49% 2,348,282 32,521 1.38% 403
Mid-North 11% 509,789 5,328 1.05% 50
Mid-South 5% 224,955 6,053 2.69% 460
Northeast 6% 295,467 1,321 0.45% 102
Southeast 6% 313,092 823 0.26% -
------------------- ------------------ ---------------- ---------------- --------------
Total 100% $ 4,820,887 $ 94,822 1.97% $ 2,620
------------------- ------------------ ---------------- ---------------- --------------
By commodity:
Crops 42% $ 2,048,046 $ 35,451 1.73% $ 533
Permanent plantings 28% 1,360,505 39,837 2.93% 1,544
Livestock 21% 1,005,134 17,206 1.71% 498
Part-time farm 8% 369,349 2,328 0.63% 45
Other 1% 37,853 - 0.00% -
------------------- ------------------ ---------------- ---------------- --------------
Total 100% $ 4,820,887 $ 94,822 1.97% $ 2,620
------------------- ------------------ ---------------- ---------------- --------------
(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).
The following table presents Farmer Mac's cumulative charge-offs and
current specific allowances relative to the cumulative original purchased,
guaranteed or LTSPC principal balances for all loans purchased and loans
underlying Post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs. This
information is presented by cohort year (origination date of the loan),
geographic region and commodity. The purpose of this information is to present
information regarding losses and collateral deficiencies relative to original
guarantees and commitments.
Farmer Mac I Post-1996 Act Charge-offs and Specific Allowance for Losses
Relative to all Cumulative Original Loans, Guarantees and LTSPCs
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative Combined
Cumulative Original Loans, Current Charge-off
Net Guarantees Charge-off Specific and Specific
Charge-offs and LTSPCs Rate Allowances Allowance Rate
---------------- ---------------- ----------------- ----------------- -----------------
(dollars in thousands)
By year of origination:
Before 1994 $ - $ 1,779,699 0.00% $ - 0.00%
1994 - 320,650 0.00% - 0.00%
1995 300 294,694 0.10% 299 0.20%
1996 1,128 570,705 0.20% 107 0.22%
1997 2,980 625,398 0.48% 49 0.48%
1998 2,243 972,088 0.23% 1,171 0.35%
1999 737 978,433 0.08% 615 0.14%
2000 660 574,815 0.11% 350 0.18%
2001 - 734,905 0.00% 14 0.00%
2002 - 647,197 0.00% 15 0.00%
2003 - 53,060 0.00% - 0.00%
---------------- ---------------- ----------------- ----------------- -----------------
Total $ 8,048 $ 7,551,644 0.11% $ 2,620 0.14%
---------------- ---------------- -----------------
By geographic region (1):
Northwest $ 4,085 $ 1,913,969 0.21% $ 1,605 0.30%
Southwest 3,908 3,361,045 0.12% 403 0.13%
Mid-North - 782,228 0.00% 50 0.01%
Mid-South 5 337,934 0.00% 460 0.14%
Northeast - 514,474 0.00% 102 0.02%
Southeast 50 641,994 0.01% - 0.01%
---------------- ---------------- ----------------- ----------------- -----------------
Total $ 8,048 $ 7,551,644 0.11% $ 2,620 0.14%
---------------- ---------------- -----------------
By commodity:
Crops $ 1,301 $ 3,179,919 0.04% $ 533 0.06%
Permanent plantings 5,580 2,039,271 0.27% 1,544 0.35%
Livestock 917 1,641,724 0.06% 498 0.09%
Part-time farm 250 596,816 0.04% 45 0.05%
Other - 93,914 0.00% - 0.00%
---------------- ---------------- ----------------- ----------------- -----------------
Total $ 8,048 $ 7,551,644 0.11% $ 2,620 0.14%
---------------- ---------------- -----------------
(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).
An analysis of Farmer Mac's historical losses and identified specific
collateral deficiencies within the portfolio (by origination year) indicates
that Farmer Mac has experienced peak loss years as loans have aged between
approximately their third and fifth years subsequent to origination, regardless
of the year the loans were added to the Farmer Mac's portfolio. As a consequence
of the combination of principal amortization and collateral value appreciation,
there are few loans in the portfolio originated prior to 1996 with known
collateral deficiencies. While Farmer Mac expects that there will be loans that
have aged past their fifth year that will become delinquent and possibly
default, Farmer Mac does not anticipate significant losses on such loans.
Analysis of the portfolio by its geographic distribution indicates that
losses and collateral deficiencies have been and are expected to remain most
prevalent in the loans concentrated in the areas that do not receive significant
government support. This analysis is consistent with corresponding commodity
analysis, which indicates that Farmer Mac has experienced higher loss and
collateral deficiency rates in its loans classified as permanent plantings. Most
of the loans classified as permanent plantings do not receive significant
government support and are therefore more susceptible to adverse
commodity-specific economic trends. Further, as adverse economic conditions
persist for a particular commodity that requires a long-term improvement on the
land, such as permanent plantings, the prospective sale value of the land is
likely to decrease and the related loans may become under-collateralized. Farmer
Mac anticipates that one or more particular commodity groups will be under
economic pressure at any one time and actively manages its portfolio to mitigate
concentration risks while preserving Farmer Mac's ability to meet the financing
needs of all commodity groups.
Farmer Mac's methodologies for pricing its guarantee and commitment fees,
managing credit risks and providing adequate allowances for losses consider all
of the foregoing factors and information.
Liquidity and Capital Resources
Farmer Mac has sufficient liquidity and capital resources to support its
operations for the next twelve months.
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 issued to obtain funds
principally to cover the costs of purchasing and holding loans and securities
(including Farmer Mac Guaranteed Securities). Farmer Mac also issues discount
notes and medium-term notes to obtain funds for investments, transaction costs
and guarantee payments. The Corporation's discount notes and medium-term notes
are obligations of Farmer Mac only, are not rated by any rating agency and the
interest and principal thereon are not guaranteed by and do not constitute debts
or obligations of FCA or the United States or any agency or instrumentality of
the United States other than Farmer Mac. Farmer Mac is an institution of the
Farm Credit System, but is not liable for any debt or obligation of any other
institution of the Farm Credit System. Likewise, neither the Farm Credit System
nor any other individual institution of the Farm Credit System is liable for any
debt or obligation of Farmer Mac. Income on Farmer Mac's discount notes and
medium-term notes has no tax exemption under federal law from federal, state or
local taxation.
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 $3.8 billion was
outstanding as of March 31, 2003), subject to periodic review of the adequacy of
that level relative to Farmer Mac's borrowing requirements. Farmer Mac invests
the proceeds of such issuances in loans, Farmer Mac Guaranteed Securities and
non-program investment assets in accordance with guidelines established by its
board of directors.
Liquidity. The funding and liquidity needs of Farmer Mac's business
programs are driven by the purchase and retention of eligible loans and Farmer
Mac Guaranteed Securities, the maturities of Farmer Mac's discount notes and
medium-term notes and payment of principal and interest on Farmer Mac Guaranteed
Securities. Farmer Mac's primary sources of funds to meet these needs are:
o principal and interest payments and ongoing guarantee and commitment
fees received on loans, Farmer Mac Guaranteed Securities and LTSPCs;
and
o the issuance of discount notes and medium-term notes.
Farmer Mac projects its expected cash flows from loans and securities,
other earnings and the sale of assets and matches those with its obligations to
retire debt and pay other liabilities as they come due. Farmer Mac issues
discount notes and medium-term notes to meet the needs associated with its
business operations, including liquidity, and also to increase its presence in
the capital markets in order to enhance the liquidity and pricing efficiency of
its discount notes and medium-term notes and Farmer Mac Guaranteed Securities
transactions and so improve the mortgage rates available to farmers, ranchers
and rural homeowners. Though Farmer Mac's mortgage purchases do not currently
necessitate daily debt issuance, the Corporation continued its strategy of using
its non-program investment portfolio (referred to as Farmer Mac's liquidity
portfolio) to facilitate increasing its ongoing presence in the capital markets
during first quarter 2003. To meet investor demand for daily presence in the
capital markets, Farmer Mac issues discount notes in maturities ranging from one
day to approximately 90 days and invests the proceeds not needed for program
asset purchases in highly-rated securities. Investments are predominantly
short-term money market securities with maturities closely matched to the
discount note maturities and floating-rate securities with reset terms of less
than one year and closely matched to the maturity of the discount notes. The
positive spread earned from these investments enhances the net interest income
Farmer Mac earns, thereby improving the net yields at which Farmer Mac can
purchase mortgages from lenders who may pass that benefit to farmers, ranchers
and rural homeowners through the Farmer Mac programs. Subject to dollar
limitations, the Corporation's board of directors has authorized non-program
investments in:
o U.S. treasury obligations;
o agency and instrumentality obligations;
o repurchase agreements;
o commercial paper;
o guaranteed investment contracts;
o certificates of deposit;
o federal funds and bankers acceptances;
o certain securities and debt obligations of corporate and municipal
issuers;
o asset-backed securities;
o corporate money market funds; and
o preferred stock of government-sponsored enterprises.
As of March 31, 2003, Farmer Mac was in compliance with the dollar limitations
and investment authorizations set forth in its investment guidelines.
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. During first quarter 2003 and throughout the period of
inaccurate and misleading publicity about the Corporation during 2002, Farmer
Mac maintained regular daily access to the discount note market at rates
comparable to the issuance and trading levels of other government-sponsored
enterprise discount notes. Farmer Mac's continued ability to access the discount
note market at such favorable rates could be affected by continued inaccurate
and misleading publicity about Farmer Mac or unusual trading in its securities.
Farmer Mac believes such factors caused spread levels in secondary market
trading of its outstanding medium-term notes to widen during second quarter
2002. Although those trading spreads have improved and Farmer Mac returned to
issuing medium-term notes at favorable issuance spreads, the foregoing factors
could affect future medium-term note issuance spreads adversely and cause Farmer
Mac to emphasize floating-to-fixed interest rate swaps, combined with discount
note issuances, as a source of fixed-rate funding. While the swap market
provides favorable fixed rates, swap transactions expose Farmer Mac to the risk
of future widening of its own issuance spreads versus corresponding LIBOR rates.
If the spreads on the Farmer Mac discount notes were to increase relative to
LIBOR, Farmer Mac would be exposed to a commensurate reduction on its net
interest yield on the notional amount of its floating-to-fixed interest rate
swaps and other LIBOR-based floating rate assets. Farmer Mac compensates for
this risk by pricing the required net yield on program asset purchases to
reflect the higher cost of medium-term notes issuance versus the savings
achieved in the interest rate swap market.
Farmer Mac maintains an investment portfolio of cash and cash equivalents
(including commercial paper and other short-term money market instruments) and
investment securities consisting mostly of floating rate securities that reprice
within one year, which can be drawn upon for liquidity needs. As of March 31,
2003, Farmer Mac's cash and cash equivalents and investment securities totaled
$685.8 million and $887.3 million, respectively, a combined 37.5 percent of
total assets. For first quarter 2003, exclusive of daily overnight discount note
issuances that were invested overnight, the average discount note issuance term
and re-funding frequency was approximately 77 days.
Other Matters
On June 26, 2002, the Senate Committee on Agriculture, Nutrition, and
Forestry requested that the U.S. General Accounting Office ("GAO") conduct an
independent analysis of a number of issues relating to Farmer Mac. The Committee
made this request of the GAO in response to reports Farmer Mac believes to be
misleading and speculation about Farmer Mac produced by certain hedge funds
acting as "short sellers," who stood to gain if the price of Farmer Mac
securities was depressed, and in concurrent articles by a reporter for a major
newspaper. Farmer Mac made it clear that those reports and articles were
inaccurate and misleading and welcomed the independent analysis by the GAO as an
opportunity to confirm that Farmer Mac continues to fulfill its
Congressionally-established mission in a financially safe and sound manner.
The GAO report was requested by the Committee specifically to address
Farmer Mac's financial stability; corporate governance; compensation policies;
investment practices; the non-voting status of Farmer Mac's Class C common
stock; and the fulfillment of Farmer Mac's Congressionally-established mission.
Farmer Mac looks forward to the GAO report as an opportunity to remove the
confusion that has been cast over it, so that it may continue to fulfill its
Congressional mission for agricultural borrowers and the lenders who serve them.
Supplemental Information
The following tables present quarterly and annual information regarding
loan purchases, guarantees and commitments and outstanding guarantees and
commitments.
Farmer Mac Purchases, Guarantees and Commitments
- --------------------------------------------------------------------------------------------------
Farmer Mac I
-----------------------------------
Loans &
Guaranteed
Securities LTSPCs Farmer Mac II Total
----------------------------------- ----------------- -----------------
(in thousands)
For the quarter ended:
March 31, 2003 $ 59,054 $ 166,574 $ 41,893 $ 267,521
December 31, 2002 62,841 395,597 38,714 497,152
September 30, 2002 58,475 140,157 37,374 236,006
June 30, 2002 551,690 280,904 57,769 890,363
March 31, 2002 74,875 338,821 39,154 452,850
December 31, 2001 62,953 237,292 51,056 351,301
For the year ended:
December 31, 2002 747,881 1,155,479 173,011 2,076,371
December 31, 2001 272,127 1,032,967 198,171 1,503,265
Outstanding Balance of Farmer Mac Loans and
On- and Off-Balance Sheet Guarantees and Commitments (1)
- ------------------------------------------------------------------------------------------------------------------
Farmer Mac I
--------------------------------------------------
Post-1996 Act
---------------------------------
Loans &
Guaranteed
Securities (2) LTSPCs Pre-1996 Act Farmer Mac II Total
---------------- ---------------- ---------------- ---------------- ----------------
(in thousands)
As of:
March 31, 2003 $ 2,111,867 $ 2,732,620 $ 29,216 $ 650,152 $ 5,523,855
December 31, 2002 2,168,994 2,681,240 31,960 645,790 5,527,984
September 30, 2002 2,127,460 2,407,469 35,297 630,452 5,200,678
June 30, 2002 2,180,948 2,336,886 37,873 617,503 5,173,210
March 31, 2002 1,655,485 2,126,485 41,414 592,836 4,416,220
December 31, 2001 1,658,716 1,884,260 48,979 595,156 4,187,111
September 30, 2001 1,605,160 1,731,861 58,813 608,944 4,004,778
June 30, 2001 1,572,800 1,537,061 65,709 579,251 3,754,821
March 31, 2001 1,466,443 1,083,528 72,646 549,003 3,171,620
(1) Farmer Mac assumes 100 percent of the credit risk on Post-1996 Act loans.
Pre-1996 Act loans back securities that are supported by unguaranteed first
loss subordinated interests representing approximately 10 percent of the
balance of the loans. Farmer Mac II loans are guaranteed by the USDA.
(2) Periods prior to June 30, 2001 include only Farmer Mac I Guaranteed
Securities.
Outstanding Balance of Loans Held and Loans Underlying
On-Balance Sheet Farmer Mac Guaranteed Securities
- ----------------------------------------------------------------------------------------------------------------------------------
Total
Fixed Rate 5-to-10-Year 1-Month-to-3-Year Held in
(10-yr. wtd. avg. term) ARMs & Resets ARMs Portfolio
----------------------- ---------------------- ---------------------- ----------------------
(in thousands)
As of:
March 31, 2003 $ 880,316 $ 1,057,310 $ 515,910 $ 2,453,536
December 31, 2002 1,003,434 981,548 494,713 2,479,695
September 30, 2002 1,000,518 934,435 498,815 2,433,768
June 30, 2002 1,016,997 892,737 516,892 2,426,626
March 31, 2002 751,222 797,780 350,482 1,899,484
December 31, 2001 764,115 790,948 302,169 1,857,232
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(d) of 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
(a) 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-14 and 15d-14 of
the Securities Exchange Act of 1934, as amended) as of a date within ninety days
of the filing date of this report. 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.
(b) There were no significant changes in Farmer Mac's internal controls or
in other factors that could significantly affect the Corporation's internal
controls subsequent to the date of such evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Farmer Mac is not a party to any material pending legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Farmer Mac is a federally chartered instrumentality of the United
States and its Common Stock is exempt from registration pursuant to
Section 3(a)(2) of the Securities Act of 1933.
Pursuant to Farmer Mac's policy that permits Directors of Farmer Mac
to elect to receive shares of Class C Non-Voting Common Stock in lieu
of their annual cash retainers, on January 10, 2003, Farmer Mac issued
an aggregate of 567 shares of its Class C Non-Voting Common Stock, at
an issue price of $30.64 per share, to the nine Directors who elected
to receive such stock in lieu of their cash retainers.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
* 3.1 - Title VIII of the Farm Credit Act of 1971, as most recently
amended by the Farm Credit System Reform Act of 1996, P.L.
104-105 (Form 10-K filed March 29, 1996).
* 3.2 - Amended and restated By-Laws of the Registrant (Form 10-Q
filed August 12, 1999).
** 4.1 - Specimen Certificate for Farmer Mac Class A Voting Common Stock.
** 4.2 - Specimen Certificate for Farmer Mac Class B Voting Common Stock.
** 4.3 - Specimen Certificate for Farmer Mac Class C Non-Voting Common
Stock.
** 4.4 - Certificate of Designation of Terms and Conditions of Farmer Mac
6.40% Cumulative Preferred Stock, Series A.
+* 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
August 12, 1999).
+* 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).
* 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.
+* 10.2.3 - Amendment No. 3 dated as of June 1, 1994 to Employment
Contract between Henry D. Edelman and the Registrant (Previously
filed as Exhibit 10.6 to Form 10-Q filed August 15, 1994).
+* 10.2.4 - Amendment No. 4 dated as of February 8, 1996 to Employment
Contract between Henry D. Edelman and the Registrant (Form 10-K
filed March 29, 1996).
+* 10.2.5 - Amendment No. 5 dated as of June 13, 1996 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 1996).
+* 10.2.6 - Amendment No. 6 dated as of August 7, 1997 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
November 14, 1997).
+* 10.2.7 - Amendment No. 7 dated as of June 4, 1998 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 1998).
+* 10.2.8 - Amendment No. 8 dated as of June 3, 1999 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 12, 1999).
+* 10.2.9 - Amendment No. 9 dated as of June 1, 2000 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 2000).
+* 10.2.10 - Amendment No. 10 dated as of June 7, 2001 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 2001).
+* 10.2.11 - Amendment No. 11 dated as of June 6, 2002 to Employment Contract
between Henry D. Edelman and the Registrant (Form 10-Q filed
August 14, 2002).
+* 10.3 - 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).
______________________
* 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.
+* 10.3.2 - Amendment No. 2 dated February 14, 1991 to Employment Agreement
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.7 to Form 10-K filed April 1, 1991).
+* 10.3.3 - Amendment to Employment Contract dated as of June 1, 1993
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.9 to Form 10-Q filed November 15, 1993).
+* 10.3.4 - Amendment No. 4 dated June 1, 1993 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.10 to Form 10-K filed March 31,1994).
+* 10.3.5 - Amendment No. 5 dated as of June 1, 1994 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.12 to Form 10-Q filed August 15,1994).
+* 10.3.6 - Amendment No. 6 dated as of June 1, 1995 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 1995).
+* 10.3.7 - Amendment No. 7 dated as of February 8, 1996 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form 10-K
filed March 29, 1996).
+* 10.3.8 - Amendment No. 8 dated as of June 13, 1996 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 1996).
+* 10.3.9 - Amendment No. 9 dated as of August 7, 1997 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
November 14, 1997).
+* 10.3.10 - Amendment No. 10 dated as of June 4, 1998 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q filed
August 14, 1998).
+* 10.3.11 - Amendmen t 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).
______________________
* 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.
+* 10.3.12 - 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).
+* 10.4 - 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).
+* 10.5 - 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).
______________________
* 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.
+* 10.5.2 - 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).
* 10.6 - Lease Agreement, dated June 28, 2001 between EOP - Two
Lafayette, filedL.L.C. and the Registrant (Previously filed as
Exhibit 10.10 to Form 10-K filed March 27, 2002).
* 10.7 - Farmer Mac I Seller/Servicer Agreement dated as of August 7,
1996 between Zions First National Bank and the Registrant (Form
10-Q filed November 14, 2002).
* 10.8 - Medium-Term Notes U.S. Selling Agency Agreement dated as of
October 1, 1998 between Zions First National Bank and the
Registrant (Form 10-Q filed November 14, 2002).
* 10.9 - Discount Note Dealer Agreement dated as of September 18, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
*# 10.10 - ISDA Master Agreement and Credit Support Annex dated as of
June 26, 1997 between Zions First National Bank and the
Registrant (Form 10-Q filed November 14, 2002).
*# 10.11 - Master Central Servicing Agreement dated as of December 17, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
*# 10.11.1 - Amendment No. 1 dated as of February 26, 1997 to Master Central
Servicing Agreement dated as of December 17, 1996 between Zions
First National Bank and the Registrant (Form 10-Q filed
November 14, 2002).
*# 10.12 - Loan File Review and Underwriting Agreement dated as of
December 17, 1996 between Zions First National Bank and the
Registrant (Form 10-Q filed November 14, 2002).
*# 10.12.1 - Amendment No. 1 dated as of January 20, 2000 to Loan File
Review and Underwriting Agreement dated as of December 17, 1996
between Zions First National Bank and the Registrant (Form 10-Q
filed November 14, 2002).
______________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request
for confidential treatment.
*# 10.13 - 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).
21 - Farmer Mac Mortgage Securities Corporation, a Delaware
corporation.
* 99.1 - Map of U.S. Department of Agriculture (Secretary of
Agriculture's) Regions (Previously filed as Exhibit 1.1 to Form
10-K filed April 1, 1991).
(b) Reports on Form 8-K.
On January 24, 2003, the Registrant furnished to the Commission a Current
Report on Form 8-K that attached a press release announcing the Registrant's
financial results for fourth quarter 2002. On the same day, the Registrant
furnished to the Commission an additional Current Report on Form 8-K that
attached a press release amplifying the previously announced financial results
for fourth quarter 2002.
On February 10, 2003, the Registrant filed with the Commission a Current
Report on Form 8-K announcing the dividends declared on the Registrant's 6.40%
Cumulative Preferred Stock, Series A.
On March 27, 2003, the Registrant furnished to the Commission a Current
Report on Form 8-K attaching the certifications of Henry D. Edelman, the
Registrant's Chief Executive Officer, and Nancy E. Corsiglia, the Registrant's
Chief Financial Officer, as required pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
______________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
# Portions of this exhibit have been omitted pursuant to a request
for confidential treatment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
May 15, 2003
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)
CERTIFICATIONS
I, Henry D. Edelman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Federal
Agricultural Mortgage Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Henry D. Edelman
------------------------
Henry D. Edelman
Chief Executive Officer
I, Nancy E. Corsiglia, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Federal
Agricultural Mortgage Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Nancy E. Corsiglia
-------------------------
Nancy E. Corsiglia
Chief Financial Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
EXHIBITS
TO
FORM 10-Q
FOR THE PERIOD ENDING MARCH 31, 2003
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
4.1 Specimen Certificate for Farmer Mac Class A Voting Common Stock
4.2 Specimen Certificate for Farmer Mac Class B Voting Common Stock
4.3 Specimen Certificate for Farmer Mac Class C Non-Voting Common Stock
4.4 Certificate of Designation of Terms and Conditions of Farmer Mac
6.40% Cumulative Preferred Stock, Series A
Exhibit 4.1
CLASS A VOTING SHARES ___________
COMMON STOCK
PAR VALUE OF $1.00 EACH
ESTABLISHED UNDER THE LAWS OF THE UNITED STATES [graphic] THE CLASS A VOTING COMMON STOCK
CAN ONLY BE TRANSFERRED TO CLASS A
ELIGIBLE HOLDERS. SEE REVERSE SIDE
FOR CERTAIN DEFINITIONS.
HOLDERS OF THE COMMON STOCK DO NOT
HAVE PREEMPTIVE RIGHTS. SEE REVERSE SIDE. CUSIP 313148 10 8
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
-------------------------------------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE OWNER OF
-------------------------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE CLASS A VOTING COMMON STOCK OF
FEDERAL AGRICULTURAL MORTGAGE CORPORATION, transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This Certificate and shares
represented hereby are issued and shall be subject to the provisions of Title
VIII of the Farm Credit Act of 1971, as amended, and the Bylaws, rules and
regulations of the Corporation, and all amendments thereto (copies of which are
on files with the Transfer Agent), to all of which the holder hereof by
acceptance of this Certificate assents.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
[corporate seal] Dated:
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE SECRETARY CHAIRMAN OF THE BOARD
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
The Corporation is authorized to issue more than one class or series of stock.
The Corporation will furnish without charge to each shareholder who so requests
a statement of the designations, preferences, restrictions, limitations and
relative rights of the shares of each class of stock or series thereof which the
Corporation is authorized to issue.
RESTRICTIONS UPON SHARES OF CLASS A VOTING COMMON STOCK
The transfer of shares of Class A Voting Common Stock is restricted by, and
is subject to restrictions imposed or which may be imposed under the authority
of, provisions of Title VIII of the Farm Credit Act of 1971, as amended (the
"Act"). The following statements summarize the provisions of the Act as in
effect on July 30, 1999 and are qualified by reference thereto and to any
subsequent amendments thereto.
Under the Act, shares of a class of Voting Common Stock may only be held by
a holder eligible to hold that class of Voting Common Stock. Eligible Holders of
Class A Voting Common Stock are defined in the Act as entities that are banks,
insurance companies and other financial entities that are not institutions of
the Farm Credit System.
Pursuant to its authority under the Act, the Board has provided that shares
of Voting Common Stock that have been acquired by Eligible Holders may
thereafter be sold and transferred to security brokers and dealers who will
acquire the shares for the purpose of making a secondary market in such shares.
The Board has also provided that any entity entitled to own shares of
Common Stock may cause such shares as it owns to be registered on the books of
the Corporation in its own name or in the name of a nominee.
NO PREEMPTIVE RIGHTS
No holder of the shares of the Corporation of any class, now or hereafter
authorized, shall as such holder have any preemptive or preferential right to
subscribe to, purchase, or receive any shares of the Corporation of any class,
now or hereafter authorized, or any rights or options for any such shares or any
rights or options to subscribe to or purchase any such shares or other
securities convertible into or exchangeable for or carrying rights or options to
purchase shares of any class or other securities that may at any time be issued,
sold or offered for sale by the Corporation or subjected to the rights or
options to purchase granted by the Corporation. The holder hereof by acceptance
of this Certificate consents and agrees to the foregoing and renounces any such
preemptive or preferential rights which he might otherwise as such holder have.
The following abbreviations, when used in the inscription on the lace of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
TEN COM - as tenants in common UNIF GIFT MIN ACT-___Custodian____ UNIF TRAN MIN ACT___Custodian___
TEN ENT - as tenants by the entireties (Cust) (Minor) (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors under Uniform Transfers to Minors
survivorship and not as tenants Act_________________ Act________________________
in common (state) (state)
Additional abbreviations may also be used though, not in the above list.
For value received ___________________________________________________hereby sell(s), assign(s), and transfer(s) unto
PLEASE INSERT TAXPAYER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
Class A Shares represented by the within Certificate, and do(es) hereby irrevocably constitute and appoint
_____________________________________________________________________________Attorney
to transfer the said Shares on the books of the within-named Corporation with full power of substitution in the premises
Dated____________________________________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN ON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER
Signature(s) Guaranteed
By_________________________________________________
THE SIGNATURES SHOULD BE GUARANTEED BY A ELIGIBILE GUARANTOR
INSTITUTION (BANKS STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT TO S.E.C.
RULE 17Ad-15)
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND INDEMNITY AS A CONDITION TO THE
ISSUANCE OF A REPLACEMENT CERTIFICATE
Exhibit 4.2
NUMBER __________ SHARES ____________
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
ESTABLISHED UNDER THE LAWS OF THE UNITED STATES
CLASS B VOTING COMMON STOCK
THE CLASS B VOTING COMMON STOCK
CAN ONLY BE TRANSFERRED TO CLASS B
ELIGIBLE HOLDERS. SEE REVERSE SIDE.
HOLDERS OF THE COMMON STOCK DO NOT
HAVE PREEMPTIVE RIGHTS. SEE REVERSE SIDE. CUSIP 313148 20 7
-------------------------------------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE OWNER OF
-------------------------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $1.00 EACH OF THE CLASS B VOTING COMMON STOCK OF
FEDERAL AGRICULTURAL MORTGAGE CORPORATION, transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This Certificate and shares
represented hereby are issued and shall be subject to the provisions of Title
VIII of the Farm Credit Act of 1971, as amended, and the Bylaws, rules and
regulations of the Corporation, and all amendments thereto (copies of which are
on files with the Transfer Agent), to all of which the holder hereof by
acceptance of this Certificate assents.
This Certificate is not valid until countersigned by the Transfer Agent.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
SECRETARY [corporate seal] CHAIRMAN OF THE BOARD
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
The Corporation is authorized to issue more than one class or series of stock.
The Corporation will furnish without charge to each shareholder who so requests
a statement of the designations, preferences, restrictions, limitations and
relative rights of the shares of each class of stock or series thereof which the
Corporation is authorized to issue.
RESTRICTIONS UPON SHARES OF CLASS B VOTING COMMON STOCK
The transfer of shares of Class B Voting Common Stock is restricted by, and
is subject to restrictions imposed or which may be imposed under the authority
of, provisions of Title VIII of the Farm Credit Act of 1971, as amended (the
"Act"). The following statements summarize the provisions of the Act as in
effect on November 23, 1993 and are qualified by reference thereto and to any
subsequent amendments thereto.
The Act provides that the board of directors of the Corporation (the
"Board") shall arrange for an initial offering of Common Stock and shall take
whatever other actions are necessary to proceed with the operations of the
Corporation. Under the Act, shares of a class of Voting Common Stock may only be
held by a holder eligible to hold that class of Voting Common Stock.
Eligible Holders of Class B Voting Common Stock are defined in the Act as
the entities which are institutions of the Farm Credit System.
Pursuant to its authority under the Act, the Board has provided that shares
of Voting Common Stock that have been acquired by Eligible Holders may
thereafter be sold and transferred to security brokers and dealers who will
acquire the shares for the purpose of making a secondary market in such shares.
The Board has also provided that any entity entitled to own shares of
Common Stock may cause such shares as it owns to be registered on the books of
the Corporation in its own name or in the name of a nominee.
PREFERENCES
The ratio of dividends paid on each share of Class C Non-Voting Common
Stock to each share of Voting Common Stock will be 3-to-1. The ratio of
distributions in any liquidation, dissolution or winding up of the Corporation,
after payment in full of all amounts due on any preferred stock, on each share
of Class C Non-Voting Common Stock to each share of Voting Common Stock is
required to be 3-to-1. Each of these ratios may be decreased only by the
affirmative vote of the holders of two-thirds of the outstanding shares of Class
C Non-Voting Common Stock.
PREEMPTIVE RIGHTS
No holder of the shares of the Corporation of any class, now or hereafter
authorized, shall as such holder have any preemptive or preferential right to
subscribe to, purchase, or receive any shares of the Corporation of any class,
now or hereafter authorized, or any rights or options for any such shares or any
rights or options to subscribe to or purchase any such shares or other
securities convertible into or exchangeable for or carrying rights or options to
purchase shares of any class or other securities that may at any time be issued,
sold or offered for sale by the Corporation or subjected to the rights or
options to purchase granted by the Corporation. The holder hereof by acceptance
of this Certificate consents and agrees to the foregoing and renounces any such
preemptive or preferential rights which he might otherwise as such holder have.
For value received ___________________________________________________hereby sell(s), assign(s), and transfer(s) unto
PLEASE INSERT TAXPAYER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
Class B Shares represented by the within Certificate, and do(es) hereby irrevocably constitute and appoint
_____________________________________________________________________________Attorney
to transfer the said Shares on the books of the within-named Corporation with full power of substitution in the premises
Dated____________________________________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN ON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER
Exhibit 4.3
CLASS C NON-VOTING SHARES ___________
COMMON STOCK
PAR VALUE OF $1.00 EACH
ESTABLISHED UNDER THE LAWS OF THE UNITED STATES [graphic] SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS.
HOLDERS OF THE COMMON STOCK DO NOT CUSIP 313148 30 6
HAVE PREEMPTIVE RIGHTS. SEE REVERSE SIDE.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
-------------------------------------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE OWNER OF
-------------------------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE CLASS C NON-VOTING COMMON STOCK OF
FEDERAL AGRICULTURAL MORTGAGE CORPORATION, transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This Certificate and shares
represented hereby are issued and shall be subject to the provisions of Title
VIII of the Farm Credit Act of 1971, as amended, and the Bylaws, rules and
regulations of the Corporation, and all amendments thereto (copies of which are
on files with the Transfer Agent), to all of which the holder hereof by
acceptance of this Certificate assents.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
[corporate seal] Dated:
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE SECRETARY CHAIRMAN OF THE BOARD
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
The Corporation is authorized to issue more than one class or series of stock.
The Corporation will furnish without charge to each shareholder who so requests
a statement of the designations, preferences, restrictions, limitations and
relative rights of the shares of each class of stock or series thereof which the
Corporation is authorized to issue.
NO PREEMPTIVE RIGHTS
No holder of the shares of the Corporation of any class, now or hereafter
authorized, shall as such holder have any preemptive or preferential right to
subscribe to, purchase, or receive any shares of the Corporation of any class,
now or hereafter authorized, or any rights or options for any such shares or any
rights or options to subscribe to or purchase any such shares or other
securities convertible into or exchangeable for or carrying rights or options to
purchase shares of any class or other securities that may at any time be issued,
sold or offered for sale by the Corporation or subjected to the rights or
options to purchase granted by the Corporation. The holder hereof by acceptance
of this Certificate consents and agrees to the foregoing and renounces any such
preemptive or preferential rights which he might otherwise as such holder have.
The following abbreviations, when used in the inscription on the lace of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
TEN COM - as tenants in common UNIF GIFT MIN ACT-___Custodian____ UNIF TRAN MIN ACT___Custodian___
TEN ENT - as tenants by the entireties (Cust) (Minor) (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors under Uniform Transfers to Minors
survivorship and not as tenants Act_________________ Act________________________
in common (state) (state)
Additional abbreviations may also be used though, not in the above list.
For value received ___________________________________________________hereby sell(s), assign(s), and transfer(s) unto
PLEASE INSERT TAXPAYER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
Class C Shares represented by the within Certificate, and do(es) hereby irrevocably constitute and appoint
_____________________________________________________________________________Attorney
to transfer the said Shares on the books of the within-named Corporation with full power of substitution in the premises
Dated____________________________________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN ON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER
Signature(s) Guaranteed
By_________________________________________________
THE SIGNATURES SHOULD BE GUARANTEED BY A ELIGIBILE GUARANTOR
INSTITUTION (BANKS STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT TO S.E.C.
RULE 17Ad-15)
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND INDEMNITY AS A CONDITION TO THE
ISSUANCE OF A REPLACEMENT CERTIFICATE.
Exhibit 4.4
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CERTIFICATE OF DESIGNATION OF TERMS AND CONDITIONS
of
6.40% CUMULATIVE PREFERRED STOCK, SERIES A
(par value $1.00 per share; liquidation preference $50.00 per share)
I, Jerome G. Oslick, Secretary of the Federal Agricultural Mortgage
Corporation, a federally chartered instrumentality of the United States of
America ("Farmer Mac" or the "Corporation"), do hereby certify that, pursuant to
authority vested in the Board of Directors of Farmer Mac by Section 8.4(e) of
the Farm Credit Act of 1971, as amended (12 U.S.C. ss.ss. 2279aa-4(e)), the
Board of Directors adopted resolutions on June 7, 2001 and February 7, 2002,
which resolutions are now, and at all times since such dates have been, in full
force and effect, and that the Chief Executive Officer, pursuant to the
authority delegated to him by such resolutions, approved the final terms of the
public issuance and sale of the preferred stock of Farmer Mac designated above.
The 6.40% Cumulative Preferred Stock, Series A shall have the following
designation, powers, preferences, rights, privileges, qualifications,
limitations, restrictions, terms and conditions:
1. Designation, Par Value, Number of Shares and Seniority
The class of preferred stock of the Corporation created hereby (the
"Preferred Stock") shall be designated "6.40% Cumulative Preferred Stock, Series
A," shall have a par value of $1.00 per share and a liquidation preference of
$50.00 per share and shall consist of 700,000 shares. The Board of Directors, or
a duly authorized committee thereof, shall be permitted to increase the
authorized number of such shares at any time. The Preferred Stock shall rank
senior to the Class A Voting Common Stock, Class B Voting Common Stock and Class
C Non-Voting Common Stock of the Corporation (collectively, the "Common Stock")
to the extent provided in this Certificate.
2. Dividends
(a) Holders of outstanding shares of the Preferred Stock shall be entitled
to receive, ratably, when as and if declared by the Board of Directors in its
sole discretion, out of funds legally available for dividend payments,
cumulative quarterly cash dividends at the annual rate of 6.40% of its
liquidation preference, or $3.20, per share of Preferred Stock. Dividends on the
Preferred Stock shall accrue from but not including May 6, 2002 and shall be
payable when, as and if declared by the Board of Directors on March 31, June 30,
September 30 and December 31 of each year (each, a "Dividend Payment Date"),
beginning on June 30, 2002. If a Dividend Payment Date is not a "Business Day,"
the related dividend shall be paid on the next Business Day with the same force
and effect as though paid on the Dividend Payment Date, without any increase to
account for the period from such Dividend Payment Date through the date of
actual payment. For these purposes, "Business Day" means a day other than (i) a
Saturday or Sunday, (ii) a day on which New York City banks are closed or (iii)
a day on which the offices of Farmer Mac are closed. The "Dividend Period"
relating to a Dividend Payment Date shall be the period from but not including
the preceding Dividend Payment Date (or from but not including May 6, 2002 in
the case of the first Dividend Payment Date) through and including the related
Dividend Payment Date. If declared, the dividend payable in respect of the first
Dividend Period shall be $0.48 per share. The amount of dividends payable in
respect of any quarterly Dividend Period other than the first Dividend Period
shall be computed at a rate equal to $3.20 divided by four. The amount of
dividends payable for any period shorter than a full quarterly Dividend Period
shall be computed on the basis of twelve 30-day months and a 360-day year.
Dividends shall be paid to holders of record of outstanding shares of the
Preferred Stock as they appear in the books and records of Farmer Mac on the
record date fixed by the Board of Directors, not to be earlier than 45 days nor
later than 10 days preceding the applicable Dividend Payment Date.
If Farmer Mac redeems the Preferred Stock, any accrued and unpaid dividends
through and including the date of redemption shall be included in the redemption
price of the shares redeemed and shall not be separately payable.
(b) No dividends shall be declared or paid or set apart for payment on the
Common Stock or any other class or series of stock ranking junior to or (except
as hereinafter provided) on a parity with the Preferred Stock with respect to
the payment of dividends unless dividends have been declared and paid or set
apart (or ordered by our Board of Directors to be set apart) for payment on the
outstanding Preferred Stock in respect of the then-current and any prior
Dividend Periods; provided, however, that the foregoing dividend preference
shall not in any way create any claim or right in favor of the holders of the
Preferred Stock in the event that Farmer Mac shall not have declared or paid or
set apart (or the Board of Directors shall not have ordered to be set apart)
dividends on the Preferred Stock in respect of any prior Dividend Period. In the
event that Farmer Mac shall not pay any one or more dividends or any part
thereof on the Preferred Stock, the holders of the Preferred Stock shall not
have any claim in respect of such non-payment so long as no dividend (other than
those referred to above) is paid on the Common Stock or any junior or parity
stock in violation of the next preceding sentence.
(c) If, prior to November 6, 2003, an amendment to the Internal Revenue
Code of 1986, as amended (the "Code"), is enacted that reduces or eliminates the
percentage of the dividends-received deduction applicable to the Preferred Stock
as specified in Section 243(a)(1) of the Code or any successor provision (the
"Dividends-Received Percentage"), including any change applicable only to
certain categories of stock, which change is applicable to the Preferred Stock,
certain adjustments may be made in respect of the dividends payable by the
Corporation, and Post Declaration Date Dividends and Retroactive Dividends (as
such terms are defined below) may become payable, as described below.
The amount of each dividend payable (if declared) per share of Preferred
Stock for dividend payments made on or after the effective date of such change
in the Code shall be adjusted by multiplying the amount of the dividend payable
pursuant to Section 2(a) (before adjustment) by a factor, which shall be the
number determined in accordance with the following formula (the "DRD Formula"),
and rounding the result to the nearest cent (with one-half cent rounded up):
1 - 0.35(1 - 0.70)
--------------------
1 - 0.35(1 - DRP)
For the purposes of the DRD Formula, "DRP" means the Dividends-Received
Percentage (expressed as a decimal) applicable to the dividend in question;
provided, however, that if the Dividends-Received Percentage applicable to the
dividend in question is less than 50%, then the DRP shall equal 0.50. No
amendment to the Code, other than a change in the percentage of the
dividends-received deduction set forth in Section 243(a)(1) of the Code or any
successor provision, or a change in the percentage of the dividends-received
deduction for certain categories of stock, which change is applicable to the
Preferred Stock, shall give rise to an adjustment.
Notwithstanding the foregoing provisions, if, with respect to any such
amendment, the Corporation receives either an unqualified opinion of nationally
recognized independent tax counsel selected by the Corporation or a private
letter ruling or similar form of assurance from the Internal Revenue Service
(the "IRS") to the effect that such an amendment does not apply to a dividend
payable on the Preferred Stock, then such amendment shall not result in the
adjustment provided for pursuant to the DRD Formula with respect to such
dividend. The opinion referenced in the previous sentence shall be based upon
the legislation amending or establishing the DRP or upon a published
pronouncement of the IRS addressing such legislation. Unless the context
otherwise requires, references to dividends herein shall mean dividends as
adjusted by the DRD Formula.
Notwithstanding the foregoing, if any such amendment to the Code is enacted
after the dividend payable on a Dividend Payment Date has been declared but
before such dividend is paid, the amount of the dividend payable on such
Dividend Payment Date shall not be increased. Instead, additional dividends (the
"Post Declaration Date Dividends"), equal to the excess, if any, of (x) the
product of the dividend paid by the Corporation on such Dividend Payment Date
and the DRD Formula (where the DRP used in the DRD Formula would be equal to the
greater of the Dividends-Received Percentage applicable to the dividend in
question and .50) over (y) the dividend paid by the Corporation on such Dividend
Payment Date, shall be payable (if declared) to holders of Preferred Stock on
the record date applicable to the next succeeding Dividend Payment Date, in
addition to any other amounts payable on such date.
If any such amendment to the Code is enacted and the reduction in the
Dividends-Received Percentage retroactively applies to a Dividend Payment Date
as to which the Corporation previously paid dividends on the Preferred Stock
(each, an "Affected Dividend Payment Date"), the Corporation shall pay (if
declared) additional dividends (the "Retroactive Dividends") to holders on the
record date applicable to the next succeeding Dividend Payment Date (or, if such
amendment is enacted after the dividend payable on such Dividend Payment Date
has been declared, to holders on the record date applicable to the second
succeeding Dividend Payment Date following the date of enactment) in an amount
equal to the excess of (x) the product of the dividend paid by the Corporation
on each Affected Dividend Payment Date and the DRD Formula (where the DRP used
in the DRD Formula would be equal to the greater of the Dividends-Received
Percentage and 0.50 applied to each Affected Dividend Payment Date) over (y) the
sum of the dividend paid by the Corporation on each Affected Dividend Payment
Date. The Corporation shall make only one payment of Retroactive Dividends for
any such amendment. Notwithstanding the foregoing provisions, if, with respect
to any such amendment, the Corporation receives either an unqualified opinion of
nationally recognized independent tax counsel selected by the Corporation or a
private letter ruling or similar form of assurance from the IRS to the effect
that such amendment does not apply to a dividend payable on an Affected Dividend
Payment Date for the Preferred Stock, then such amendment shall not result in
the payment of Retroactive Dividends with respect to such Affected Dividend
Payment Date. The opinion referenced in the previous sentence must be based upon
the legislation amending or establishing the DRP or upon a published
pronouncement of the IRS addressing such legislation.
In the event that the amount of dividends payable per share of the
Preferred Stock is adjusted pursuant to the DRD Formula and/or Post Declaration
Date Dividends or Retroactive Dividends are to be paid, the Corporation shall
give notice of each such adjustment and, if applicable, any Post Declaration
Date Dividends and Retroactive Dividends to be given as soon as practicable to
the holders of Preferred Stock.
(d) Notwithstanding any other provision of this Certificate, the Board of
Directors, in its discretion, may choose to pay dividends on the Preferred Stock
without the payment of any dividends on the Common Stock or any other
outstanding class or series of stock ranking junior to the Preferred Stock with
respect to the payment of dividends.
(e) No dividend shall be declared or paid or set apart for payment on any
shares of the Preferred Stock if at the same time any arrears or default exists
in the payment of dividends on any outstanding class or series of stock of
Farmer Mac ranking senior to or (except as provided herein) on a parity with the
Preferred Stock with respect to the payment of dividends. If and whenever
dividends, having been declared, shall not have been paid in full, as aforesaid,
on shares of the Preferred Stock and on the shares of any other class or series
of stock of Farmer Mac ranking on a parity with the Preferred Stock with respect
to the payment of dividends, all such dividends that have been declared on
shares of the Preferred Stock and on the shares of any such other class or
series shall be paid pro rata, so that the respective amounts of dividends paid
per share on the Preferred Stock and on such other class or series shall in all
cases bear to each other the same ratio that the respective amounts of dividends
declared but unpaid per share on the shares of the Preferred Stock (including
any adjustments due to changes in the Dividends-Received Percentage) and on the
shares of such other class or series bear to each other.
(f) Holders of shares of the Preferred Stock shall not be entitled to any
dividends, whether payable in cash or in property, other than as herein provided
and shall not be entitled to interest, or any sum in lieu of interest, on or in
respect of any dividend payment.
3. Optional Redemption
(a) The Preferred Stock shall not be redeemable before June 30, 2012. On
that date and at any time thereafter, subject to the notice provisions set forth
in Section 3(b) below and to any further limitations that may be imposed by law,
Farmer Mac may redeem the Preferred Stock, in whole or in part, out of funds
legally available therefor, at the redemption price of $50.00 per share plus an
amount, determined in accordance with Section 2 above, equal to the amount of
any accrued and unpaid dividends for any prior Dividend Periods and for the
then-current Dividend Period through and including the date of redemption. If
less than all of the outstanding shares of the Preferred Stock are to be
redeemed, Farmer Mac shall select shares to be redeemed from the outstanding
shares not previously called for redemption by lot or pro rata (as nearly as
possible) or by any other method which Farmer Mac in its sole discretion deems
fair.
(b) In the event Farmer Mac shall redeem any or all of the Preferred Stock,
Farmer Mac shall give notice of such redemption by first class mail, postage
prepaid, mailed neither less than 30 nor more than 60 days prior to the
redemption date, to each holder of record of the shares of the Preferred Stock
being redeemed, at such holder's address as the same appears in the books and
records of Farmer Mac. Each such notice shall state the number of shares to be
redeemed, the redemption price, the redemption date and the place at which such
holder's certificate(s) representing shares of the Preferred Stock must be
presented for cancellation or exchanges, as the case may be, upon such
redemption. In the event that fewer than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares without cost to the holder thereof. Failure to duly give
notice, or any defect in the notice, to any holder of the Preferred Stock shall
not affect the validity of the proceedings for the redemption of shares of any
other holder of the Preferred Stock being redeemed.
(c) If any redemption date is not a Business Day, payment of the redemption
price may be made on the next Business Day with the same force and effect as if
made on the redemption date, and no interest, additional dividends or other sums
will accrue on the amount payable from the redemption date to the next Business
Day.
(d) Notice having been mailed as aforesaid, from and after the redemption
date specified therein and upon payment of the consideration set forth in
Section 3(a) above, said shares of the Preferred Stock shall no longer be deemed
to be outstanding, and all rights of the holders thereof as holders of the
Preferred Stock shall cease, with respect to shares so redeemed.
(e) Any shares of the Preferred Stock so redeemed shall, after such
redemption, no longer have the status of authorized, issued or outstanding
shares.
(f) The Preferred Stock shall not be subject to any mandatory redemption,
sinking fund or other similar provisions. In addition, holders of the Preferred
Stock shall have no right to require redemption of any shares of the Preferred
Stock.
4. No Voting Rights
Except as set forth in Section 9 below, the shares of the Preferred Stock
shall not have any voting powers, either general or special.
5. No Conversion or Exchange Rights
The holders of shares of the Preferred Stock shall not have any right to
convert such shares into or exchange such shares for any other class or series
of stock or obligations of Farmer Mac.
6. No Preemptive Rights
No holder of the Preferred Stock shall as such holder be entitled as a
matter of right to subscribe for or purchase, or have any preemptive right with
respect to, any new or additional issue of other shares, rights, options or
other securities of any class of Farmer Mac whatsoever, whether now or hereafter
authorized and whether issued for cash or other consideration or by way of
dividend.
7. Liquidation Rights and Preference
(a) Except as otherwise set forth herein, upon the voluntary or involuntary
dissolution, liquidation or winding up of Farmer Mac, after payment of or
provision for the liabilities of Farmer Mac and the expenses of such
dissolution, liquidation or winding up, the holders of the outstanding shares of
the Preferred Stock shall be entitled to receive out of the assets of Farmer Mac
available for distribution to stockholders, before any payment or distribution
shall be made on the Common Stock or any other class or series of stock of
Farmer Mac ranking junior to the Preferred Stock upon liquidation, the amount of
$50.00 per share plus an amount, determined in accordance with Section 2 above,
equal to the amount of any accrued and unpaid dividends for any prior Dividend
Periods and for the then-current Dividend Period through and including the date
of payment in respect of such dissolution, liquidation or winding up. The
holders of the outstanding shares of any class or series of stock of Farmer Mac
ranking on a parity with the Preferred Stock upon liquidation shall be entitled
to receive out of the assets of Farmer Mac available for distribution to
stockholders, before any such payment or distribution shall be made on the
Common Stock or any other class or series of stock of Farmer Mac ranking junior
to the Preferred Stock and to such parity stock upon liquidation, any
corresponding preferential amount to which the holders of such parity stock may,
by the terms thereof, be entitled; provided, however, that if the assets of
Farmer Mac available for distribution to stockholders shall be insufficient for
the payment of the full amounts to which the holders of the outstanding shares
of the Preferred Stock and the holders of the outstanding shares of such parity
stock shall be entitled to receive upon such dissolution, liquidation or winding
up of Farmer Mac as aforesaid, then, subject to paragraph (b) of this Section 7,
all of the assets of Farmer Mac available for distribution to stockholders shall
be distributed to the holders of outstanding shares of the Preferred Stock and
to the holders of outstanding shares of such parity stock pro rata, so that the
amounts so distributed to holders of the Preferred Stock and to holders of such
classes or series of such parity stock, respectively, shall bear to each other
the same ratio that the respective distributive amounts to which they are so
entitled (including any adjustment due to changes in the Dividends-Received
Percentage) bear to each other. After the payment of the aforesaid amounts to
which they are entitled, the holders of outstanding shares of the Preferred
Stock and the holders of outstanding shares of any such parity stock shall not
be entitled to any further participation in any distribution of assets of Farmer
Mac. Solely for purposes of Section 8.4(e)(3) of the Farm Credit Act of 1971, as
amended, the Preferred Stock shall be deemed to have a par value of $50.00 per
share.
(b) Notwithstanding the foregoing, upon the dissolution, liquidation or
winding up of Farmer Mac, the holders of shares of the Preferred Stock then
outstanding shall not be entitled to be paid any amounts to which such holders
are entitled pursuant to paragraph (a) of this Section 7 unless and until the
holders of any classes or series of stock of Farmer Mac ranking senior to the
Preferred Stock upon liquidation shall have been paid all amounts to which such
classes or series are entitled pursuant to their respective terms.
(c) Neither the sale, lease or exchange of all or substantially all of the
property or business of Farmer Mac, nor the merger, consolidation or combination
of Farmer Mac into or with any other corporation or entity, shall be deemed to
be a dissolution, liquidation or winding up for the purpose of this Section 7.
8. Additional Classes or Series of Stock
The Board of Directors shall have the right at any time in the future to
authorize, create and issue, by resolution or resolutions, one or more
additional classes or series of stock of Farmer Mac, and to determine and fix
the distinguishing characteristics and the relative rights, preferences,
privileges and other terms of the shares thereof. Any such class or series of
stock may rank senior to, on a parity with or junior to the Preferred Stock as
to dividends, upon liquidation or otherwise.
9. Amendments
Farmer Mac, by or under the authority of the Board of Directors, may amend,
alter, supplement or repeal any provision of this Certificate pursuant to the
following terms and conditions:
(a) Without the consent of the holders of the Preferred Stock, Farmer
Mac may amend, alter, supplement or repeal any provision of this
Certificate to cure any ambiguity, to correct or supplement any provision
herein which may be defective or inconsistent with any other provision
herein, or to make any other provisions with respect to matters or
questions arising under this Certificate, provided that such action shall
not materially and adversely affect the interests of the holders of the
Preferred Stock.
(b) The consent of the holders of at least two-thirds of all of the
shares of the Preferred Stock at the time outstanding, given in person or
by proxy, either in writing or by a vote at a meeting called for the
purpose at which the holders of shares of the Preferred Stock shall vote
together as a class, shall be necessary for authorizing, effecting or
validating the amendment, alteration, supplementation or repeal of the
provisions of this Certificate if such amendment, alteration,
supplementation or repeal would materially and adversely affect the powers,
preferences, rights, privileges, qualifications, limitations, restrictions,
terms or conditions of the Preferred Stock. Notwithstanding the foregoing
sentence, the 6.40% annual dividend rate, the redemption price or the
liquidation preference of the Preferred Stock shall not be reduced without
the unanimous consent of all shares of the Preferred Stock. The creation
and issuance of any other class or series of stock of Farmer Mac, or the
issuance of additional shares of any existing class or series of stock of
Farmer Mac (including the Preferred Stock), whether ranking senior to, on a
parity with or junior to the Preferred Stock, shall not be deemed to
constitute such an amendment, alteration, supplementation or repeal.
(c) Holders of the Preferred Stock shall be entitled to one vote per
share on matters on which their consent is required pursuant to
subparagraph (b) of this Section 9. Consents shall be effective when duly
executed and delivered to the Corporation. In connection with any meeting
of such holders, the Board of Directors shall fix a record date, neither
earlier than 60 days nor later than 10 days prior to the date of such
meeting, and holders of record of shares of the Preferred Stock on such
record date shall be entitled to notice of and to vote at any such meeting
and any adjournment. The Board of Directors, or such person or persons as
it may designate, may establish reasonable rules and procedures as to the
solicitation of the consent of holders of the Preferred Stock at any such
meeting or otherwise, which rules and procedures shall conform to the
requirements of any national securities exchange on which the Preferred
Stock may be listed at such time.
10. Priority
Any stock of any class or series of Farmer Mac shall be deemed to rank:
(a) senior to the shares of the Preferred Stock, either as to
dividends or upon liquidation, if the holders of such class or series shall
be entitled to the receipt of dividends or of amounts distributable upon
dissolution, liquidation or winding up of Farmer Mac, as the case may be,
in preference or priority to the holders of shares of the Preferred Stock;
(b) on a parity with shares of the Preferred Stock, either as to
dividends or upon liquidation, whether or not the dividend rates or
amounts, dividend payment dates or redemption of liquidation prices per
share, if any, be different from those of the Preferred Stock, if the
holders of such class or series shall be entitled to the receipt of
dividends or of amounts distributable upon dissolution, liquidation or
winding up of Farmer Mac, as the case may be, in proportion to their
respective dividend rates or amounts or liquidation prices, without
preference or priority, one over the other, as between the holders of such
class or series and the holders of shares of the Preferred Stock; and
(c) junior to shares of the Preferred Stock, either as to dividends or
upon liquidation, if such class or series shall be Common Stock, or if the
holders of shares of the Preferred Stock shall be entitled to receipt of
dividends or of amounts distributable upon dissolution, liquidation or
winding up of Farmer Mac, as the case may be, in preference or priority to
the holders of shares of such class or series.
11. Notices
Any notice, demand or other communication that by any provision of this
Certificate is required or permitted to be given or served to or upon Farmer Mac
shall be given or served in writing addressed (unless and until another address
shall be published by Farmer Mac) to the Federal Agricultural Mortgage
Corporation, 1133 Twenty-First Street, N.W., Suite 600, Washington, D.C. 20036,
Attention: Vice President - General Counsel and Secretary. Such notice, demand
or other communication to or upon Farmer Mac shall be deemed to have been
sufficiently given or made only upon actual receipt of a writing by Farmer Mac.
Any notice, demand or other communication that by any provision of this
Certificate is required or permitted to be given or served by Farmer Mac
hereunder may be given or served by being deposited first class, postage
prepaid, in the United States mail addressed (1) to the holder as such holder's
name and address may appear at such time in the books and records of Farmer Mac
or (2) if to a person or entity other than a holder of record of the Preferred
Stock, to such person or entity at such address as appears to Farmer Mac to be
appropriate at such time. Such notice, demand or other communication shall be
deemed to have been sufficiently given or made, for all purposes, upon mailing.
12. Miscellaneous
(a) Farmer Mac and any agent of Farmer Mac may deem and treat the holder of
a share or shares of Preferred Stock, as shown in Farmer Mac's books and
records, as the absolute owner of such share or shares of Preferred Stock for
the purpose of receiving payment of dividends in respect of such share or shares
of Preferred Stock and for all other purposes whatsoever, and neither Farmer Mac
nor any agent of Farmer Mac shall be affected by any notice to the contrary. All
payments made to or upon the order of any such person shall be valid and, to the
extent of the sum or sums so paid, effectual to satisfy and discharge
liabilities for moneys payable by Farmer Mac on or with respect to any such
share or shares of Preferred Stock.
(b) The shares of the Preferred Stock, when duly issued, shall be fully
paid and non-assessable.
(c) The Preferred Stock shall be issued and shall be transferable on the
books of Farmer Mac, only in whole shares, it being intended that no fractional
interests in shares of Preferred Stock shall be created or recognized by Farmer
Mac.
(d) Farmer Mac appoints American Stock Transfer & Trust Company ("AST") as
its transfer agent, dividend disbursing agent and registrar for the Preferred
Stock, in accordance with the general practices of AST and its regulations set
forth in the pamphlet entitled "Regulations of the American Stock Transfer &
Trust Company." Such appointment shall be for an initial term of three years
from May 1, 2002 and shall automatically be renewed for three-year successive
periods unless terminated by written notice by Farmer Mac or AST.
(e) For purposes of this Certificate, the terms "Farmer Mac" and
"Corporation" mean the Federal Agricultural Mortgage Corporation and any
successor thereto by operation of law or by reason of a merger, consolidation or
combination.
(f) This Certificate and the respective rights and obligations of Farmer
Mac and the holders of the Preferred Stock with respect to such Preferred Stock
shall be construed in accordance with and governed by the laws of the United
States, provided that the law of the District of Columbia shall serve as the
federal rule of decision in all instances except where such law is inconsistent
with Farmer Mac's enabling legislation, its public purposes or any provision of
this Certificate.
(g) RECEIPT AND ACCEPTANCE OF A SHARE OR SHARES OF THE PREFERRED STOCK BY
OR ON BEHALF OF A HOLDER SHALL CONSTITUTE THE UNCONDITIONAL ACCEPTANCE BY THE
HOLDER (AND ALL OTHERS HAVING BENEFICIAL OWNERSHIP OF SUCH SHARE OR SHARES) OF
ALL OF THE TERMS AND PROVISIONS OF THIS CERTIFICATE. NO SIGNATURE OR OTHER
FURTHER MANIFESTATION OF ASSENT TO THE TERMS AND PROVISIONS OF THIS CERTIFICATE
SHALL BE NECESSARY FOR ITS OPERATION OR EFFECT AS BETWEEN FARMER MAC AND THE
HOLDER (AND ALL SUCH OTHERS).
Dated as of May 6, 2002
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
By: /s/ Henry D. Edelman
---------------------
Name: Henry D. Edelman
Title: President and Chief Executive Officer
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of the Federal
Agricultural Mortgage Corporation this 6th day of May 2002.
[Seal]
/s/ Jerome G. Oslick
----------------------
Name: Jerome G. Oslick
Title: Secretary