FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004 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 20036
Washington, D.C.
(Address of principal executive (Zip code)
offices)
(202) 872-7700
(Registrant's telephone number, including area code)
-----------------------------------------------
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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 August 2, 2004, there were 1,030,780 shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common Stock and 10,571,485 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 interim condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial condition and the results of operations and cash flows of Farmer Mac for the interim periods presented. Certain information and footnote disclosures normally included in annual consolidated financial statements have been condensed or omitted as permitted by such rules and regulations. Management believes that the disclosures are adequate to present fairly the condensed consolidated financial position, condensed consolidated results of operations and condensed consolidated cash flows as of the dates and for the periods presented. These condensed consolidated financial statements should be read in conjunction with the audited 2003 consolidated financial statements of Farmer Mac included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year.
The following information concerning Farmer Mac's interim condensed consolidated financial statements is included in this report beginning on the pages listed below:
Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003..............................................3 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003...................4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003...........................5 Notes to Condensed Consolidated Financial Statements.............6
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
June 30, December 31,
2004 2003
------------- -------------
Assets:
Cash and cash equivalents $ 581,502 $ 623,674
Investment securities 1,061,475 1,064,782
Farmer Mac Guaranteed Securities 1,384,814 1,508,134
Loans held for sale 24,243 46,662
Loans held for investment 919,645 942,929
Allowance for loan losses (5,565) (5,967)
------------- -------------
Loans, net 938,323 983,624
Real estate owned, net of valuation allowance of
$0.5 million and $0.2 million 9,179 15,478
Financial derivatives 2,662 961
Interest receivable 51,216 58,423
Guarantee and commitment fees receivable 18,554 16,885
Deferred tax asset, net 10,461 10,891
Prepaid expenses and other assets 22,364 16,798
------------- -------------
Total Assets $ 4,080,550 $ 4,299,650
------------- -------------
Liabilities and Stockholders' Equity:
Liabilities:
Notes payable:
Due within one year $ 2,364,793 $ 2,799,384
Due after one year 1,360,338 1,136,110
------------- -------------
Total notes payable 3,725,131 3,935,494
Financial derivatives 51,566 67,670
Accrued interest payable 25,201 26,342
Guarantee and commitment obligation 16,714 14,144
Accounts payable and accrued expenses 22,692 29,574
Reserve for losses 13,187 13,172
------------- -------------
Total Liabilities 3,854,491 4,086,396
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,
10,565,918 and 10,522,513 shares issued and outstanding
as of June 30, 2004 and December 31, 2003 10,566 10,523
Additional paid-in capital 89,546 88,652
Accumulated other comprehensive loss (214) (2,295)
Retained earnings 89,630 79,843
------------- -------------
Total Stockholders' Equity 226,059 213,254
------------- -------------
Total Liabilities and Stockholders' Equity $ 4,080,550 $ 4,299,650
------------- -------------
See accompanying notes to condensed consolidated financial statements.
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FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Interest income:
Investments and cash equivalents $ 8,109 $ 8,890 $ 16,445 $ 18,496
Farmer Mac Guaranteed Securities 16,239 18,688 32,866 38,200
Loans 12,565 13,288 26,690 26,137
----------- ----------- ------------ ----------
Total interest income 36,913 40,866 76,001 82,833
Interest expense 29,074 31,501 58,695 63,594
----------- ----------- ------------ ----------
Net interest income 7,839 9,365 17,306 19,239
Provision for loan losses 230 (1,416) (2,563) (2,624)
----------- ----------- ------------ ----------
Net interest income after provision
for loan losses 8,069 7,949 14,743 16,615
Guarantee and commitment fees 5,251 5,111 10,473 10,205
Gains/(Losses) on financial derivatives
and trading assets (6,152) 3,669 (2,903) 7,003
Gain on sale of Farmer Mac Guaranteed Securities 367 - 367 -
Gains/(Losses) on the sale of
real estate owned 30 (225) (252) (102)
Miscellaneous income 1,960 138 2,482 389
----------- ----------- ------------ ----------
Total revenues 9,525 16,642 24,910 34,110
----------- ----------- ------------ ----------
Expenses:
Compensation and employee benefits 1,717 1,465 3,512 2,905
General and administrative 1,820 1,213 3,893 2,404
Regulatory fees 649 382 1,061 765
REO operating costs, net 268 - 343 -
Provision for losses 1,845 472 668 1,490
----------- ------------ ----------- ----------
Total operating expenses 6,299 3,532 9,477 7,564
----------- ------------ ----------- ----------
Income before income taxes 3,226 13,110 15,433 26,546
Income tax expense 706 4,184 4,526 8,636
---------- - ------------ ----------- ----------
Net income 2,520 8,926 10,907 17,910
---------- - ------------ ----------- ----------
Preferred stock dividends (560) (560) (1,120) (1,120)
---------- - ------------ ----------- ----------
Net income available to common stockholders 1,960 $ 8,366 $ 9,787 $ 16,790
---------- - ------------ ----------- ----------
Earnings per common share:
Basic earnings per common share $ 0.16 $ 0.72 $ 0.81 $ 1.44
Diluted earnings per common share $ 0.16 $ 0.70 $ 0.80 $ 1.40
See accompanying notes to condensed consolidated financial statements.
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FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six Months Ended
----------------------------
June 30, 2004 June 30, 2003
------------- -------------
Cash flows from operating activities:
Net income $ 10,907 $ 17,910
Adjustments to reconcile net income to net cash provided by
operating activities:
Net amortization of investment premiums and discounts 906 281
Amortization of debt premiums, discounts and issuance costs 13,791 18,615
Proceeds from repayment of trading investment securities 2,516 5,207
Net change in fair value of trading securities and derivatives 3,869 (7,635)
Amortization of settled financial derivatives contracts 541 823
Gain on sale of Farmer Mac Guaranteed Securities (367) -
Losses on the sale of real estate owned 252 102
Total provision for losses 3,231 4,114
Decrease in interest receivable 7,207 9,105
(Increase)/decrease in guarantee and commitment fees receivable (1,669) 1,290
Increase in other assets (7,913) (40,428)
Increase in accrued interest payable (1,141) (407)
Increase/(decrease) in other liabilities (8,287) 11,774
------------ ------------
Net cash provided by operating activities 23,843 20,751
Cash flows from investing activities:
Purchases of available-for-sale investment securities (359,853) (400,675)
Purchases of Farmer Mac II Guaranteed Securities and
AgVantage bonds (80,216) (130,410)
Purchases of loans (61,963) (174,181)
Proceeds from repayment of investment securities 359,157 257,685
Proceeds from repayment of Farmer Mac Guaranteed Securities 149,958 195,586
Proceeds from repayment of loans 78,363 101,105
Proceeds from sale of loans and Farmer Mac Guaranteed Securities 63,408 35,084
Proceeds from sale of real estate owned 8,029 3,285
------------ ------------
Net cash provided by/(used in) investing activities 156,883 (112,521)
Cash flows from financing activities:
Proceeds from issuance of discount notes 36,433,510 32,047,218
Proceeds from issuance of medium-term notes 650,881 155,027
Payments to redeem discount notes (37,108,240) (32,126,608)
Payments to redeem medium-term notes (199,020) (85,400)
Settlement of financial derivatives 154 (2,695)
Proceeds from common stock issuance 937 2,129
Preferred stock dividends (1,120) (1,120)
------------ ------------
Net cash used in financing activities (222,898) (11,449)
------------ ------------
Net decrease in cash and cash equivalents (42,172) (103,219)
Cash and cash equivalents at beginning of period 623,674 723,800
------------ ------------
Cash and cash equivalents at end of period $ 581,502 $ 620,581
------------ ------------
See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Accounting Policies
(a) Cash and Cash Equivalents
Farmer Mac considers highly liquid investment securities with remaining maturities of three months or less at the time of purchase to be cash equivalents. Changes in the balance of cash and cash equivalents are reported in the Condensed Consolidated Statements of Cash Flows. The following table sets forth information regarding certain cash and non-cash transactions for the six months ended June 30, 2004 and 2003.
Six Months Ended
June 30,
------------------
2004 2003
------- --------
(in thousands)
Cash paid for:
Interest $ 31,632 $ 30,652
Income taxes 5,500 6,750
Non-cash activity:
Real estate owned acquired through foreclosure 5,732 18,310
Loans acquired and securitized as Farmer Mac
Guaranteed Securities 51,908 35,171
Loans acquired from on-balance sheet Farmer Mac
Guaranteed Securities 5,893 22,413
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(b) Allowance for Losses
As of June 30, 2004, Farmer Mac maintained a $21.8 million allowance and
contingent obligation for probable losses ("allowance for losses") to cover
estimated probable losses on loans held for investment, real estate owned, and
loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and long-term
standby purchase commitments ("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, as amended ("SFAS 114"). The methodology for
determining the allowance for losses is the same for loans held for investment
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs
because Farmer Mac believes the ultimate credit risk is substantially the same,
i.e., the underlying agricultural mortgage loans all meet the same credit
underwriting and appraisal standards.
The allowance for losses is increased through periodic provisions for loan losses that are charged against net interest income and provisions for losses that are charged to operating expense and is reduced by charge-offs for actual losses, net of recoveries. Charge-offs represent losses on the outstanding principal balance, any interest payment previously accrued or advanced and expected costs of liquidation.
The table below summarizes the components of Farmer Mac's allowance for losses, which includes its contingent obligation for probable losses, as of June 30, 2004 and December 31, 2003.
June 30, December 31,
2004 2003
------------ -----------
(in thousands)
Allowance for loan losses $ 5,565 $ 5,967
Real estate owned valuation allowance 545 238
Reserve for losses:
On-balance sheet Farmer Mac I Guaranteed Securities 2,504 2,861
Off-balance sheet Farmer Mac I Guaranteed Securities 1,166 1,070
LTSPCs 9,517 9,241
Contingent obligation for probable losses 2,501 2,676
------------ -----------
Total $ 21,798 $ 22,053
------------ -----------
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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 structured 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 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.
(c) Financial Derivatives
Farmer Mac enters into financial derivative transactions principally to protect against risk from the effects of market price or interest rate movements on the value of certain assets and future cash flows or debt issuance, not for trading or speculative purposes. Farmer Mac enters into interest rate swap contracts principally to adjust the characteristics of its short-term debt to match more closely the cash flow and duration characteristics of its longer-term mortgage and other assets, and also to adjust the characteristics of its long-term debt to match more closely the cash flow and duration characteristics of its short-term assets, thereby reducing interest rate risk. These transactions also may provide an overall lower effective cost of borrowing than would otherwise be available in the conventional debt market.
All financial derivatives are recorded on the balance sheet at fair value as a freestanding asset or liability. Financial derivatives in hedging relationships that mitigate exposure to changes in the fair value of assets are considered fair value hedges. Financial derivatives in hedging relationships that mitigate the exposure to the variability in expected future cash flows or other forecasted transactions are considered cash flow hedges. Financial derivatives that do not satisfy the hedging criteria of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended ("SFAS 133") are not accounted for as hedges and changes in the fair values of those financial derivatives are reported as gains or losses on financial derivatives and trading assets in the condensed consolidated statements of operations.
The following table summarizes information related to Farmer Mac's financial derivatives as of June 30, 2004 and December 31, 2003:
June 30, 2004
-----------------------------------------------------------------------------------------------
Cash Flow Hedges Fair Value Hedges No Hedge Designation Total
----------------------- ----------------------- ----------------------- -----------------------
Notional Fair Value Notional Fair Value Notional Fair Value Notional Fair Value
---------- ----------- ---------- ----------- ---------- ------------ ----------- -----------
(in thousands)
Interest rate swaps:
Pay-fixed $611,015 $ (36,246) $ - $ - $ 14,254 $ (25) $ 625,269 $ (36,271)
Receive-fixed - - 105,000 (4,068) 100,000 (4,415) 205,000 (8,483)
Basis 283,292 (3,169) - - 391,780 (239) 675,072 (3,408)
Other - - - - 25,000 (23) 25,000 (23)
Interest rate caps - - - - 210,000 - 210,000 -
Agency forwards 69,720 (714) - - 470 (5) 70,190 (719)
---------- ----------- ---------- ----------- ---------- ------------ ----------- -----------
Total $964,027 $(40,129) $ 105,000 $ (4,068) $741,504 $ (4,707) $1,810,531 $ (48,904)
---------- ----------- ---------- ----------- ---------- ------------ ----------- -----------
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December 31, 2003
-----------------------------------------------------------------------------------------------
Cash Flow Hedges Fair Value Hedges No Hedge Designation Total
----------------------- ----------------------- ----------------------- -----------------------
Notional Fair Value Notional Fair Value Notional Fair Value Notional Fair Value
---------- ----------- ---------- ----------- ---------- ------------ ----------- -----------
(in thousands)
Interest rate swaps:
Pay-fixed $ 636,213 $ (55,397) $ - $ - $ 138,177 $ (2,023) $ 774,390 $ (57,420)
Receive-fixed - - 145,000 (2,782) - - 145,000 (2,782)
Basis 307,621 (5,879) - - 14,296 (260) 321,917 (6,139)
Other - - - - 25,000 (27) 25,000 (27)
Interest rate caps - - - - 210,000 - 210,000 -
Agency forwards 54,196 (417) 26,332 76 - - 80,528 (341)
---------- ----------- ---------- ----------- ---------- ------------ ----------- -----------
Total $ 998,030 $ (61,693) $ 171,332 $ (2,706) $ 387,473 $ (2,310) $1,556,835 $ (66,709)
---------- ----------- ---------- ----------- ---------- ------------ ----------- -----------
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As of June 30, 2004, Farmer Mac had approximately $30.9 million of net after-tax unrealized losses on cash flow hedges included in accumulated other comprehensive income/(loss). These amounts will be reclassified into earnings in the same period or periods during which the hedged forecasted transactions (either the payment of interest or the issuance of discount notes) affect earnings or immediately when it becomes probable that the original hedged forecasted transaction will not occur within two months of the originally specified date. Over the next twelve months, Farmer Mac estimates that $5.3 million of the amount currently reported in accumulated other comprehensive income/(loss) will be reclassified into earnings. For the quarter ended June 30, 2004, any ineffectiveness related to Farmer Mac's designated hedges was insignificant.
(d) Earnings Per Common Share
Basic earnings per common share are based on the weighted-average number of common shares outstanding. Diluted earnings per common share are based on the weighted-average number of common shares outstanding adjusted to include all potentially dilutive common stock options. The following schedule reconciles basic and diluted earnings per common share for the three and six months ended June 30, 2004 and 2003:
June 30, 2004 June 30, 2003
---------------------------- ----------------------------
Dilutive Dilutive
Basic stock Diluted Basic stock Diluted
EPs options EPs EPs options EPs
---------------------------- ----------------------------
(in thousands, except per share amounts)
Three Months Ended:
Net income available to $ 1,960 $ 1,960 $ 8,366 $ 8,366
common stockholders
Weighted average shares 12,089 131 12,220 11,697 262 11,959
Earnings per common share $ 0.16 $ 0.16 $ 0.72 $ 0.70
Six Months Ended:
Net income available to $ 9,787 $ 9,787 $16,790 $16,790
common stockholders
Weighted average shares 12,077 169 12,246 11,668 294 11,962
Earnings per common share $ 0.81 $ 0.80 $ 1.44 $ 1.40
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(e) Stock-Based Compensation
Farmer Mac accounts for its stock-based employee compensation plans using the intrinsic value method of accounting for employee stock options pursuant to Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, as amended ("SFAS 123"). Accordingly, no compensation expense was recognized in second quarter 2004 or second quarter 2003 for employee stock options. Had Farmer Mac elected to use the fair value method of accounting for employee stock options, net income available to common stockholders and earnings per share for the three and six months ended June 30, 2004 and 2003, would have been reduced to the pro forma amounts indicated in the following table:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
-------- ------- -------- -------
(in thousands, except per share amounts)
Net income available to common
stockholders, as reported $ 1,960 $ 8,366 $ 9,787 $ 16,790
Add back: Restricted stock
compensation expense included in
reported net income, net of taxes 6 164 11 330
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method
for all awards, net of tax (486) (2,519) (491) (2,685)
Pro forma net income available to
common stockholders -------- ------- -------- -------
$ 1,480 $ 6,011 $ 9,307 $ 14,435
-------- ------- -------- -------
Earnings per common share:
Basic - as reported $ 0.16 $ 0.72 $ 0.81 $ 1.44
Basic - pro forma $ 0.12 $ 0.51 $ 0.77 $ 1.24
Diluted - as reported $ 0.16 $ 0.70 $ 0.80 $ 1.40
Diluted - pro forma $ 0.12 $ 0.50 $ 0.76 $ 1.21
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The following table summarizes stock option activity for the three and six months ended June 30, 2004 and 2003:
June 30, 2004 June 30, 2003
---------------------- --------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ----------- ---------- ---------
Three Months Ended:
Outstanding, beginning of period 1,557,355 $ 23.00 1,637,111 $ 19.45
Granted 90,000 22.11 343,104 22.40
Exercised (26,000) 20.75 (159,834) 9.49
Canceled (34,699) 22.26 (3,332) 29.10
---------- ----------- ---------- ---------
Outstanding, end of period 1,586,656 $ 23.01 1,817,049 $ 20.86
---------- ----------- ---------- ---------
Six Months Ended:
Outstanding, beginning of period 1,575,980 $ 22.92 1,637,111 $ 19.45
Granted 90,000 22.11 343,104 22.40
Exercised (42,124) 18.02 (159,834) 9.49
Canceled (37,200) 22.79 (3,332) 29.10
---------- ----------- ---------- ---------
Outstanding, end of period 1,586,656 $ 23.01 1,817,049 $ 20.86
---------- ----------- ---------- ---------
Options exercisable at end of period 1,395,288 1,492,572
---------- ----------
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(f) Reclassifications
Certain reclassifications of prior period information were made to conform to the current period presentation.
(g) New Accounting Standards
In March 2004, the Emerging Issues Task Force ("EITF") amended EITF 03-01, The Meaning of Other-Than-Temporary Impairment, to introduce a three-step model to: (1) determine whether an investment is impaired; (2) evaluate whether the impairment is other-than-temporary; and (3) account for other-than-temporary impairments. In part, this amendment requires companies to apply qualitative and quantitative measures to determine whether a decline in the fair value of a security is other-than-temporary. The amount of other-than-temporary impairment to be recognized, if any, will depend on market conditions and management's intent and ability to hold investments until the forecasted recovery in fair value. This amendment is effective for financial periods beginning after June 15, 2004. Farmer Mac is evaluating this amendment and will adopt it beginning in third quarter 2004.
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"), which requires 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. In December 2003, the Securities and Exchange Commission provided additional guidance on the "day two" accounting for these financial instruments. In accordance with this guidance, Farmer Mac has adopted the amortized cost model for day two accounting prospectively effective January 1, 2004.
Note 2. Farmer Mac Guaranteed Securities
The following table sets forth information about Farmer Mac Guaranteed Securities retained by Farmer Mac as of June 30, 2004 and December 31, 2003.
June 30, 2004 December 31, 2003
-------------------------------------------------------------------------------
Available- Held-to- Available- Held-to-
for-Sale Maturity Total for-Sale Maturity Total
------------ -------------- ------------- ----------- ----------- ----------
(in thousands)
Farmer Mac I $ 663,688 $ 51,423 $ 715,111 $ 779,560 $ 49,901 $ 829,461
Farmer Mac II - 669,703 669,703 - 678,673 678,673
------------ -------------- ------------ ------------ ----------- ------------
Total $ 663,688 $ 721,126 $ 1,384,814 $ 779,560 $ 728,574 $ 1,508,134
------------ -------------- ------------ ------------ ----------- ------------
Amortized cost $ 627,821 $ 721,126 $ 1,348,947 $ 725,674 $ 728,574 $ 1,454,248
Unrealized gains 35,867 5,972 41,839 53,902 14,434 68,336
Unrealized losses - - - (16) - (16)
------------ -------------- ------------ ----------- ----------- -------------
Fair value $ 663,688 $ 727,098 $ 1,390,786 $ 779,560 $ 743,008 $ 1,522,568
------------ -------------- ------------ ----------- ----------- -------------
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The table below presents a sensitivity analysis for Farmer Mac's retained Farmer Mac Guaranteed Securities as of June 30, 2004.
June 30, 2004
----------------------------
(dollars in thousands)
Fair value of beneficial interests retained
in Farmer Mac Guaranteed Securities $ 1,390,786
Weighted-average remaining life (in years) 5.2
Weighted-average prepayment speed (annual rate) 8.1%
Effect on fair value of a 10% adverse change $ (376)
Effect on fair value of a 20% adverse change $ (705)
Weighted-average discount rate 4.9%
Effect on fair value of a 10% adverse change $ (18,836)
Effect on fair value of a 20% adverse change $ (37,445)
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These sensitivities are hypothetical. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, in this table the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In fact, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which might amplify or counteract the sensitivities.
The table below presents the outstanding principal balances, 90-day delinquencies and net credit losses as of and for the periods indicated for Farmer Mac Guaranteed Securities, loans, and LTSPCs.
Outstanding Principal 90-Day
Amount Delinquencies (1) Net Credit Losses
-------------------------- -------------------------- ----------------------------
As of As of As of As of For the Six Months Ended
June 30, December 31, June 30, December 31, June 30,
----------- ----------- ----------- ----------- ----------- ----------
2004 2003 2004 2003 2004 2003
----------- ----------- ----------- ----------- ----------- ----------
(in thousands)
On-balance sheet assets:
Farmer Mac I:
Loans $ 931,527 $ 976,280 $ 30,186 $ 28,089 $ 2,965 $ 842
Guaranteed Securities 680,592 777,134 - - - 180
Farmer Mac II:
Guaranteed Securities 669,296 678,229 - - - -
----------- ----------- ----------- ----------- ----------- ----------
Total on-balance sheet $ 2,281,415 $ 2,431,643 $ 30,186 $ 28,089 $ 2,965 $ 1,022
----------- ----------- ----------- ----------- ----------- ----------
Off-balance sheet assets:
Farmer Mac I:
LTSPCs $ 2,390,779 $ 2,348,703 $ 2,587 $ 1,967 $ - $ -
Guaranteed Securities 921,338 952,134 - - - -
Farmer Mac II:
Guaranteed Securities 46,454 51,241 - - - -
----------- ----------- ----------- ----------- ----------- ----------
Total off-balance sheet $ 3,358,571 $ 3,352,078 $ 2,587 $ 1,967 $ - $ -
----------- ----------- ----------- ----------- ----------- ----------
Total $ 5,639,986 $ 5,783,721 $ 32,773 $ 30,056 $ 2,965 $ 1,022
----------- ----------- ----------- ----------- ----------- ----------
(1) Includes loans and loans underlying post-1996 Act Farmer Mac I
Guaranteed Securities that are 90 days or more past due, in
foreclosure, restructured after delinquency, and in bankruptcy
excluding loans performing under either their original loan terms or a
court-approved bankruptcy plan.
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Note 3. Off-Balance Sheet Guarantees and Long-Term Standby Purchase Commitments
Overview
Farmer Mac offers approved agricultural and rural residential mortgage lenders two off-balance sheet alternatives to increase their liquidity or lending capacity while retaining the cash flow benefits of their loans: (1) Farmer Mac Guaranteed Securities, which are available through either the Farmer Mac I program or the Farmer Mac II program, and (2) LTSPCs, which are available only through the Farmer Mac I program. Both of these alternatives result in off-balance sheet transactions for Farmer Mac.
Off-Balance Sheet Farmer Mac Guaranteed Securities
Periodically Farmer Mac transfers agricultural mortgage loans into trusts that are used as vehicles for the securitization of the transferred assets and the beneficial interests in the trusts are sold to third party investors. The table below summarizes certain cash flows received from and paid to these trusts.
Six Months Ended June 30,
-------------------------------
2004 2003
------------ ------------
(in thousands)
Proceeds from new securitizations $ 51,908 $ 35,171
Guarantee fees received 688 807
Purchases of assets from the trusts 2,433 24,001
Servicing advances 22 315
Repayment of servicing advances 21 -
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The following table presents the maximum principal amount of potential undiscounted future payments that Farmer Mac could be required to make under off-balance sheet Farmer Mac Guaranteed Securities as of June 30, 2004 and December 31, 2003, 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
----------------------------------------------------------------
June 30, December 31,
2004 2003
----------- ------------
(in thousands)
Farmer Mac I Guaranteed Securities $ 921,338 $ 952,134
Farmer Mac II Guaranteed Securities 46,454 51,241
----------- ------------
Total Farmer Mac I and II $ 967,792 $ 1,003,375
----------- ------------
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As of June 30, 2004, the weighted-average remaining maturity of all loans underlying off-balance sheet Farmer Mac Guaranteed Securities was 16.3 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 of $1.2 million as of June 30, 2004 and $1.1 million as of December 31, 2003. For those securities that were issued or modified on or after January 1, 2003, Farmer Mac has recorded the fair value of its initial obligation to stand ready under the guarantee as a liability. This liability approximated $4.8 million as of June 30, 2004 and $4.1 million as of December 31, 2003 and is reported in the guarantee and commitment obligation on the condensed consolidated balance sheet.
Long-Term Standby Purchase Commitments (LTSPCs)
An LTSPC is a commitment by Farmer Mac to purchase eligible loans, either for cash or in exchange for Farmer Mac I Guaranteed Securities, on one or more undetermined future dates.
As of June 30, 2004 and December 31, 2003, 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 $2.4 billion and $2.3 billion, respectively. For all LTSPC transactions to date, Farmer Mac has incurred a charge-off on one loan.
As of June 30, 2004, the weighted-average remaining maturity of all loans underlying LTSPCs was 14.7 years. For the LTSPCs that were executed on or before December 31, 2002, Farmer Mac has recorded an allowance for probable losses of $9.5 million as of June 30, 2004 and $9.2 million as of December 31, 2003. For those LTSPCs that were issued or modified on or after January 1, 2003, Farmer Mac has recorded the fair value of its initial obligation to stand ready under the commitment as a liability. This liability approximated $9.4 million as of June 30, 2004 and $7.3 million as of December 31, 2003 and was included in the guarantee and commitment obligation on the condensed consolidated balance sheet.
Note 4. Comprehensive Income
Comprehensive income is comprised of net income plus other changes in stockholders' equity not resulting from investments by or distributions to stockholders. The following table sets forth comprehensive income for the three and six months ended June 30, 2004 and 2003.
Three Months Ended Six Months Ended
June 30 June 30
-------------------- -------------------
2004 2003 2004 2003
-------------------- --------------------
(in thousands)
Net income $ 2,520 $ 8,926 $ 10,907 $ 17,910
Other comprehensive income/(loss):
Available-for-sale securities:
Change in net unrealized gains (26,672) 13,395 (19,292) 8,538
Tax effect 9,335 (4,688) 6,752 (2,988)
-------- -------- -------- --------
Net change from available-for-sale securities (17,337) 8,707 (12,540) 5,550
Cash flow hedges:
Change in fair value, net of
reclassification adjustments 41,642 (9,988) 22,494 (8,225)
Tax effect (14,575) 3,496 (7,873) 2,879
-------- -------- -------- --------
Net change from cash flow hedges 27,067 (6,492) 14,621 (5,346)
-------- -------- -------- --------
Other comprehensive income/(loss) 9,730 2,215 2,081 204
-------- -------- -------- --------
Comprehensive income $ 12,250 $ 11,141 $ 12,988 $ 18,114
-------- -------- -------- --------
|
Note 5. Investments
Farmer Mac's investment portfolio is comprised of the following:
June 30, December 31,
2004 2003
----------- -----------
(in thousands)
Held-to-maturity $ 10,604 $ 10,604
Available-for-sale 1,039,096 1,039,673
Trading 11,775 14,505
----------- -----------
$ 1,061,475 $ 1,064,782
----------- -----------
|
The amortized cost and estimated fair values of investments as of June 30, 2004 and December 31, 2003 were as follows. Fair value was estimated based on quoted market prices.
June 30, 2004 December 31, 2003
-------------------------------------------------- ---------------------------------------------------
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gain Loss Fair Value Cost Gain Loss Fair Value
---------- ------------ ------------ ------------ ---------- ------------ ------------ ------------
(in thousands)
Cash investment in
fixed rate guaranteed
investment contract $ 10,604 $ 8 $ - $ 10,612 $ 10,604 $ 342 $ - $ 10,946
----------- -------- --------- ----------- ----------- -------- -------- -----------
Total held-to-maturity $ 10,604 $ 8 $ - $ 10,612 $ 10,604 $ 342 $ - $ 10,946
----------- -------- --------- ----------- ----------- -------- -------- -----------
Floating rate
asset-backed securities $ 113,547 $ 286 $ (906) $ 112,927 $ 78,817 $ 682 $ - $ 79,499
Floating rate corporate
debt securities 396,085 340 (148) 396,277 370,145 573 (100) 370,618
Fixed rate preferred
stock 185,756 11,508 - 197,264 186,253 12,196 - 198,449
Fixed rate
commercial paper 79,876 - - 79,876 120,452 - - 120,452
Floating rate
municipal bonds - - - - 2,820 - - 2,820
Floating rate mortgage-
backed securities 252,443 406 (97) 252,752 268,522 198 (885) 267,835
----------- -------- --------- ----------- ----------- -------- -------- -----------
Total available-for-sale $ 1,027,707 $ 12,540 $ (1,151) $ 1,039,096 $ 1,027,009 $ 13,649 $ (985) $ 1,039,673
----------- -------- --------- ----------- ----------- -------- -------- -----------
Adjustable rate mortgage-
backed securities $ 11,780 $ 9 $ (14) $ 11,775 $ 14,296 $ 209 $ - $ 14,505
----------- -------- --------- ----------- ----------- -------- -------- -----------
Total trading $ 11,780 $ 9 $ (14) $ 11,775 $ 14,296 $ 209 $ - $ 14,505
----------- -------- --------- ----------- ----------- -------- -------- -----------
|
The amortized cost, fair value and yield of investments by remaining contractual maturity as of June 30, 2004 are set forth below. Asset- and mortgage-backed securities are included based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets or mortgages. As of June 30, 2004 Farmer Mac owned one held-to-maturity investment that matures after ten years with an amortized cost and fair value of $10.6 million and a yield of six percent.
Available-for-Sale Trading Total
----------------------------------- ------------------------------------ ------------------------------------
Amortized Cost Fair Value Yield Amortized Cost Fair Value Yield Amortized Cost Fair Value Yield
-------------- ------------ ------- -------------- ------------ ------- -------------- ------------ -------
(dollars in thousands)
Due within one year $ 125,072 $ 125,069 1.38% $ - $ - - $ 125,072 $ 125,069 1.38%
Due after one year
through five years 315,901 316,097 1.49% - - - 315,901 316,097 1.49%
Due after five years
through ten years 128,649 133,806 6.03% - - - 128,649 133,806 6.03%
Due after ten years 458,085 464,124 3.02% 11,780 11,775 3.75% 469,865 475,899 3.04%
-------------- ------------ ------- -------------- ------------ ------- -------------- ------------ ------
Total $ 1,027,707 $ 1,039,096 2.73% $ 11,780 $ 11,775 3.75% $ 1,039,487 $ 1,050,871 2.74%
-------------- ------------ ------- -------------- ------------ ------- -------------- ------------ ------
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with (1) the condensed consolidated financial statements and the related notes that appear elsewhere in this report and (2) Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
Special Note Regarding Forward-Looking Statements
Certain statements made in this report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 pertaining to management's current expectations as to Farmer Mac's future financial results, business prospects and business developments. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and typically are accompanied by, and identified with, such terms as "anticipates," "believes," "expects," "intends," "should" and similar phrases. The following management's discussion and analysis includes forward-looking statements addressing Farmer Mac's:
o prospects for earnings;
o growth in loan purchase, guarantee, LTSPC and securitization
volume;
o trends in net interest income;
o trends in provisions for losses;
o changes in capital position; and
o other business and financial matters.
Management's expectations for Farmer Mac's future necessarily involve a number of assumptions and estimates and the evaluation of risks and uncertainties. Various factors could cause Farmer Mac's actual results or events to differ materially from the expectations as expressed or implied by the forward-looking statements, including uncertainties regarding:
o the rate and direction of development of the secondary market for
agricultural mortgage loans;
o the possible establishment of additional statutory or regulatory
restrictions or constraints on Farmer Mac that could hamper its
growth or diminish its profitability;
o legislative or regulatory developments or interpretations of
Farmer Mac's statutory charter that could adversely affect Farmer
Mac or the ability or motivation of certain lenders to
participate in its programs or the terms of any such
participation, or increase the cost of regulation and related
corporate activities;
o possible reaction in the financial markets to events involving
government-sponsored enterprises other than Farmer Mac;
o Farmer Mac's access to the debt markets at favorable rates and
terms;
o the possible effect of the risk-based capital requirement, which
could, under certain circumstances, be in excess of the statutory
minimum capital requirement;
o the rate of growth in agricultural mortgage indebtedness;
o lender interest in Farmer Mac credit products and the Farmer Mac
secondary market;
o borrower preferences for fixed-rate agricultural mortgage
indebtedness;
o competitive pressures in the purchase of agricultural mortgage
loans and the sale of agricultural mortgage-backed securities and
debt securities;
o substantial changes in interest rates, agricultural land values,
commodity prices, export demand for U.S. agricultural products
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 the willingness of investors to invest in agricultural
mortgage-backed securities; or
o the effects on the agricultural economy or the value of
agricultural real estate of any changes in federal assistance for
agriculture.
The foregoing factors are not exhaustive. Other sections of this report may include additional factors that could adversely affect Farmer Mac's business and its financial performance. Furthermore, new risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor assess the effects of such factors on Farmer Mac's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from the expectations expressed or implied by the forward-looking statements. In light of these potential risks and uncertainties, no undue reliance should be placed on any forward-looking statements expressed in this report. Furthermore, Farmer Mac undertakes no obligation to release publicly the results of revisions to any forward-looking statements that may be made to reflect any future events or circumstances, except as otherwise mandated by the Securities and Exchange Commission.
Critical Accounting Policy and Estimates
The critical accounting policy that is both important to the portrayal of Farmer Mac's financial condition and results of operations and requires complex, subjective judgments is the accounting policy for the allowance for losses. For a discussion of Farmer Mac's critical accounting policy, as well as Farmer Mac's use of estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related notes for the periods presented, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Critical Accounting Policy and Estimates" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003, filed with the SEC on March 15, 2004.
Results of Operations
Overview. Net income available to common stockholders for second quarter 2004 was $2.0 million or $0.16 per diluted common share, compared to $8.4 million or $0.70 per diluted common share for second quarter 2003. This decrease was principally due to the decrease in the fair value of financial derivatives as accounted for in accordance with SFAS 133, as explained below. During second quarter 2004, Farmer Mac:
o added $127.1 million of Farmer Mac I eligible loans under LTSPCs;
o purchased $27.5 million of newly originated Farmer Mac I eligible
loans; and
o purchased $34.7 million of Farmer Mac II eligible USDA-guaranteed
portions of loans.
USDA is currently forecasting national farm cash receipts to increase to $215.0 billion in 2004 from the $212.4 billion forecasted level in 2003. Prices available to farmers have been rising as a result of strong domestic and foreign demand. Forecasted net cash income on farms for 2004 is $55.9 billion, a $7.1 billion decrease from 2003 forecasted levels of $63.0 billion, but still higher than the $49.1 billion level of 2002. The forecasted net cash income on farms for 2004 includes government payments of $10.3 billion, as compared to $17.4 billion in 2003 and $11.0 billion in 2002.
Despite the decline in farm income in 2004, the rise in farm business assets, debt, and equity values is expected to continue through the end of the year. USDA forecasts the value of U.S. farm real estate assets to rise 3.5 percent to $1.13 trillion in 2004, up from $1.09 trillion in 2003. Total farm real estate debt is expected to approach $116.5 billion by the end of 2004, a 4.7 percent increase over the 2003 level. This more moderate rise in farm real estate debt follows growth of 7.7 percent in 2003 and 7.7 percent in 2002. Sector equity is expected to rise more than 3 percent, as the gain in asset values exceeds the increase in debt by approximately $36 billion.
The financial measures reflect farm investors' and lenders' collective decisions about the long-term expected profitability of farm investments and agriculture generally. These expectations should be favorable for Farmer Mac's long-term business plans, as they indicate increased U.S. farm real estate values, an expanding mortgageable farm real estate base, and a stronger equity position in U.S. agriculture, which should in the aggregate improve Farmer Mac's ability to recover in foreclosures.
Farmer Mac is subject to interest rate risk on all assets held for investment because of possible timing differences in the cash flows of the assets and related liabilities. This risk is primarily related to loans held and on-balance sheet Farmer Mac Guaranteed Securities because of the ability of borrowers to prepay their mortgages before the scheduled maturities, thereby increasing the risk of asset and liability cash flow mismatches. Yield maintenance provisions and other prepayment penalties contained in many agricultural mortgage loans reduce, but do not eliminate, this prepayment risk, particularly in the case of a defaulted loan where yield maintenance may not be collected.
Farmer Mac's primary exposure to credit risk is the risk of loss resulting from the inability of borrowers to repay their mortgages in conjunction with a deficiency in the value of the collateral relative to the amount outstanding on the mortgage and the costs of liquidation. Farmer Mac has established underwriting, appraisal and documentation standards for agricultural mortgage loans to mitigate the risk of loss from borrower defaults and to provide guidance concerning the management, administration and conduct of underwriting and appraisals to all participating sellers and potential sellers in its programs.
As of June 30, 2004, Farmer Mac's outstanding program volume was $5.6 billion, which represented approximately 13 percent of management's estimate of a $44.5 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.
In the aggregate, approximately 285 lenders were actively participating either directly or indirectly in one or both of the Farmer Mac I or Farmer Mac II programs as of June 30, 2004, with loans to approximately 20,000 borrowers.
As of June 30, 2004, there were 144 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 2003, there were 81 approved loan sellers active in the Farmer Mac I program. In addition to participating directly in the Farmer Mac I program, some of the approved loan sellers enable other lenders to participate indirectly in the Farmer Mac I program by managing correspondent networks of lenders from which they purchase loans to sell to Farmer Mac. As of June 30, 2004, more than 75 lenders were participating in those networks, bringing the total Farmer Mac I program participants to more than 200 as of June 30, 2004.
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 June 30, 2004, there were 128 active sellers in the Farmer Mac II program, compared to 150 as of December 31, 2003 and 143 as of June 30, 2003. Sellers in the Farmer Mac II program consist mostly of community and regional banks.
Set forth below is a more detailed discussion of Farmer Mac's results of operations.
Net Interest Income. Net interest income, which does not include guarantee fees for loans purchased prior to April 1, 2001 (the effective date of Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 140")), was $7.8 million for second quarter 2004 and $17.3 million for the six months ended June 30, 2004, compared to $9.4 million and $19.2 million, respectively, for the same periods in 2003. The net interest yield was 87 basis points for the six months ended June 30, 2004, compared to 95 basis points for the six months ended June 30, 2003. The effect of the adoption of SFAS 140 was a reclassification of approximately $2.2 million (11 basis points) of guarantee fee income as interest income for the six months ended June 30, 2004, compared to $2.2 million (11 basis points) for the six months ended June 30, 2003.
As a result of the application of additional guidance provided in 2003 by the Chief Accountant at the U.S. Securities and Exchange Commission, the net interest income and expense realized on financial derivatives that are not in fair value or cash flow hedge relationships have been reclassified from net interest income into gains and losses on financial derivatives and trading assets. For the six months ended June 30, 2004 and 2003, this reclassification resulted in the decrease of the net interest yield of 5 basis points and an increase of 3 basis points, respectively.
The net interest yields for the six months ended June 30, 2004 and 2003 included the benefits of yield maintenance payments received of 12 basis points. Yield maintenance payments represent the present value of expected future interest income streams and accelerate the recognition of interest income from the related loans. Because the timing and amounts of these payments vary greatly, variations should not be considered indicative of positive or negative trends to gauge future financial results. For the six months ended June 30, 2004 and 2003, the effects of yield maintenance payments on net income and diluted earnings per share were $1.6 million or $0.13 per diluted share and $1.7 million or $0.14 per diluted share, respectively.
The following table provides information regarding the average balances and rates of interest-earning assets and funding for the six months ended June 30, 2004 and 2003. 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 (69.9 percent of investments and 65.8 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.
Six Months Ended June 30,
----------------------------------------------------------------------
2004 2003
---------------------------------- ----------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
---------------------------------- ----------------------------------
(dollars in thousands)
$ 636,504 $ 3,606 1.13% $ 712,539 $ 4,744 1.33%
995,617 12,839 2.58% 889,142 13,752 3.09%
2,343,805 59,556 5.08% 2,438,231 64,337 5.28%
---------- -------- ------- ---------- -------- -------
Total interest-earning assets 3,975,926 76,001 3.82% 4,039,912 82,833 4.10%
---------- -------- ---------- --------
Notes payable due within one year 2,294,421 25,630 2.23% 2,752,969 32,330 2.35%
Notes payable due after one year 1,489,571 33,065 4.44% 1,121,492 31,264 5.58%
---------- -------- ------- ---------- -------- -------
Total interest-bearing liabilities 3,783,992 58,695 3.10% 3,874,461 63,594 3.28%
Net non-interest-bearing funding 191,934 165,451
---------- -------- ------- ---------- -------- -------
Total funding $ 3,975,926 58,695 2.95% $ 4,039,912 63,594 3.15%
---------- -------- ------- ---------- -------- -------
$ 17,306 0.87% $ 19,239 0.95%
-------- ------- -------- -------
|
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 most assets or liabilities and the general decreases in market rates described above.
Six Months Ended June 30, 2004
Compared to Six Months Ended
June 30, 2003
----------------------------------------
Increase/(Decrease) Due to
----------------------------------------
Rate Volume Total
---------- ---------- ---------
(in thousands)
Income from interest-earning assets
Cash and cash equivalents $ (663) $ (475) $ (1,138)
Investments (2,445) 1,532 (913)
Loans and Farmer Mac Guaranteed Securities (2,337) (2,444) (4,781)
---------- ---------- ---------
Total (5,445) (1,387) (6,832)
Expense from interest-bearing liabilities (3,438) (1,461) (4,899)
---------- ---------- ---------
Change in net interest income $ (2,007) $ 74 $ (1,933)
---------- ---------- ---------
|
See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Regulatory Matters" for actions by Farmer Mac's federal regulator, the Farm Credit Administration ("FCA"), that may potentially affect future net interest income.
Guarantee and Commitment Fees. Guarantee and commitment fees were $5.3 million for second quarter 2004, compared to $5.1 million for second quarter 2003. The increase in guarantee and commitment fees reflects an increase in the average balance of outstanding guarantees and LTSPCs. The effects of the adoption of SFAS 140 reclassified $1.1 million of guarantee fee income as interest income for second quarter 2004 and second quarter 2003, although management considers the amount to have been earned in consideration for the assumption of credit risk. That portion of the difference or "spread" between the cost of Farmer Mac's debt funding for loans and the yield on post-1996 Act Farmer Mac I Guaranteed Securities held on its books compensates for credit and interest rate risk. If a post-1996 Act Farmer Mac I Guaranteed Security is sold to a third party, Farmer Mac continues to receive the guarantee fee component of that spread, which continues to compensate Farmer Mac for its assumption of credit risk. The portion of the spread that compensates for interest rate risk would not typically continue to be received by Farmer Mac if the asset were sold, except to the extent attributable to any retained interest-only strip.
Farmer Mac's ongoing guarantee and commitment fee income reflects the annuity-like revenue stream of that aspect of the Corporation's business. That fee income is earned on the cumulative outstanding principal balance of guaranteed securities and loans underlying LTSPCs. Accordingly, GAAP earnings increase or decrease through changes in periodic business volume in proportion to the change in that cumulative outstanding principal balance, not in proportion to the change in periodic volume.
Other Income. During second quarter 2004, through a competitive bid process, the Corporation sold Farmer Mac Guaranteed Securities in the amount of $26.9 million to a related party in a transaction that resulted in a $0.4 million gain on sale. Also during the quarter, Farmer Mac received $1.8 million from two sellers (one of which was a related party) for breaches of representations and warranties associated with prior sales of agricultural mortgage loans to Farmer Mac. Farmer Mac had previously charged off these amounts as losses on the associated loans.
Expenses. Compensation and employee benefits for second quarter 2004 were $1.7 million, compared to $1.5 million for second quarter 2003. General and administrative expenses for second quarter 2004 were $1.8 million, compared to $1.2 million for second quarter 2003. The increases in compensation and employee benefits and general and administrative expenses were due, in large part, to increased staffing levels necessary for increased regulatory compliance activities, including requirements of the Sarbanes-Oxley Act of 2002 and FCA, as well as heightened focus on the regulatory environment for government-sponsored enterprises generally. Regulatory fees assessed by FCA for second quarter 2004 and 2003 were $0.6 million and $0.4 million, respectively. FCA has advised Farmer Mac that its estimated assessment level for the year ending September 30, 2004 will be $1.7 million. After the end of a federal government fiscal year, FCA may revise its prior year estimated assessments to reflect actual costs incurred, and has issued both additional assessments and refunds in the past.
Farmer Mac's total provision for losses was $1.6 million for second quarter 2004, compared to $1.9 million for second quarter 2003. (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 June 30, 2004, Farmer Mac's total allowance for losses totaled $21.8 million, or 0.45 percent of outstanding loans held or loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, compared to $22.1 million (0.44 percent of outstanding loans held or loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs) as of December 31, 2003.
Gains and Losses on Financial Derivatives and Trading Assets. For second quarter 2004, the loss on financial derivatives and trading assets was $6.2 million, compared to a gain of $3.7 million for second quarter 2003. The loss in second quarter 2004 and the gain in second quarter 2003 resulted primarily from fluctuations in the fair values of financial derivatives, resulting from movements in interest rates, that have not been designated in either fair value or cash flow hedge relationships in accordance with SFAS 133.
Non-GAAP Performance Measures. Farmer Mac reports its financial results in accordance with GAAP. In addition to GAAP measures, Farmer Mac presents certain non-GAAP performance measures. Farmer Mac uses these non-GAAP performance measures to develop financial plans, to measure corporate economic performance, and to set incentive compensation. As described below, because FASB has adopted a mixed attribute accounting model that does not reflect the economics for transactions involving Farmer Mac's callable swaps, in management's view the non-GAAP measures provide a more accurate representation of Farmer Mac's economic performance, transaction economics and business trends. Investors and the investment analyst community have previously relied upon similar measures to evaluate performance and issue projections. These non-GAAP disclosures are not intended to replace GAAP information but, rather, to supplement it.
One such non-GAAP measure is core earnings, which Farmer Mac developed to present net income less the after-tax effects of SFAS 133. Core earnings for the three and six months ended June 30, 2004 were $6.2 million and $12.1 million, respectively, compared to $5.8 million and $11.7 million for the three and six months ended June 30, 2003. The reconciliation of GAAP net income available to common stockholders to core earnings is presented in the following table:
Reconciliation of GAAP Net Income Available to Common Stockholders to Core Earnings
------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
-------------------------------- -------------------------------
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
--------------- --------------- --------------- ---------------
(in thousands)
GAAP net income available
to common stockholders $ 1,960 $ 8,366 $ 9,787 $ 16,790
Less the effects of SFAS 133:
Unrealized gains/(losses)
on financial derivatives and
trading assets, net of tax (4,336) 2,521 (2,511) 4,963
Benefit from non-amortization
of premium payments
on financial derivatives,
net of tax 76 81 152 162
------------ ----------- ------------- -----------
Core earnings $ 6,220 $ 5,764 $ 12,146 $ 11,665
------------ ----------- ------------- -----------
|
Business Volume. The following tables set forth the amount of all Farmer Mac I and Farmer Mac II loan purchase and guarantee activities for newly originated and current seasoned loans during the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2004 2003 2004 2003
---------- --------- --------- ---------
(in thousands)
Loan purchase and guarantee and
commitment activity:
Farmer Mac I:
Loans $ 27,520 $ 65,615 $ 52,964 $124,669
LTSPCs 127,098 179,025 274,371 345,599
Farmer Mac II Guaranteed Securities 34,671 77,636 69,154 119,529
---------- --------- --------- ---------
Total purchases, guarantees
and commitments $ 189,289 $322,276 $ 396,489 $589,797
---------- --------- --------- ---------
Farmer Mac I Guaranteed Securities issuances:
Retained $ - $ - $ - $ -
Sold 24,705 21,910 51,908 35,171
---------- --------- --------- ---------
Total $ 24,705 $ 21,910 $ 51,908 $ 35,171
---------- --------- --------- ---------
|
To fulfill its guarantee and commitment obligations, Farmer Mac purchases delinquent loans underlying Farmer Mac Guaranteed Securities and LTSPCs. The decreases in defaulted loans purchased and in defaulted loans transferred to loans reflect a reduction in newly delinquent loans underlying Farmer Mac Guaranteed Securities and LTSPCs. The 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 Six Months Ended
June 30, June 30,
--------------------- --------------------
2004 2003 2004 2003
------- -------- -------- --------
(in thousands)
Farmer Mac I newly originated
and current seasoned loan purchases $27,520 $ 65,615 $ 52,964 $ 124,669
Defaulted loans purchased from
off-balance sheet Farmer Mac I
Guaranteed Securities 1,387 523 2,433 24,001
Defaulted loans transferred from
on-balance sheet Farmer Mac I
Guaranteed Securities 1,149 2,394 5,893 22,413
Defaulted loans purchased
from LTSPCs 673 2,239 673 3,098
------- -------- -------- ---------
Total loan purchases $30,729 $ 70,771 $ 61,963 $ 174,181
------- -------- -------- ---------
|
The weighted-average age of the Farmer Mac I newly originated and current seasoned loans purchased during second quarter 2004 and second quarter 2003 was less than one month. Of the Farmer Mac I newly originated and current seasoned loans purchased during second quarter 2004 and second quarter 2003, 80 percent and 75 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 15.2 years and 15.1 years, respectively. The weighted-average age of delinquent loans purchased out of securitized pools and LTSPCs during second quarter 2004 and second quarter 2003 was 5.0 years and 6.1 years, respectively.
As of June 30, 2004, outstanding commitments to purchase Farmer Mac I loans totaled $5.4 million, compared to $10.7 million as of June 30, 2003. Of the total Farmer Mac I commitments outstanding as of June 30, 2004 and 2003, $5.4 million and $3.6 million, respectively, were mandatory commitments. Loans submitted for approval or approved but not yet committed to purchase totaled $18.7 million as of June 30, 2004, compared to $59.8 million as of June 30, 2003. Not all of these loans will be purchased, as some will ultimately be denied for credit reasons or withdrawn by the seller.
New business volume for second quarter 2004 was $189.3 million, down $133.0 million from the same period in 2003. Presently, Farmer Mac's new business with agricultural mortgage lenders has been slowed by:
o reduced growth rates in the agricultural mortgage market;
o increased liquidity of agricultural borrowers;
o increased capital and liquidity at those agricultural mortgage
lenders in the current interest rate and regulatory environments;
and
o increased regulatory pressure on government-sponsored
enterprises.
Regulatory actions by the Farm Credit Administration (FCA), the federal regulator of both Farmer Mac and the primary lenders in the Farm Credit System (FCS) and the Farm Credit System Insurance Corporation (FCSIC), a U.S. Government controlled corporation managed by a three-member board of directors composed of the members of the FCA Board, may diminish Farmer Mac's business prospects. Statements by either FCA or FCSIC, or both, have cautioned other entities they regulate about doing business with GSEs, including Farmer Mac, and have raised objections to FCS institutions' use of Farmer Mac swaps. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Regulatory Matters" for other actions by FCA that may potentially affect existing and future business volume.
Notwithstanding the developments described above, Farmer Mac continues to see promising new business opportunities, with marketing initiatives advanced by new and expanded business relationships, including a strategic alliance, product enhancements and refined security structures.
Balance Sheet Review
During the six months ended June 30, 2004, total assets decreased by $219.1 million from December 31, 2003, with decreases in program assets (Farmer Mac Guaranteed Securities and loans) of $169.0 million. For further information regarding 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 $231.9 million from December 31, 2003 to June 30, 2004.
During the six months ended June 30, 2004, accumulated other comprehensive income/(loss) increased $2.1 million, which is the net after-tax effect of a $12.5 million decrease in unrealized gains on securities available for sale and a $14.6 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 June 30, 2004, Farmer Mac's core capital totaled $226.3 million, compared to $215.5 million as of December 31, 2003. As of June 30, 2004, core capital exceeded Farmer Mac's statutory minimum capital requirement of $136.4 million by $89.9 million.
Farmer Mac was in compliance with the risk-based capital standards under the regulation as of June 30, 2004. As of June 30, 2004, the risk-based capital stress test generated a regulatory capital requirement of $49.3 million. Farmer Mac's regulatory capital of $247.5 million exceeded that amount by approximately $198.2 million. The increase in the risk-based capital requirement from December 31, 2003 ($38.8 million) to June 30, 2004 ($49.3 million) was a result of changes in the interest rate environment. Farmer Mac is required to hold capital at the higher of the statutory minimum capital requirement or the amount required by the risk-based capital stress test.
Off-Balance Sheet Program Activities
Farmer Mac offers approved agricultural and rural residential mortgage lenders two off-balance sheet alternatives to increase their liquidity or lending capacity while retaining the cash flow benefits of their loans: (1) Farmer Mac Guaranteed Securities, which are available through either the Farmer Mac I program or the Farmer Mac II program, and (2) LTSPCs, which are available only through the Farmer Mac I program. Both of these alternatives result in off-balance sheet transactions for Farmer Mac.
Quantitative and Qualitative Disclosures About Market Risk Management
Interest Rate Risk. Farmer Mac is subject to interest rate risk on all assets held for investment because of possible timing differences in the cash flows of the assets and related liabilities. This risk is primarily related to loans held and on-balance sheet Farmer Mac Guaranteed Securities because of the ability of borrowers to prepay their mortgages before the scheduled maturities, thereby increasing the risk of asset and liability cash flow mismatches. Cash flow mismatches in a changing interest rate environment can reduce the earnings of the Corporation if assets repay sooner than expected and the resulting cash flows must be reinvested in lower-yielding investments when Farmer Mac's funding costs cannot be correspondingly reduced, or if assets repay more slowly than expected and the associated debt must be replaced by higher-cost debt.
Yield maintenance provisions and other prepayment penalties contained in many agricultural mortgage loans reduce, but do not eliminate, this prepayment risk, particularly in the case of a defaulted loan where yield maintenance may not be collected. Those provisions require borrowers to make an additional payment when they prepay their loans, so that, when reinvested with the prepaid principal, yield maintenance payments generate substantially the same cash flows that would have been generated had the loan not prepaid. Those provisions create a disincentive to prepayment and compensate the Corporation for its interest rate risks to a large degree. As of June 30, 2004, 58 percent of the outstanding balance of all loans held and loans underlying on-balance sheet Farmer Mac I Guaranteed Securities (including 79 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 second quarter 2004, nine percent had yield maintenance or another form of prepayment protection. None of the USDA-guaranteed portions underlying Farmer Mac II Guaranteed Securities had yield maintenance provisions.
Cash and cash equivalents and investment securities pose only limited interest rate risk, due to their closely matched funding. Farmer Mac's $581.5 million of cash and cash equivalents as of June 30, 2004 mature within three months and are match-funded with discount notes having similar maturities. Investment securities of $1.1 billion as of June 30, 2004 consist of $773.7 million (69.9 percent) of floating rate securities that all have rates that adjust within one year. These floating rate investments are funded using:
o a series of discount note issuances in which each successive
discount note is issued and matures on or about the corresponding
interest rate reset date of the related investment;
o floating-rate notes having similar rate reset provisions as the
related investment; or
o fixed-rate notes swapped to floating rates having similar reset
provisions as the related investment.
The most comprehensive stress test of the long-term interest rate risk in Farmer Mac's current portfolio is the sensitivity of its Market Value of Equity ("MVE") to yield curve shocks. MVE represents the present value of all future cash flows from on- and off-balance sheet assets, liabilities and financial derivatives, discounted at current interest rates and spreads. The following schedule summarizes the results of Farmer Mac's MVE sensitivity analysis as of June 30, 2004 and December 31, 2003 to an immediate and instantaneous parallel shift in the yield curve.
Percentage Change in MVE from
Base Case
-----------------------------
Interest Rate June 30, December 31,
Scenario 2004 2003
----------- ------------ -------------
+ 300 bp -6.7% -0.4%
+ 200 bp -4.1% 0.2%
+ 100 bp -1.7% 0.4%
- 100 bp 0.2% 0.0%
- 200 bp N/A* N/A*
- 300 bp N/A* N/A*
* As of the dates 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 second quarter 2004, Farmer Mac maintained a relatively low level of interest rate sensitivity through ongoing asset and liability management activities. As of June 30, 2004, a uniform or "parallel" increase of 100 basis points would have increased NII, a shorter-term measure of interest rate risk, by 8.2 percent, while a parallel decrease of 100 basis points would have decreased NII by 9.8 percent. Farmer Mac also measures the sensitivity of both MVE and NII to a variety of non-parallel interest rate shocks, including flattening and steepening yield curve scenarios. As of June 30, 2004, both MVE and NII showed similar or lesser sensitivity to non-parallel shocks as to the parallel shocks. As of June 30, 2004, Farmer Mac's effective duration gap, another standard measure of interest rate risk that measures the expected life of assets compared to that of liabilities, was positive 0.6 months, compared to minus 0.1 months as of December 31, 2003. Duration matching helps to maintain the correlation of cash flows and stable portfolio earnings even when interest rates are not stable. The sensitivity of Farmer Mac's MVE and NII to both parallel and non-parallel interest rate shocks, and its duration gap, are indicators of the effectiveness of the Corporation's approach to managing its interest rate risk exposures.
As of June 30, 2004, Farmer Mac had $1.5 billion combined notional amount of interest rate swaps with terms ranging from 1 to 15 years. Of those interest rate swaps, $625.3 million were floating-to-fixed rate interest rate swaps, $675.1 million were basis swaps and $205.0 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 consolidated statements of operations. All of Farmer Mac's financial derivative transactions are conducted under standard collateralized agreements that limit Farmer Mac's potential credit exposure to any counterparty. As of June 30, 2004, Farmer Mac had no uncollateralized net exposure to any counterparty.
Credit Risk. Farmer Mac's primary exposure to credit risk is the risk of loss resulting from the inability of borrowers to repay their mortgages in conjunction with a deficiency in the value of the collateral relative to the amount outstanding on the mortgage and the costs of liquidation.
Farmer Mac's allowance for losses is presented in four components on its consolidated balance sheet:
o an "Allowance for loan losses" on loans held for investment;
o a valuation allowance on real estate owned, which is included in
the balance sheet under "Real estate owned, net of valuation
allowance";
o an allowance for losses on loans underlying post-1996 Act Farmer
Mac I Guaranteed Securities and LTSPCs entered into or modified
after January 1, 2003, which is included in the balance sheet as
a portion of the amount reported as "Guarantee and commitment
obligation"; and
o an allowance for losses on loans underlying post-1996 Act Farmer
Mac I Guaranteed Securities and LTSPCs entered into prior to
January 1, 2003, which is included in the balance sheet under
"Reserve for losses."
Farmer Mac's provision for losses is presented in two components on its consolidated statement of operations:
o a "Provision for loan losses," which represents estimated
probable losses on Farmer Mac's loans held for investment; and
o a "Provision for losses," which represents estimated probable
losses on loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs and real estate owned.
Farmer Mac estimates probable losses using a systematic process that begins with management's evaluation of the results of its proprietary loan pool simulation and guarantee fee model (the "Model"). The Model draws upon historical information from a data set of agricultural mortgage loans recorded over a longer period of time than Farmer Mac's own experience to date, screened to include only those loans with credit characteristics similar to those on which Farmer Mac has assumed credit risk. The results generated by the Model are modified by the application of management's judgment, as required to take key factors into account, including:
o economic conditions;
o geographic and agricultural commodity concentrations in Farmer
Mac's portfolio;
o the credit profile of Farmer Mac's portfolio;
o delinquency trends of Farmer Mac's portfolio;
o Farmer Mac's experience in the management and sale of real estate
owned; and
o historical charge-off and recovery activities of Farmer Mac's
portfolio.
Management believes that the general allowance, which is the difference between the total allowance for losses (generated through use of the Model) and the specific allowances, adequately covers any probable losses inherent in the portfolio of performing loans under Statement of Financial Accounting Standard No. 5, Accounting for Contingencies ("SFAS 5").
The following table summarizes the changes in the components of Farmer Mac's allowance for losses for the three and six months ended June 30, 2004 and 2003:
June 30, 2004
-----------------------------------------------------------------------
Contingent
Allowance REO Obligation Total
for Loan Valuation Reserve for Probable Allowance
Losses Allowance for Losses Losses for Losses
--------- ---------- --------- --------- ---------
(in thousands)
Three Months Ended:
Beginning balance $ 7,671 $ 193 $11,952 $ 2,343 $ 22,159
Provision for losses (230) 452 1,235 158 1,615
Net charge-offs (1,876) (100) - - (1,976)
--------- ---------- --------- --------- ---------
Ending balance $ 5,565 $ 545 $13,187 $ 2,501 $ 21,798
--------- ---------- --------- --------- ---------
Six Months Ended:
Beginning balance $ 5,967 $ 238 $13,172 $ 2,676 $ 22,053
Provision for losses 2,564 827 15 (175) 3,231
Net charge-offs (2,966) (520) - - (3,486)
--------- ---------- --------- --------- ---------
Ending balance $ 5,565 $ 545 $13,187 $ 2,501 $ 21,798
--------- ---------- --------- --------- ---------
June 30, 2003
-----------------------------------------------------------------------
Contingent
Allowance REO Obligation Total
for Loan Valuation Reserve for Probable Allowance
Losses Allowance for Losses Losses for Losses
--------- ---------- --------- --------- ---------
(in thousands)
Three Months Ended:
Beginning balance $ 3,028 $ 592 $17,472 $ - $ 21,092
Provision for losses 1,416 (225) 697 - 1,888
Net charge-offs (1,342) 225 - - (1,117)
--------- ---------- --------- --------- ---------
Ending balance $ 3,102 $ 592 $18,169 $ - $ 21,863
--------- ---------- --------- --------- ---------
Six Months Ended:
Beginning balance $ 2,662 $ 592 $16,757 $ - $ 20,011
Provision for losses 2,624 (102) 1,592 - 4,114
Net charge-offs (2,184) 102 (180) - (2,262)
--------- ---------- --------- --------- ---------
Ending balance $ 3,102 $ 592 $18,169 $ - $ 21,863
--------- ---------- --------- --------- ---------
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Farmer Mac's total provision for losses was $1.6 million for second quarter 2004, compared to $2.1 million for second quarter 2003. During second quarter 2004, Farmer Mac charged off $2.0 million in losses against the allowance for losses and received $1.8 million from two sellers (one of which was a related party) for breaches of representations and warranties associated with prior sales of agricultural mortgage loans to Farmer Mac, which amount Farmer Mac had previously charged off as losses on the associated loans. This recovery is reported as miscellaneous income. During second quarter 2003, Farmer Mac charged off $1.3 million in losses against the allowance for losses and had no recoveries. The net charge-offs for second quarter 2004 and 2003 did not include previously accrued or advanced interest on loans and Farmer Mac I Guaranteed Securities. As of June 30, 2004, Farmer Mac's allowance for losses totaled $21.8 million, or 45 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 $22.1 million (44 basis points) as of December 31, 2003.
As of June 30, 2004, Farmer Mac's 90-day delinquencies totaled $32.8 million and represented 0.68 percent of the principal balance of all loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, compared to $51.3 million (1.06 percent) as of June 30, 2003. As of June 30, 2004, Farmer Mac's non-performing assets (which includes 90-day delinquencies, loans performing under either their original loan terms or a court-approved bankruptcy plan, and real estate owned) totaled $69.8 million and represented 1.43 percent of the principal balance of all loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, compared to $80.2 million (1.64 percent) as of June 30, 2003. Loans that have been restructured after delinquency were insignificant and are included within the reported 90-day delinquency and non-performing asset disclosures. From quarter to quarter, Farmer Mac anticipates that 90-day delinquencies and non-performing assets will fluctuate, both in dollars and as a percentage of the outstanding portfolio, with higher levels likely at the end of the first and third quarters of each year corresponding to the semi-annual (January 1st and July 1st) payment characteristics of most Farmer Mac I loans.
The following table presents historical information regarding Farmer Mac's non-performing assets and 90-day delinquencies:
Outstanding
Post-1996 Act Less:
Loans, Non- REO and
Guarantees and performing Performing 90-Day
LTSPCs Assets Percentage Bankruptcies Delinquencies Percentage
-------------- ---------- ---------- ------------ ------------- ----------
(dollars in thousands)
As of:
June 30, 2004 $ 4,882,505 $ 69,751 1.43% $ 36,978 $ 32,773 0.68%
March 31, 2004 4,922,759 91,326 1.86% 33,951 57,375 1.17%
December 31, 2003 5,020,032 69,964 1.39% 39,908 30,056 0.60%
September 30, 2003 4,871,756 84,583 1.74% 37,442 47,141 0.98%
June 30, 2003 4,875,059 80,169 1.64% 28,883 51,286 1.06%
March 31, 2003 4,820,887 94,822 1.97% 18,662 76,160 1.58%
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%
|
As of June 30, 2004, approximately $1.6 billion (32.2 percent) of Farmer Mac's outstanding loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs were in their peak delinquency and default years (approximately years three through five after origination) compared to $1.8 billion (37.1 percent) of such loans as of June 30, 2003. 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 June 30, 2004, Farmer Mac analyzed the following three categories of assets for impairment, based on the fair vale of the underlying collateral:
o $69.8 million of non-performing assets;
o $32.9 million of loans for which Farmer Mac has adjusted the
timing of borrowers' payment schedules within the past three
years, but still expects to collect all amounts due and has not
made economic concessions; and
o $54.4 million of performing loans that have previously been
delinquent or are secured by real estate that produces
commodities currently under stress.
Those individual assessments covered a total of $157.1 million of assets measured for impairment against updated appraised values, other updated collateral valuations or discounted values. Of the $157.1 million of assets analyzed, $135.8 million were adequately collateralized. For the $21.3 million that were not adequately collateralized, individual collateral shortfalls totaled $2.4 million. Accordingly, Farmer Mac allocated specific allowances of $2.4 million to those under-collateralized assets as of June 30, 2004. As of June 30, 2004, after the allocation of specific allowances to under-collateralized loans, Farmer Mac had additional non-specific or general allowances of $19.4 million, bringing the total allowance for losses to $21.8 million.
The following table summarizes Farmer Mac's assets specifically reviewed for impairment and allowance for losses:
Farmer Mac I Post-1996 Act Assets Specifically Reviewed
for Impairment and Allowance for Losses
-------------------------------------------------------------------------------------------------------
As of June 30, 2004 As of December 31, 2003
------------------------------- -------------------------------
(in thousands)
Specific Specific
Non-performing Allowance Non-performing Allowance
Assets for Losses Assets for Losses
------------- ----------- ------------- ----------
Loans 90 days or more past due $ 9,530 $ 16 $ 5,185 $ 100
Loans in foreclosure 10,682 234 11,016 119
Loans in bankruptcy * 39,556 292 38,047 2,769
Real estate owned 9,983 545 15,716 238
Other loans specifically reviewed 87,355 1,315 102,736 536
------------- ----------- ------------- ----------
Total $ 157,106 $ 2,402 $ 172,700 $ 3,762
------------- ----------- ------------- ----------
Allowance Allowance
for Losses for Losses
----------- ----------
Specific allowance for losses $ 2,402 $ 3,762
General allowance for losses 19,396 18,291
----------- ----------
Total allowance for losses $ 21,798 $ 22,053
----------- ----------
* Includes loans that are performing under either their original loan terms
or a court-approved bankruptcy plan.
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As of June 30, 2004, the weighted-average original loan-to-value ("LTV") ratio for all loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs was 49 percent, and the weighted-average original LTV ratio for all post-1996 Act non-performing assets was 56 percent.
The following table summarizes the post-1996 Act non-performing assets by original LTV ratio:
Distribution of Post-1996 Act Non-performing
Assets by Original LTV Ratio
as of June 30, 2004
------------------------------------------------
(dollars in thousands)
Post-1996 Act
Non-performing
Original LTV Ratio Assets Percentage
------------------ -------------- ----------
0.00% to 40.00% $ 6,939 10%
40.01% to 50.00% 9,435 14%
50.01% to 60.00% 33,696 48%
60.01% to 70.00% 17,742 25%
70.01% to 80.00% 1,762 3%
80.01% + 177 0%
---------- ---------
Total $ 69,751 100%
---------- ---------
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The following table presents outstanding loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs, post-1996 Act non-performing assets and specific allowances for losses as of June 30, 2004 by year of origination, geographic region and commodity.
Farmer Mac I Post-1996 Act Non-performing Assets and Specific Allowance for Losses
-----------------------------------------------------------------------------------------------------------------
Distribution of
Outstanding Outstanding Post-1996 Act
Loans, Loans, Non- Non- Specific
Guarantees and Guarantees and performing performing Allowance
LTSPCs LTSPCs Assets (1) Asset Rate for Losses
------------- --------------- ------------ ----------- ----------
(dollars in thousands)
By year of origination:
Before 1994 12% $ 587,138 $ 2,455 0.42% $ -
1994 3% 141,738 1,313 0.93% -
1995 3% 142,385 2,860 2.01% 85
1996 6% 317,950 12,058 3.79% 483
1997 8% 380,076 10,201 2.68% 435
1998 12% 602,068 12,466 2.07% 654
1999 13% 619,048 12,673 2.05% 258
2000 8% 370,726 6,767 1.83% 445
2001 12% 565,216 8,450 1.50% 42
2002 12% 610,233 508 0.08% -
2003 9% 460,323 - 0.00% -
2004 2% 85,604 - 0.00% -
------------- ------------ ----------- ----------- ----------
Total 100% $ 4,882,505 $ 69,751 1.43% $ 2,402
------------- ------------ ----------- ----------- ----------
By geographic region (2):
Northwest 21% $ 1,005,200 $ 42,248 4.20% $ 1,311
Southwest 47% 2,308,729 18,809 0.81% 803
Mid-North 13% 633,931 2,070 0.33% 106
Mid-South 5% 264,382 4,516 1.71% 1
Northeast 8% 367,590 1,628 0.44% 72
Southeast 6% 302,673 480 0.16% 109
------------- ------------ ----------- ----------- ----------
Total 100% $ 4,882,505 $ 69,751 1.43% $ 2,402
------------- ------------ ----------- ----------- ----------
By commodity:
Crops 44% $ 2,158,610 $ 26,994 1.25% $ 336
Permanent plantings 27% 1,312,928 27,917 2.13% 1,755
Livestock 22% 1,079,882 11,172 1.03% 160
Part-time farm 6% 297,210 3,668 1.23% 151
Other 1% 33,875 - 0.00% -
------------- ------------ ----------- ----------- ----------
Total 100% $ 4,882,505 $ 69,751 1.43% $ 2,402
------------- ------------ ----------- ----------- ----------
(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 credit losses and current specific allowances relative to the cumulative original balance for all loans purchased and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs. This information is presented by year of origination, geographic region and commodity. The purpose of this table is to present information regarding losses and collateral deficiencies relative to original guarantees and commitments.
Farmer Mac I Post-1996 Act Credit Losses and Specific Allowance for Losses
Relative to all Cumulative Original Loans, Guarantees and LTSPCs
-------------------------------------------------------------------------------------------------------------------------
Cumulative Cumulative Combined
Original Loans, Net Credit Cumulative Current Credit Loss
Guarantees Losses / Loss Specific and Specific
and LTSPCs (Gains) Rate Allowances Allowance Rate
-------------- ----------- ------------ ------------ --------------
(dollars in thousands)
By year of origination:
Before 1994 $ 1,984,151 $ - 0.00% $ - 0.00%
1994 367,211 - 0.00% - 0.00%
1995 324,103 961 0.30% 85 0.32%
1996 630,513 1,943 0.31% 483 0.38%
1997 721,131 2,879 0.40% 435 0.46%
1998 1,071,287 3,017 0.28% 654 0.34%
1999 1,062,603 1,196 0.11% 258 0.14%
2000 661,879 1,615 0.24% 445 0.31%
2001 878,099 650 0.07% 42 0.08%
2002 815,108 - 0.00% - 0.00%
2003 483,769 - 0.00% - 0.00%
2004 98,658 - 0.00% - 0.00%
----------- ----------- ------------ ------------ -----------
Total $ 9,098,512 $ 12,261 0.13% $ 2,402 0.16%
----------- ----------- ------------
By geographic region (1):
Northwest $ 2,006,625 $ 5,389 0.27% $ 1,311 0.33%
Southwest 4,006,931 4,935 0.12% 803 0.14%
Mid-North 1,137,205 38 0.00% 106 0.01%
Mid-South 444,199 1,782 0.40% 1 0.40%
Northeast 726,350 - 0.00% 72 0.01%
Southeast 777,202 117 0.02% 109 0.03%
----------- ----------- ------------ ------------ -----------
Total $ 9,098,512 $ 12,261 0.13% $ 2,402 0.16%
----------- ----------- ------------
By commodity:
Crops $ 3,947,637 $ 552 0.01% $ 336 0.02%
Permanent plantings 2,376,608 8,734 0.37% 1,755 0.44%
Livestock 2,075,834 2,613 0.13% 160 0.13%
Part-time farm 602,703 362 0.06% 151 0.09%
Other 95,730 - 0.00% - 0.00%
----------- ----------- ------------ ------------ -----------
Total $ 9,098,512 $ 12,261 0.13% $ 2,402 0.16%
----------- ----------- ------------
(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).
|
Liquidity and Capital Resources
Farmer Mac has sufficient liquidity and capital resources to support its operations for the next twelve months and has a contingency funding plan to handle unanticipated disruptions in its access to the capital markets.
Debt Issuance. Farmer Mac funds its program operations primarily by issuing debt obligations of various maturities in the public capital markets. Farmer Mac's debt obligations consist of discount notes and medium-term notes, including floating rate notes, issued to obtain funds principally to cover the costs of purchasing and holding loans and securities (including Farmer Mac Guaranteed Securities). Farmer Mac also issues discount notes and medium-term notes to obtain funds for investments, transaction costs and guarantee payments. The interest and principal on Farmer Mac's debt are not guaranteed by and do not constitute debts or obligations of FCA or the United States or any agency or instrumentality of the United States other than Farmer Mac. Farmer Mac is an institution of the Farm Credit System, but is not liable for any debt or obligation of any other institution of the Farm Credit System. Likewise, neither the Farm Credit System nor any other individual institution of the Farm Credit System is liable for any debt or obligation of Farmer Mac. Income on Farmer Mac's discount notes and medium-term notes has no tax exemption under federal law from federal, state or local taxation. The Corporation's discount notes and medium-term notes are not currently rated by a nationally recognized statistical rating organization (NRSRO), although Farmer Mac intends to obtain a rating to eliminate the absence of a rating as a future point of contention. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Regulatory Matters" below.)
Farmer Mac's board of directors has authorized the issuance of up to $5.0 billion of discount notes and medium-term notes (of which $3.7 billion was outstanding as of June 30, 2004), subject to periodic review of the adequacy of that level relative to Farmer Mac's borrowing requirements. Farmer Mac invests the proceeds of such issuances in loans, Farmer Mac Guaranteed Securities and non-program investment assets in accordance with guidelines established by its board of directors.
Liquidity. The funding and liquidity needs of Farmer Mac's business programs are driven by the purchase and retention of eligible loans and Farmer Mac Guaranteed Securities, the maturities of Farmer Mac's discount notes and medium-term notes and payment of principal and interest on Farmer Mac Guaranteed Securities. Farmer Mac's primary sources of funds to meet these needs are:
o principal and interest payments and ongoing guarantee and
commitment fees received on loans, Farmer Mac Guaranteed
Securities and LTSPCs;
o principal and interest payments received from investment
securities; and
o the issuance of discount notes and medium-term notes.
As a result of Farmer Mac's regular issuance of discount notes and medium-term notes, as well as its status as a federally chartered instrumentality of the United States, Farmer Mac has been able to issue debt securities in the capital markets at favorable rates of interest. Farmer Mac has also used fixed-to-floating interest rate swaps, combined with medium-term notes, as a source of floating rate funding, and floating-to-fixed interest rate swaps, combined with discount note issuances, as a source of fixed-rate funding. While the swap market may provide favorable fixed rates, swap transactions expose Farmer Mac to the risk of future widening of its own issuance spreads versus corresponding LIBOR rates. If the spreads on the Farmer Mac discount notes were to increase relative to LIBOR, Farmer Mac would be exposed to a commensurate reduction on its net interest yield on the notional amount of its floating-to-fixed interest rate swaps and other LIBOR-based floating rate assets. Farmer Mac compensates for this risk by maintaining the flexibility to adjust the required net yield on program asset purchases to reflect the change in the discount note to LIBOR relationship, as necessary. During the second quarter, Farmer Mac continued its practice of issuing floating rate notes as an alternative to discount notes.
For liquidity, 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 whose rates reset within one year, and a Farmer Mac II portfolio of USDA Guaranteed Portions (full faith and credit of the U.S. Government). As of June 30, 2004, Farmer Mac's cash and cash equivalents, investment securities and USDA Guaranteed Portions, were $0.6 billion, $1.1 billion, and $0.7 billion, respectively, a combined 60 percent of total liabilities. Farmer Mac has a policy of maintaining a minimum of 60 days of liquidity and a target of 90 days of liquidity. For second quarter 2004, Farmer Mac maintained an average of greater than 90 days of liquidity.
Regulatory Matters
During second quarter 2004, FCA published a proposed regulation relating to Farmer Mac's investments and liquidity, adding administrative requirements and restricting the future composition of the non-program investment liquidity portfolio and its growth in proportion to Farmer Mac's total guarantees and commitments. Farmer Mac believes that the proposed regulation would not be largely inconsistent with the Corporation's current policies and expects to be able to comply with the regulation, though analysis indicates it could limit future increases in Farmer Mac's non-program investment portfolio and the related net interest income. Farmer Mac believes there are good and sufficient reasons why the proposed regulation should not be adopted in its current form and, as part of the formal rule-making process, will provide written comments to FCA within the public comment period, which on ends on September 13, 2004.
Additionally, on June 10, 2004, the FCA Board approved a proposed regulation that would establish a new risk-weight allocation of capital applicable to Farmer Mac transactions with FCS institutions, a major segment of Farmer Mac's customer base. The proposed regulation would require FCS institutions to risk-weight assets on their books that are guaranteed by a GSE based on the financial strength rating of the GSE, as determined by an NRSRO. Under the proposed regulation: (a) the 20 percent risk-weight would apply to such assets only if the GSE guarantor had a AAA or AA rating from an NRSRO; (b) an A rating would result in a 50 percent risk-weight; and (c) a lower rating (or no rating) would result in a 100 percent risk-weight. Farmer Mac is currently unrated. Currently, all banking regulators and FCA accord a 20 percent risk-weight to assets backed by guarantees of government sponsored enterprises (GSEs) such as Fannie Mae, Freddie Mac or Farmer Mac.
The proposed regulation was published in the Federal Register on August 6, 2004, starting a 90-day public comment period. As proposed, the regulation would require FCS institutions to comply with the risk-weight allocation of capital eighteen months after the effective date of the final regulation. If the proposed regulation is adopted as a final rule in its current form and Farmer Mac does not receive a rating of at least AA within the period provided for in the proposed regulation, not only would the benefit to an FCS institution of doing business with Farmer Mac be diminished after the adoption of the regulation, but also, based on the language of the proposed regulation, a significant portion of the current $2.8 billion of outstanding Farmer Mac I guarantees and commitments currently in place with FCS institutions might be subject to early termination.
There can be no assurance that the regulation will not be adopted as a final rule in its current form, or in a modified form with substantially the same effect. Likewise, Farmer Mac currently is not rated, and there can be no assurance that Farmer Mac would receive a AAA or AA rating from an NRSRO. Without regard to the proposed regulation, Farmer Mac intends to obtain a rating from an NRSRO well before the effective date of any final regulation. Farmer Mac believes there are good and sufficient reasons why the proposed regulation should not be adopted in its current form and, as part of the formal rule-making process, will provide written comments to FCA setting forth those reasons. Farmer Mac's comments will include the facts that the proposed regulation is inconsistent with regulations with respect to secondary market GSEs currently in effect at other federal regulators; that it would defeat the legislative intent of Congress that Farmer Mac should be able reliably to increase the lending capacity of all agricultural lenders; and that its logic is essentially circular, in that Farmer Mac's financial strength would become a function of the NRSRO's rating of its financial strength. Always conscious of the importance of oversight and sound regulation in the performance of its mission for the farmers, ranchers and rural homeowners of America, Farmer Mac looks forward to participating in the regulatory process as to both of the proposed regulations.
Other Matters
On August 3, 2004 the Board of Directors adopted a policy to begin paying a quarterly dividend of $0.10 per share on all classes of the Corporation's common stock in the fourth quarter of 2004, and authorized a program to repurchase up to ten percent of the Corporation's outstanding Class C non-voting common stock. The Board's decisions were made in consideration of the Corporation's forward capital requirements to support fulfillment of its mission of providing greater liquidity and lending capacity to agricultural lenders and increasing the availability of capital markets-based funding for mortgage loans to the Nation's farmers, ranchers and rural homeowners. The Board determined that Farmer Mac's capital was more than sufficient to meet those requirements. Likewise, the Board's decisions gave due regard to Farmer Mac's level of excess capital above both statutory minimum and risk-based capital requirements, 66 percent and 391 percent, respectively, and the annuity-like nature of the Corporation's income streams.
Considering recent market price levels of Class C common stock, the Board concluded that the repurchase program would enable Farmer Mac to reacquire shares at prices inconsistent with the Board's and management's positive view of the Corporation's long-term business outlook. Under the program, Farmer Mac will use a broker-dealer as repurchasing agent to acquire shares from time to time over the next 2 years through open market transactions, block purchases or private transactions. The timing of purchases and the number of shares to be purchased will depend on market conditions. The plan does not obligate the Corporation to acquire any specific number of shares and may be discontinued at any time. Farmer Mac intends to fund such repurchases with currently available working capital. Shares repurchased under the program will become authorized but unissued shares available for future issuance, as determined by the Board.
Supplemental Information
The following tables present quarterly and annual information regarding loan purchases, guarantees and LTSPCs and outstanding guarantees and LTSPCs.
Farmer Mac Purchases, Guarantees and LTSPCs
----------------------------------------------------------------------------
Farmer Mac I
------------------------
Loans and
Guaranteed
Securities LTSPCs Farmer Mac II Total
------------- ----------- ---------------- -----------
(in thousands)
For the quarter ended:
June 30, 2004 $ 27,520 $ 127,098 $ 34,671 $ 189,289
March 31, 2004 25,444 147,273 34,483 207,200
December 31, 2003 25,148 218,097 44,971 288,216
September 30, 2003 42,760 199,646 106,729 349,135
June 30, 2003 65,615 179,025 77,636 322,276
March 31, 2003 59,054 166,574 41,893 267,521
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
For the year ended:
December 31, 2003 192,577 763,342 271,229 1,227,148
December 31, 2002 747,881 1,155,479 173,011 2,076,371
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Outstanding Balance of Farmer Mac Loans and
On- and Off-Balance Sheet Guarantees and LTSPCs (1)
-------------------------------------------------------------------------------
Farmer Mac I
------------------------------------------
Post-1996 Act
-------------------------
Loans and
Guaranteed
Securities LTSPCs Pre-1996 Act Farmer Mac II Total
------------- -------- -------------- --------------- -----------
(in thousands)
As of:
June 30, 2004 $ 2,521,026 $ 2,390,779 $ 22,155 $ 715,750 $ 5,649,710
March 31, 2004 2,566,412 2,382,648 22,261 722,978 5,694,299
December 31, 2003 2,696,530 2,348,702 24,734 729,470 5,799,436
September 30, 2003(2) 2,721,775 2,174,182 25,588 720,584 5,642,129
June 30, 2003 2,108,180 2,790,480 28,057 668,899 5,595,616
March 31, 2003 2,111,861 2,732,620 29,216 650,152 5,523,849
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
(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) The Loans and Guaranteed Securities and LTSPCs amounts reflect the
conversion of $722.3 million of existing LTSPCs to a Farmer Mac I
Guaranteed Security during third quarter 2003 at the request of a program
participant, Farm Credit West, ACA, of which Farmer Mac director Kenneth A.
Graff is President.
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Outstanding Balance of Loans Held and Loans Underlying
On-Balance Sheet Farmer Mac Guaranteed Securities
-----------------------------------------------------------------------------------------------
Total
Fixed Rate 5-to-10-Year 1-Month-to-3-Year Held in
(10-yr. wtd. avg.terms) ARMs & Resets ARMs Portfolio
----------------------- --------------- ----------------- ------------
(in thousands)
As of:
June 30, 2004 $ 782,854 $ 978,531 $ 529,654 $ 2,291,039
March 31, 2004 818,497 978,263 548,134 2,344,894
December 31, 2003 860,874 1,045,217 542,024 2,448,115
September 30, 2003 865,817 1,037,168 535,915 2,438,900
June 30, 2003 889,839 1,064,824 511,700 2,466,363
March 31, 2003 880,316 1,057,310 515,910 2,453,536
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
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Farmer Mac is exposed to market risk attributable to changes in interest rates. Farmer Mac manages this market risk by entering into various financial transactions, including financial derivatives, and by monitoring its exposure to changes in interest rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quantitative and Qualitative Disclosures About Market Risk Management--Interest Rate Risk" for more information about Farmer Mac's exposure to interest rate risk and strategies to manage such risk. For information regarding Farmer Mac's use of and accounting policies for financial derivatives, see Note 1(c) to the condensed consolidated financial statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for further information regarding Farmer Mac's debt issuance and liquidity risks.
Item 4. Controls and Procedures
Farmer Mac maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Corporation's periodic filings under the Securities Exchange Act of 1934 (the "Exchange Act"), including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to the Corporation's management on a timely basis to allow decisions regarding required disclosure. Farmer Mac's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Corporation's disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30, 2004. 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. For the quarter ended June 30, 2004, there were no significant changes in Farmer Mac's internal controls, or in other factors that could materially affect these controls, subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies or material weaknesses.
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 April 2, 2004, Farmer Mac issued an aggregate of 787 shares of its Class C Non-Voting Common Stock, at an issue price of $26.21 per share, to the eleven Directors who elected to receive such stock in lieu of their cash retainers.
During second quarter 2004, Farmer Mac granted options under its 1997 Stock Option Plan to purchase an aggregate of 90,000 shares of Class C Non-Voting Common Stock, at an exercise price of $22.11 per share, to directors as incentive compensation.
(d) Not applicable.
(e) Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Farmer Mac's Annual Meeting of Stockholders was held on June 3, 2004.
(b) See paragraph (c)(1) below. In addition to the Directors elected at the Annual Meeting of Stockholders on June 3, 2004, the following Directors appointed by the President of the United States continue to serve as Directors of Farmer Mac:
Fred L. Dailey (Chairman)
Julia Bartling
Grace T. Daniel
Lowell L. Junkins
Glen O. Klippenstein
(c) (1) Election of Directors (cumulative voting):
Class A Nominees
Number of Shares
For Withheld
------------------------
Dennis L. Brack 698,366 2,100
Dennis A. Everson 698,666 1,800
Mitchell A. Johnson 698,266 2,200
Timothy F. Kenny 698,366 2,100
Charles E. Kruse 698,866 1,600
Class B Nominees
Number of Shares
For Withheld
------------------------
Ralph "Buddy" Cortese 391,678 200
Paul A. DeBriyn 391,678 200
Kenneth E. Graff 892,443 1,050
John G. Nelson, III 391,678 200
John Dan Raines 391,678 200
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(2) Selection of Independent Auditors (Deloitte & Touche LLP):
Class A Stockholders
Number of Shares
--------------------
For 697,166
Against 1,300
Abstain 2,000
Class B Stockholders
Number of Shares
--------------------
For 492,401
Against 0
Abstain 0
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(d) 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.
* 4.1 - Specimen Certificate for Farmer Mac Class A Voting Common Stock (Form 10-Q filed May 15, 2003).
* 4.2 - Specimen Certificate for Farmer Mac Class B Voting Common Stock (Form 10-Q filed May 15, 2003).
* 4.3 - Specimen Certificate for Farmer Mac Class C Non-Voting Common Stock (Form 10-Q filed May 15, 2003).
* 4.4 - Certificate of Designation of Terms and Conditions of Farmer Mac 6.40% Cumulative Preferred Stock, Series A (Form 10-Q filed May 15, 2003).
+* 10.1 - Stock Option Plan (Previously filed as Exhibit 19.1 to Form 10-Q filed August 14, 1992).
+* 10.1.1 - Amendment No. 1 to Stock Option Plan (Previously filed as Exhibit 10.2 to Form 10-Q filed August 16, 1993).
+* 10.1.2 - 1996 Stock Option Plan (Form 10-Q filed August 14, 1996).
+* 10.1.3 - Amended and Restated 1997 Incentive Plan (Form 10-Q filed November 14, 2003).
+* 10.2 - Employment Agreement dated May 5, 1989 between Henry D. Edelman and the Registrant (Previously filed as Exhibit 10.4 to Form 10-K filed February 14, 1990).
+* 10.2.1 - Amendment No. 1 dated as of January 10, 1991 to Employment Contract between Henry D. Edelman and the Registrant (Previously filed as Exhibit 10.4 to Form 10-K filed April 1, 1991).
+* 10.2.2 - Amendment to Employment Contract dated as of June 1, 1993 between Henry D. Edelman and the Registrant (Previously filed as Exhibit 10.5 to Form 10-Q filed November 15, 1993).
+* 10.2.3 - Amendment No. 3 dated as of June 1, 1994 to Employment Contract between Henry D. Edelman and the Registrant (Previously filed as Exhibit 10.6 to Form 10-Q filed August 15, 1994).
+* 10.2.4 - Amendment No. 4 dated as of February 8, 1996 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-K filed March 29, 1996).
+* 10.2.5 - Amendment No. 5 dated as of June 13, 1996 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed August 14, 1996).
+* 10.2.6 - Amendment No. 6 dated as of August 7, 1997 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed November 14, 1997).
+* 10.2.7 - Amendment No. 7 dated as of June 4, 1998 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed August 14, 1998).
+* 10.2.8 - Amendment No. 8 dated as of June 3, 1999 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed August 12, 1999).
+* 10.2.9 - Amendment No. 9 dated as of June 1, 2000 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed August 14, 2000).
+* 10.2.10- Amendment No. 10 dated as of June 7, 2001 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed August 14, 2001).
+* 10.2.11- Amendment No. 11 dated as of June 6, 2002 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed August 14, 2002).
+* 10.2.12- Amendment No. 12 dated as of June 5, 2003 to Employment Contract between Henry D. Edelman and the Registrant (Form 10-Q filed August 14, 2003).
+* 10.3 - Employment Agreement dated May 11, 1989 between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.5 to Form 10-K filed February 14, 1990).
+* 10.3.1 - Amendment dated December 14, 1989 to Employment Agreement between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.5 to Form 10-K filed February 14, 1990).
+* 10.3.2 - Amendment No. 2 dated February 14, 1991 to Employment Agreement between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.7 to Form 10-K filed April 1, 1991).
+* 10.3.3 - Amendment to Employment Contract dated as of June 1, 1993 between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.9 to Form 10-Q filed November 15, 1993).
+* 10.3.4 - Amendment No. 4 dated June 1, 1993 to Employment Contract between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.10 to Form 10-K filed March 31, 1994).
+* 10.3.5 - Amendment No. 5 dated as of June 1, 1994 to Employment Contract between Nancy E. Corsiglia and the Registrant (Previously filed as Exhibit 10.12 to Form 10-Q filed August 15, 1994).
+* 10.3.6 - Amendment No. 6 dated as of June 1, 1995 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14, 1995).
+* 10.3.7 - Amendment No. 7 dated as of February 8, 1996 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-K filed March 29, 1996).
+* 10.3.8 - Amendment No. 8 dated as of June 13, 1996 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14, 1996).
+* 10.3.9 - Amendment No. 9 dated as of August 7, 1997 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed November 14, 1997).
+* 10.3.10- Amendment No. 10 dated as of June 4, 1998 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14, 1998).
+* 10.3.11- Amendment No. 11 dated as of June 3, 1999 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 12, 1999).
+* 10.3.12- Amendment No. 12 dated as of June 1, 2000 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14, 2000).
+* 10.3.13- Amendment No. 13 dated as of June 7, 2001 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14, 2001).
+* 10.3.14- Amendment No. 14 dated as of June 6, 2002 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14, 2002).
+* 10.3.15- Amendment No. 15 dated as of June 5, 2003 to Employment Contract between Nancy E. Corsiglia and the Registrant (Form 10-Q filed August 14, 2003).
+* 10.4 - Employment Contract dated as of September 1, 1997 between Tom D.
Stenson and the Registrant (Previously filed as Exhibit 10.8 to Form
10-Q filed November 14, 1997).
+* 10.4.1 - Amendment No. 1 dated as of June 4, 1998 to Employment Contract between Tom D. Stenson and the Registrant (Previously filed as Exhibit 10.8.1 to Form 10-Q filed August 14, 1998).
+* 10.4.2 - Amendment No. 2 dated as of June 3, 1999 to Employment Contract between Tom D. Stenson and the Registrant (Form 10-Q filed August 12, 1999).
+* 10.4.3 - Amendment No. 3 dated as of June 1, 2000 to Employment Contract between Tom D. Stenson and the Registrant (Form 10-Q filed August 14, 2000).
+* 10.4.4 - Amendment No. 4 dated as of June 7, 2001 to Employment Contract between Tom D. Stenson and the Registrant (Form 10-Q filed August 14, 2001).
+* 10.4.5 - Amendment No. 5 dated as of June 6, 2002 to Employment Contract between Tom D. Stenson and the Registrant (Form 10-Q filed August 14, 2002).
+* 10.4.6 - Amendment No. 6 dated as of June 5, 2003 to Employment Contract between Tom D. Stenson and the Registrant (Form 10-Q filed August 14, 2003).
+* 10.5 - Employment Contract dated February 1, 2000 between Jerome G. Oslick and the Registrant (Previously filed as Exhibit 10.6 to Form 10-Q filed May 11, 2000).
+* 10.5.1 - Amendment No. 1 dated as of June 1, 2000 to Employment Contract between Jerome G. Oslick and the Registrant (Previously filed as Exhibit 10.6.1 to Form 10-Q filed August 14, 2000).
+* 10.5.2 - Amendment No. 2 dated as of June 7, 2001 to Employment Contract between Jerome G. Oslick and the Registrant (Previously filed as Exhibit 10.6.2 to Form 10-Q filed August 14, 2001).
+* 10.5.3 - Amendment No. 3 dated as of June 6, 2002 to Employment Contract between Jerome G. Oslick and the Registrant (Form 10-Q filed August 14, 2002).
+* 10.5.4 - Amendment No. 4 dated as of June 5, 2003 to Employment Contract between Jerome G. Oslick and the Registrant (Form 10-Q filed August 14, 2003).
+* 10.6 - Employment Contract dated June 5, 2003 between Timothy L. Buzby and the Registrant (Form 10-Q filed August 14, 2003).
* 10.7 - Farmer Mac I Seller/Servicer Agreement dated as of August 7, 1996 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002).
* 10.8 - Medium-Term Notes U.S. Selling Agency Agreement dated as of October 1, 1998 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002).
* 10.9 - Discount Note Dealer Agreement dated as of September 18, 1996 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002).
*# 10.10 - ISDA Master Agreement and Credit Support Annex dated as of June 26, 1997 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002).
*# 10.11 - Master Central Servicing Agreement dated as of December 17, 1996 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002).
*# 10.11.1- Amendment No. 1 dated as of February 26, 1997 to Master Central Servicing Agreement dated as of December 17, 1996 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002).
**#10.11.2- Amended and Restated Master Central Servicing Agreement dated as of May 1, 2004 between Zions First National Bank and the Registrant.
*# 10.12 - Loan File Review and Underwriting Agreement dated as of December 17, 1996 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002).
*# 10.12.1- Amendment No. 1 dated as of January 20, 2000 to Loan File Review and Underwriting Agreement dated as of December 17, 1996 between Zions First National Bank and the Registrant (Form 10-Q filed November 14, 2002).
*# 10.13 - Long Term Standby Commitment to Purchase dated as of August 1, 1998 between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed November 14, 2002).
*# 10.13.1- Amendment No. 1 dated as of January 1, 2000 to Long Term Standby Commitment to Purchase dated as of August 1, 1998 between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed November 14, 2002).
* 10.13.2- Amendment No. 2 dated as of September 1, 2002 to Long Term Standby Commitment to Purchase dated as of August 1, 1998, as amended by Amendment No. 1 dated as of January 1, 2000, between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed November 14, 2002).
* 10.14 - Lease Agreement, dated June 28, 2001 between EOP - Two Lafayette, L.L.C. and the Registrant (Previously filed as Exhibit 10.10 to Form 10-K filed March 27, 2002).
+* 10.15 - Employment Contract dated October 31, 2003 between Michael P. Morris and the Registrant (Form 10-K filed March 15, 2004).
21 - Farmer Mac Mortgage Securities Corporation, a Delaware corporation.
** 31.1 - Certification of Chief Executive Officer relating to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004, pursuant to Rule 13a-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
** 31.2 - Certification of Chief Financial Officer relating to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
** 32 - Certification of Chief Executive Officer and Chief Financial Officer relating to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On April 6, 2004, Farmer Mac filed with the Securities and Exchange Commission a Current Report on Form 8-K announcing that, on April 1, 2004, the Board of Directors of Farmer Mac had declared a quarterly dividend on the Corporation's 6.40% Cumulative Preferred Stock, Series A.
On April 29, 2004, Farmer Mac furnished to the Securities and Exchange Commission a Current Report on Form 8-K that attached a press release announcing Farmer Mac's financial results for first quarter 2004.
On June 3, 2004, Farmer Mac furnished to the Securities and Exchange Commission a Current Report on Form 8-K that attached a press release regarding Farmer Mac's update to Congress on its mission achievements and financial condition.
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
August 9, 2004
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)
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Exhibit 3.2
BY-LAWS OF THE
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
("FARMER MAC")
as amended by the Board of Directors
through June 3, 2004
Table of Contents
ARTICLE I
NAME AND LOCATION OF OFFICES
Section 1. Name.................................................... 1
Section 2. Principal Office and Other Offices...................... 1
Section 3. Seal.................................................... 1
Section 4. Service of Process...................................... 1
Section 5. Fiscal Year............................................. 1
ARTICLE II
PURPOSES
Section 1. Statutory Purposes...................................... 1
Section 2. Ancillary Purposes...................................... 2
ARTICLE III
OFFICERS AND EMPLOYEES
Section 1. Number and Type......................................... 2
Section 2. Appointment and Confirmation............................ 2
Section 3. Removal................................................. 2
Section 4. Vacancies............................................... 2
Section 5. The President........................................... 3
Section 6. The Secretary........................................... 3
Section 7. The Treasurer........................................... 3
Section 8. The Controller.......................................... 3
Section 9. Employee Conduct........................................ 4
Section 10. Outside or Private Employment........................... 4
ARTICLE IV
BOARD OF DIRECTORS
Section 1. Powers.................................................. 4
Section 2. Number and Type of Directors............................ 5
Section 3. Meetings and Waiver of Notice........................... 6
Section 4. Meetings by Telephone................................... 6
Section 5. Quorum.................................................. 6
Section 6. Action Without a Meeting................................ 6
Section 7. Compensation............................................ 7
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Section 8. Chairman and Vice Chairman............................. 7
Section 9. Standing Committees..................................... 7
(a) Audit Committee................................... 7
(b) Compensation Committee............................ 8
(c) Corporate Governance Committee.................... 8
(d) Credit Committee.................................. 9
(e) Finance Committee................................. 9
(f) Marketing Committee............................... 10
(g) Public Policy Committee........................... 10
Section 10. Ad Hoc Committees....................................... 10
ARTICLE V
SHAREHOLDERS
Section 1. Special Meeting......................................... 10
Section 2. Annual Meeting.......................................... 11
Section 3. Notice.................................................. 11
Section 4. Waiver of Notice........................................ 11
Section 5. Record Date............................................. 11
Section 6. Voting Lists............................................ 12
Section 7. Quorum.................................................. 12
Section 8. Proxies................................................. 12
Section 9. Organization............................................ 13
Section 10. Voting of Shares........................................ 13
Section 11. Inspectors of Votes..................................... 14
ARTICLE VI
SHARES OF STOCK
Section 1. Issuance and Conditions................................. 14
Section 2. Common Stock............................................ 14
Section 3. Redemption.............................................. 15
Section 4. Dividends on Voting Common Stock and Non-Voting
Common Stock............................................ 15
Section 5. Preferred Stock......................................... 15
Section 6. Dividends, Redemption, Conversion of Preferred Shares... 15
Section 7. Preference on Liquidation............................... 16
Section 8. Purchase of Own Shares.................................. 16
Section 9. Consideration for Shares................................ 16
Section 10. Stated Capital.......................................... 16
Section 11. No Preemptive Rights.................................... 17
Section 12. Liability of Shareholders............................... 17
Section 13. Reclassifications, Etc.................................. 17
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ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates............................................ 17
Section 2. Contents................................................ 18
Section 3. Transfer................................................ 18
Section 4. Records................................................. 19
ARTICLE VIII
INDEMNIFICATION
Section 1. Authorization........................................... 19
Section 2. Procedure............................................... 20
Section 3. Advance Payments........................................ 20
Section 4. Other Rights to Indemnification......................... 20
Section 5. Indemnification Insurance............................... 20
ARTICLE IX
CONTRACTS, LOANS, CHECKS, DEPOSITS AND INVESTMENTS
Section 1. Contracts............................................... 21
Section 2. Loans................................................... 21
Section 3. Checks, Drafts, etc..................................... 21
Section 4. Deposits................................................ 21
Section 5. Investments............................................. 21
ARTICLE X
FACSIMILE SIGNATURES.........................21
ARTICLE XI
AMENDMENTS............................ 22
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ARTICLE I
NAME AND LOCATION OF OFFICES
Section 1. Name
The Corporation shall do business as the Federal Agricultural Mortgage Corporation.
Section 2. Principal Office and Other Offices
The principal office of the Corporation shall be located in Washington, D.C. The Corporation may establish other offices in such other places, within or without the District of Columbia, as the Board of Directors shall, from time to time, deem useful for the conduct of the Corporation's business.
Section 3. Seal
The seal of the Corporation shall be of such design as shall be approved and adopted from time to time by the Board of Directors, and may be affixed to any document by impression, by printing, by rubber stamp, or otherwise.
Section 4. Service of Process
The Corporate Secretary or any Assistant Secretary of the Corporation shall be agents of the Corporation upon whom any process, notice or demand required or permitted by law to be served upon the Corporation may be served.
Section 5. Fiscal Year
The fiscal year of the Corporation shall end on the thirty-first day of December of each year.
ARTICLE II
PURPOSES
Section 1. Statutory Purposes
The Corporation is organized pursuant to its governing statute, Title VIII of the Farm Credit Act of 1971, as amended, to provide a secondary market for agricultural real estate mortgage loans and to enhance the ability of individuals in small rural communities to obtain financing for moderate-priced homes and to undertake such other activities authorized by such Act as may be necessary and appropriate to further the availability of funds for agricultural real estate mortgage loans and housing in small rural communities.
Section 2. Ancillary Purposes
The Corporation is further organized to engage in such other related activities that are not prohibited and as the Board of Directors shall from time to time determine to be in the furtherance of its statutory purposes.
ARTICLE III
OFFICERS AND EMPLOYEES
Section 1. Number and Type
The officers of the Corporation shall be a President, one or more Vice Presidents (the number thereof to be determined by the Board of Directors), a Secretary, a Treasurer, and a Controller, each of whom shall be appointed by the Chairman of the Board of Directors subject to confirmation by resolution of the Board of Directors. Such other officers and assistant officers as may be deemed necessary may be appointed by the Chairman subject to confirmation by resolution of the Board of Directors. Any of the above offices may be held by the same person, except the offices of President and Secretary.
Section 2. Appointment and Confirmation
The initial officers of the Corporation shall be appointed and confirmed at such time as may be appropriate. Thereafter, the officers shall be appointed and confirmed annually at the first meeting of the Board of Directors held after each annual meeting of the shareholders. If the selection of officers is not held at such meeting, such selection shall be held as soon thereafter as practicable. Each officer shall hold office until his successor shall have been duly appointed and confirmed or until his death or until he shall resign or shall have been removed in the manner hereinafter provided.
Section 3. Removal
Any officer may be removed by a majority of the Board of Directors, whenever in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the persons so removed. Appointment or confirmation of an officer shall not of itself create contract rights.
Section 4. Vacancies
A vacancy in an office because of death, resignation, removal, disqualification or otherwise, may be filled by the Chairman of the Board of Directors, subject to confirmation by the Board of Directors at the meeting next following the appointment, for the unexpired portion of the term.
Section 5. The President
The President shall be the principal executive officer of the Corporation and, subject to the control of the Board of Directors, shall in general supervise and control all of the business and affairs of the Corporation. He may sign, singly or with the Secretary or any other proper officer of the Corporation authorized by the Board of Directors, certificates for shares of the Corporation, any deeds, mortgages, bonds, contracts, or other instruments which the Board of Directors has authorized to be executed, except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation, or shall be required to be otherwise signed or executed, and in general shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time.
Section 6. The Secretary
The Secretary shall: (a) keep the minutes of the shareholders' and of the Board of Directors' meetings in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these By-Laws; (c) be the custodian of the corporate records and of the seal of the Corporation and see that the Seal of the Corporation is affixed to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized; (d) keep a register of the post office address of each shareholder which shall be furnished to the Secretary by such shareholder; (e) sign with the President, certificates for shares of the Corporation, the issuance of which shall have been authorized by resolution of the Board of Directors; (f) have general control of the stock transfer books of the Corporation; and (g) in general, perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the President or by the Board of Directors.
Section 7. The Treasurer
The Treasurer shall: (a) have charge and custody of and be responsible for all funds and securities of the Corporation, receive and give receipts for monies due and payable to the Corporation from any source whatsoever, and deposit all such monies in the name of the Corporation in such banks, trust companies or other depositories as shall be selected in accordance with a resolution of the Board of Directors; and (b) in general, perform all of the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the President or by the Board of Directors.
Section 8. The Controller
The Controller shall: (a) keep full and accurate accounts of all assets, liabilities, commitments, receipts, disbursements, and other financial transactions of the Corporation; (b) certify vouchers for payment by the Treasurer or his designee, and designate, with the written concurrence of the Chairman of the Board, such other officers, agents, and employees, severally, who may so certify; and (c) in general, perform all the duties ordinarily incident to the office of Controller and such other duties as may be assigned to him by the Board of Directors or by the Chairman of the Board.
Section 9. Employee Conduct
No officer or employee shall engage, directly or indirectly, in any personal business transaction or private arrangement for personal profit which arises from or is based upon his official position or authority or upon confidential information which he gains by reason of such position or authority, and he shall reasonably restrict his personal business affairs so as to avoid conflicts of interest with his official duties. No officer or employee shall divulge confidential information to any unauthorized person, or release any such information in advance of authorization for its release, nor shall he accept, directly or indirectly, any valuable gift favor or service from any person with whom he transacts business on behalf of the Corporation.
Section 10. Outside Private Employment
No officer or employee shall have any outside or private employment or affiliation with any firm or organization incompatible with his concurrent employment by the Corporation and he shall not accept or perform any outside or private employment which the President of the Corporation determines will interfere with the efficient performance of his official duties. Any officer or employee who intends to perform services for compensation or to engage in any business shall report his intention to do so to the President of the Corporation prior to such acceptance or performance.
ARTICLE IV
BOARD OF DIRECTORS
Section 1. Powers
Except as otherwise provided in these By-Laws, the powers of the Corporation shall be exercised by the Board of Directors, which shall have all powers granted to it by the Corporation's governing statute, as may be amended from time to time, and such other powers including, but not limited to, the power:
a. to determine the general policies that shall govern the operations of the Corporation;
b. to issue stock in the manner provided in Section 8.4 of TitleVIII of the Farm Credit Act of 1971, as amended;
c. to adopt, alter and use a corporate seal, which shall be judicially noted;
d. to provide for a president, one or more vice presidents, secretary, treasurer, and such other officers, employees and agents, as may be necessary and define their duties and compensation levels, all without regard to title 5, United States Code, and require surety bonds or make other provisions against losses occasioned by acts of the aforementioned persons;
e. to provide guarantees in the manner provided under Section 8.6 of Title VIII of the Farm Credit Act of 1971, as amended;
f. to have succession until dissolved by law enacted by the Congress;
g. to prescribe such standards as may be necessary to carry out Title VIII of the Farm Credit Act of 1971, as amended;
h. to enter into contracts and make payments with respect to the contracts;
i. to sue and be sued in its corporate capacity and to complain and defend in any action brought by or against the Corporation in any state or federal court of competent jurisdiction;
j. to make and perform contracts, agreements, and commitments with persons and entities both inside and outside the Farm Credit System;
k. to acquire, hold, lease, mortgage or dispose of, at public or private sale, real and personal property, purchase or sell any securities or obligations, and otherwise exercise all the usual incidents of ownership of property necessary and convenient to the business of the Corporation;
1. to conduct its business, carry on its operations, and have officers and exercise the power granted by the governing statute in any state without regard to any qualification or similar statute in any such state;
m. to accept gifts or donations of services, of property, real, personal or mixed, tangible or intangible; and
n. to exercise such other incidental powers as are necessary to carry out the powers, duties, and functions of the Corporation in accordance with the governing statute.
Section 2. Number and Type of Directors
The Board of Directors shall consist of those directors appointed or elected as provided in Section 8.2 of Title VIII of the Farm Credit Act of 1971, as amended.
Section 3. Meetings and Waiver of Notice
The Board of Directors shall meet at the call of the Chairman or a majority of its members. Notice shall be given to each member by the Secretary at the direction of the calling authority. Such notice shall be by letter, telegram, cable, or radiogram delivered for transmission not later than during the third day immediately preceding the day of the meeting or by word of mouth, telephone, or radio phone, received not later than during the second day immediately preceding the day of the meeting. Notice of any such meeting may be waived in writing signed by the person or persons entitled thereto either before or after the time of the meeting. Neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors need be specified in the notice or waiver of notice of the meeting.
Section 4. Meetings by Telephone
Any meeting of the Board of Directors or any meeting of a Board committee may be held with the members of the Board or such committee participating in such meeting by telephone or by any other means of communication by which all such members participating in the meeting are able to speak to and hear one another.
Section 5. Quorum
The presence, in person or otherwise, in accordance with Section 6 of this Article, of eight of the then incumbent members of the Board of Directors or of a majority of the then incumbent members of a Board committee, as applicable, at the time of any meeting of the Board or such committee, shall constitute a quorum for the transaction of business. The act of the majority of such members present at a meeting at which a quorum is present shall be the act of the Board of Directors or committee, as applicable, unless the act of a greater number is required by these By-Laws. Members may not be represented by proxy at any meeting of the Board of Directors or committee thereof.
Section 6. Action Without a Meeting
Any action required to be taken by the Board of Directors at a meeting, or by a committee of the Board at a meeting can be taken without a meeting, if a consent in writing, setting forth the actions so taken, is later signed by a majority of the directors, or a majority of the members of the committee, as the case may be. Such consent shall have the same effect as a majority vote of the Board of Directors or committee, as the case may be. Written notice of any action taken pursuant to this section by a majority of the directors, or members of a committee, as the case may be, shall, within 10 days of such action, be given to all directors or members of a committee not consenting to the action.
Section 7. Compensation
Each director shall be paid such compensation as may be fixed from time to time by resolution of the Board of Directors, and each director shall also be reimbursed for his or her travel and subsistence expenses incurred while attending meetings of the Board of Directors or committees thereof.
Section 8. Chairman and Vice Chairman
Under the authority of the Corporation's governing statute, the President of the United States shall designate one director from among those directors appointed by the President as provided in Section 8.2 of the Farm Credit Act of 1971, as amended, to be Chairman of the Board of Directors. The Chairman shall preside over meetings of the Board of Directors.
The Board of Directors shall select a Vice Chairman from among the directors appointed by the President of the United States who shall have all the rights, duties and obligations of the Chairman at any time when the incumbent Chairman is absent, unable or unwilling so to act, and at any time when there is a vacancy in the office of Chairman. The Vice Chairman shall serve at the pleasure of the Board and shall be selected no less frequently than annually for a term expiring on December 31 of each year.
Section 9. Standing Committees
The Standing Committees described in this Section shall have such responsibilities and authority as are set forth herein, together with such other responsibilities and authority as may from time to time be provided in resolutions adopted by the Board of Directors. The Board of Directors shall designate members of the Standing Committees from among its members.
(a) Audit Committee
The Audit Committee shall select and engage independent accountants to audit the books, records and accounts of the Corporation and its subsidiaries, if any, and to perform such other duties as the Committee may from time to time prescribe. The Committee shall review the scope of audits as recommended by the public accountants to ensure that the recommended scope is sufficiently comprehensive. The Audit Committee's selection of accountants shall be made annually in advance of the Annual Meeting of Stockholders and shall be submitted for ratification or rejection at such meeting.
The Audit Committee shall receive a special report from the independent accountants, prior to the public accountants' report on the published financial statements. The special report shall, among other things, point out and describe each material item affecting the financial statements of the Corporation which might in the opinion of the independent public accountants receive, under generally accepted accounting principles, treatment varying from that proposed for such statements. The Committee shall decide in its discretion upon the treatment to be accorded such items and shall take such other action in respect of the special report as the Committee may deem appropriate. A copy of the special report shall be transmitted to the Compensation Committee, together with the Audit Committee's decision.
(b) Compensation Committee
The Compensation Committee shall make recommendations to the Board on the salaries and benefit plans of all corporate directors and officers. The Committee shall recommend a framework to the Board for all compensation plans and shall have authority to act within the framework approved by the Board. The Committee shall have exclusive jurisdiction on behalf of the Corporation to make recommendations to the full Board to approve, disapprove, modify or amend all plans to compensate employees eligible for incentive compensation.
The Compensation Committee shall review and approve, prior to implementation, any employee benefit plan and any amendment or modification thereof submitted to the Board to the extent such plan or amendment or modification affects employees under its jurisdiction.
(c) Corporate Governance Committee
The Corporate Governance Committee shall assist the Board in: (i) developing and recommending to the Board a set of effective corporate governance guidelines and principles applicable to the Corporation; (ii) reviewing, on a regular basis, the overall corporate governance of the Corporation and recommending improvements when necessary; and (iii) identifying individuals qualified to serve as directors and recommending to the Board nominees for the directors to be elected by the holders of voting common stock at each Annual Meeting of Stockholders. In addition, the Corporate Governance Committee shall, during the intervals between meetings of the Board, have and may exercise the powers of the Board, other than those assigned to the Audit and Compensation Committees, except that it shall not have the authority to take any of the following actions:
o the submission to stockholders of any action requiring stockholders'
authorization;
o the filling of vacancies on the Board of Directors or on the Corporate
Governance Committee;
o the fixing of compensation of directors for serving on the Board or on
the Corporate Governance Committee;
o the removal of any director, the President or any Vice President,
except that vacancies in established management positions may be
filled subject to ratification by the Board of Directors;
o the amendment or repeal of the By-Laws or the adoption of new by-laws;
o the amendment or repeal of any resolution of the Board which, by its
terms, is not so amendable or repealable;
o the declaration of dividends; and
o any action which the Chairman or Vice Chairman of the Board of
Directors (in the event that the Vice Chairman is the Chairman of the
Board due to the absence, inability or unwillingness of the Chairman
so to act) or the President shall, by written instrument filed with
the Secretary, designate as a matter which should be considered by the
Board of Directors.
The Corporate Governance Committee shall include the Chairman of the Board, the Vice Chairman of the Board, who shall be the chairman of the Committee, and two representatives from each of the Corporation's two elected classes of directors. The designation of such Committee and the delegation thereto of authority shall not relieve any director of any duty he or she owes to the Corporation. The Corporate Governance Committee shall meet at the call of its chairman or a majority of its members. A majority of the members of the Committee shall constitute a quorum sufficient for the taking of any action by the Committee, except that either the Chairman or Vice Chairman and at least one member who has been elected to the Board by the holders of Class A voting common stock and one member who has been elected to the Board by the holders of Class B voting common stock must be present to constitute a quorum. The action of the majority of the members of the Committee present at a duly convened meeting shall be the action of the Committee. Members of the Committee may not be represented by proxy at any meeting of the Committee. In connection with each regular meeting of the Board of Directors, the minutes of all meetings of the Corporate Governance Committee since the last meeting of the Board shall be distributed to the Board, and the Board shall take such action, if any, as the Board may deem appropriate, to approve, alter or rescind actions, if any, previously taken by the Committee under these By-Laws, provided that rights or acts of third parties vested or taken in reliance on such action prior to any such alteration or rescission shall not be adversely affected thereby.
(d) Credit Committee
The Credit Committee shall have primary responsibility for reviewing and approving all policy matters relating to changes, additions or deletions to the credit, collateral valuation, underwriting and loan diversification standards and any forms or documents used in the Corporation's programs. The Committee shall have primary responsibility for matters relating to mortgage portfolio servicing and management, including the methodology that results in the Corporation's allowance for loan losses.
(e) Finance Committee
The Finance Committee shall be responsible for determining the financial policies of the Corporation and managing the Corporation's financial affairs, except those financial policies and affairs that are assigned to the Audit and Compensation Committees.
The guarantee fee policies of the Corporation shall be reviewed and approved by the Finance Committee and recommended to the Board for its approval. All capital expenditures of the Corporation shall be approved by the Committee, except that it may authorize the President to approve expenditures which do not involve the Corporation in a new line of business. All action taken by the Finance Committee shall be reported to the Board and shall be subject to revision by the Board, provided that no acts or rights of third parties shall be affected thereby.
(f) Marketing Committee
The Marketing Committee shall have primary responsibility for the development of the Corporation's programs and shall make recommendations to the Board with respect to commencement of new programs and modification or discontinuance of existing programs. The Committee shall routinely monitor the Corporation's success in accomplishing its Marketing Plan as contained in the Business Plan.
(g) Public Policy Committee
The Public Policy Committee shall consider matters of public policy referred to it by the Board or the Chairman including: (i) the Corporation's relationship with and policies regarding Borrowers; (ii) the Corporation's relationship with and policies regarding Congress and governmental agencies and instrumentalities; and (iii) matters which generate actual or apparent conflicts of interest between the Corporation and one or more of its directors. The Committee shall report the outcome of its evaluation of matters under preceding clause (iii) within a reasonable time after reference is made.
Section 10. Ad Hoc Committees
The Board of Directors may, by resolution adopted by a majority of its members, designate from among its members one or more ad hoc committees, each of which to the extent provided in the resolution and in these By-Laws shall have and may exercise all the authority of the Board of Directors. No such ad hoc committee shall have the authority of the Board of Directors in reference to any powers reserved to the full Board of Directors by the resolution or these By-Laws.
ARTICLE V
SHAREHOLDERS
Section 1. Special Meeting
Special meetings of the shareholders shall be held upon the call of either the Chairman or a majority of the directors of the Corporation, and shall be called by the Chairman upon the written request of holders of at least one-third of the shares of the Corporation having voting power. A special meeting may be called for any purpose or purposes for which shareholders may legally meet, and shall be held, within or without the District of Columbia, at such place as may be determined by the Chairman or a majority of the directors of the Corporation, whichever shall call the meeting.
Section 2. Annual Meeting
An annual meeting of the shareholders shall be held each year at such date and at such time as designated by the Board of Directors. At the meeting, the shareholders entitled to vote shall elect directors and transact such other business as may properly be brought before the meeting.
Section 3. Notice
Written or printed notice stating the place, day and hour of any meeting and, in the case of a special meeting, the purpose for which the meeting is called, shall be delivered not less than 10 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board, or the Secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation or such other address as the shareholder has in writing instructed the Secretary.
Section 4. Waiver of Notice
Attendance by a shareholder at a shareholders' meeting, whether in person or by proxy, without objection to the notice or lack thereof, shall constitute a waiver of notice of the meeting. Any shareholder may, either before or after the time of the meeting, execute a waiver of notice of such meeting.
Section 5. Record Date
For the purpose of determining shareholders entitled to notice or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors shall fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than 60 days, in the case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the Board of Directors fails to designate such a date, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividends is adopted, as the case may be, shall be the record date for such determination of shareholders. When a date is set for the determination of shareholders entitled to vote at any meeting of shareholders, such determination shall apply to any adjournment thereof.
Section 6. Voting Lists
The officer or agent having charge of the stock transfer books for shares of the Corporation shall make a complete record of the shareholders entitled to vote at each meeting of the shareholders or any adjournment thereof, arranged in alphabetical order, with the address and the number of shares held by each. Such officer or agent shall also prepare two separate lists of such shareholders, one indicating in alphabetical order which shareholders are financial institutions not members of the Farm Credit System and another indicating in alphabetical order which shareholders are member institutions of the Farm Credit System. Such records shall be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder during the whole time of the meeting for the purposes thereof.
Section 7. Quorum
A majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn a meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Shares of its own stock belonging to the Corporation shall not be counted in determining the total number of outstanding shares at any given time.
Section 8. Proxies
At all meetings of shareholders, a shareholder entitled to vote may vote by proxy executed in writing by the shareholder or by its duly authorized attorney in fact. Shares standing in the name of another corporation may be voted by such officer, agent or proxy as the by-laws of such corporation may prescribe, or, in the absence of such provisions, as the board of directors of such corporation may determine. All proxies shall be filed with the Secretary of the Corporation before or at the time of the meeting, and shall be revocable, if such revocation be in writing, until exercised. No proxy shall be valid after eleven months from the date of its executions unless otherwise provided in the proxy.
The Board of Directors may solicit proxies from shareholders to be voted by such person or persons as shall be designated by resolution of the Board of Directors. The Corporation shall assume the expense of solicitations undertaken by the Board.
Any solicitation of proxies by the Corporation shall contain the names of all persons the Corporation proposes to nominate for directorships to be filled at the next meeting, their business addresses, and a brief summary of their business experience during the last five years. Each proxy solicitation shall be accompanied by a copy of the most recent annual report of the Corporation which report, to the satisfaction of the Board of Directors, shall reasonably represent the financial situation of the Corporation as of the time of its preparation.
If any shareholder entitled to vote at a meeting of shareholders shall seek a list of shareholders for the purpose of soliciting proxies from any other shareholders, the Corporation may, at its option, either (a) provide the soliciting shareholder with a complete and current list containing the names of all shareholders of the Corporation entitled to vote at such meeting; and their addresses as they appear on the transfer books of the Corporation; or (b) mail such proxy solicitations on behalf of the soliciting shareholders, upon being furnished the material to be mailed and the reasonable cost of the mailing.
Section 9. Organization
Meetings of the shareholders shall be presided over by the Chairman of the Board of Directors. The Secretary of the Corporation shall act as secretary of every meeting and, if the Secretary is not present, the meeting shall choose any person present to act as secretary of the meeting.
Section 10. Voting of Shares
Except as provided in this Section, at every meeting of the shareholders, every holder of common stock entitled to vote on a matter coming before such meeting shall be entitled to one vote for each share of common stock registered in its name on the stock transfer books of the Corporation at the close of the record date.
At each election of directors, the Chairman of the meeting shall inform the shareholders present of the persons appointed by the President of the United States to be the appointed directors of the Corporation. The shareholders entitled to vote for the election of directors which are institutions of the Farm Credit System shall constitute a single class and shall then proceed to elect five directors. Following the election of directors by shareholders which are institutions of the Farm Credit System, the shareholders entitled to vote for the election of directors which are financial institutions and are not institutions of the Farm Credit System shall constitute a single class and shall proceed to elect five directors.
Every holder of common stock entitled to vote for the election of directors shall have the right to cast the number of votes that is equal to the product of the number of shares owned by it multiplied by the number of directors to be elected of the class for which it may vote, and it may cast all such votes for one person or may distribute them evenly or unevenly among any number of persons not greater than the number of such directors of such class to be elected, at its option. Shares of its own stock belonging to the Corporation shall not be eligible to vote on any matter.
Section 11. Inspectors of Votes
The Board of Directors, in advance of any meeting of shareholders, may appoint one or more Inspectors of Votes to act at the meeting or any adjournment thereof. In case any person so appointed resigns or fails to act, the vacancy may be filled by appointment by the Chairman of the meeting. The Inspectors of Votes shall determine all questions concerning the qualification of voters, the validity of proxies, the acceptance or rejection of votes and, with respect to each vote by ballot, shall collect and count the ballots and report in writing to the secretary of the meeting the result of the vote. The Inspectors of Votes need not be shareholders of the Corporation. No person who is an officer or director of the Corporation, or who is a candidate for election as a director, shall be eligible to be an Inspector of Votes.
ARTICLE VI
SHARES OF STOCK
Section 1. Issuance and Conditions
The Board of Directors shall have the power in accordance with the provisions of the governing statute to authorize the issuance of voting common, non-voting common and preferred shares of stock. The Board of Directors may by resolution impose a stock purchase requirement as a prerequisite to participation in any program of the Corporation. Any stock purchase requirement shall not apply to any participant who is prohibited by law from acquiring stock of the Corporation, provided such participant undertakes to make such purchase when such legal restrictions are alleviated, or to such otherwise eligible participants as the Board may by resolution provide.
Section 2. Common Stock
The Corporation shall have voting common stock having such par value as may be fixed by the Board of Directors, which may only be issued to institutions which are authorized to be issued such shares pursuant to Title VIII of the Farm Credit Act of 1971, as amended.
The Corporation may issue non-voting common stock having such par value as may be fixed by the Board of Directors, which may be issued without limitations as to the status of the holders thereof.
Except as otherwise provided in these By-Laws, the powers, preferences and relative and other special rights and the qualifications, limitations and restrictions applicable to all shares of common stock, whether voting common stock or non-voting common stock, shall be identical in every respect.
Except as provided in this Section, the voting common stock and the non-voting common stock of the Corporation shall be fully transferable, except that, as to the Corporation, they shall be transferred only on the books of the Corporation.
Section 3. Redemption
Whenever the Corporation shall determine that any shares of the voting common stock of the Corporation are held by a person, including a partnership, joint venture, trust, corporation or any other association, not eligible to acquire such shares under the provisions of Title VIII of the Farm Credit Act of 1971, as amended, the Corporation shall notify such person in writing that such shares are to be disposed of to a person eligible to acquire such shares within a period of not more than 30 days. If the Corporation determines that the shares have not been transferred within 30 days of such notice, the Corporation may redeem such shares at the lesser of the fair market value thereof or the book value thereof at the date established for such redemption.
The power to redeem voting common stock found to be held by ineligible persons granted by this Section shall not be deemed to limit the right of the Corporation, at its discretion, to pursue any other lawful remedy against such ineligible person.
Section 4. Dividends on Voting Common Stock and Non-Voting Common Stock
To the extent that income is earned and realized, the Board of Directors may from time to time declare and the Corporation shall pay, dividends on the voting common stock and the non-voting common stock, except that no such dividends shall be payable with respect to any share that has been called for redemption after the date established for such redemption. No dividend shall be declared or paid on any share of voting common stock or non-voting common stock at any time when any dividend is due on the shares of preferred stock and has not been paid.
Section 5. Preferred Stock
The Corporation may issue shares of preferred stock having such par value, and such other powers, preferences and relative and other special rights, and qualifications, limitations and restrictions applicable thereto, as may be fixed by the Board of Directors. Such shares shall be freely transferable, except that, as to the Corporation, such shares shall be transferred only on the books of the Corporation.
Section 6. Dividends, Redemption, Conversion of Preferred Shares
The holders of the preferred shares shall be entitled to such rate of cumulative dividends, and such shares shall be subject to such redemption or conversion provisions, as may be provided for at the time of issuance. Such dividends shall be paid out of the net income of the Corporation, to the extent earned and realized.
Section 7. Preference on Liquidation
In the event of any liquidation, dissolution, or winding up of the Corporation's business, the holders of shares of preferred stock shall be paid in full at par value thereof, plus all accrued dividends, before the holders of the voting common stock and non-voting common stock receive any payment.
Section 8. Purchase of Own Shares
The Corporation shall have the right, pursuant to resolution by the Board of Directors, to purchase, take, receive or otherwise acquire its own shares, but purchases, whether direct or indirect, shall be made only to the extent of unreserved and unrestricted earned or capital surplus available therefor.
Section 9. Consideration for Shares
The Corporation shall issue shares of stock for such consideration, expressed in dollars, but not less than the par value thereof, as shall be fixed from time to time by the Board of Directors. That part of the surplus of the Corporation which is transferred to stated capital upon issuance of shares as a share dividend shall be deemed to be the consideration for the shares so issued.
The consideration for the issuance of shares may be paid, in whole or in part, in cash or other property acceptable to the Board of Directors, except that a promissory note shall not constitute payment or partial payment for the issuance of shares of the Corporation.
Section 10. Stated Capital
The consideration received upon the issuance of any share of stock shall constitute stated capital to the extent of the par value of such shares and the excess, if any, of such consideration shall constitute capital surplus. The stated capital of the Corporation may be increased from time to time by resolution of the Board of Directors directing that all or a part of the surplus of the Corporation be transferred to stated capital. The Board of Directors may direct that the amount of the surplus so transferred shall be deemed to be stated capital in respect of any designated class of shares.
The Board of Directors may, by resolution from time to time, reduce the stated capital of the Corporation but only in the amount of the aggregate par value of any shares of the Corporation which shall have been reacquired and canceled. Any surplus created by virtue of a reduction of stated capital shall be deemed to be capital surplus.
Section 11. 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 rights 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, which 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.
Section 12. Liability of Shareholders
A holder of shares of the Corporation shall be under no obligation to the Corporation with respect to such shares other than the obligation to pay to the Corporation the full consideration for which such shares were or are to be issued.
Any person becoming a transferee of shares in good faith and without notice or knowledge that the full consideration thereof had not been paid shall not be personally liable to the Corporation for any unpaid portion of such consideration.
Section 13. Reclassifications, Etc.
No class of outstanding voting or non-voting common stock may be subdivided, combined, reclassified or otherwise changed unless contemporaneously therewith all other classes of outstanding common stock are subdivided, combined, reclassified or otherwise changed in the same proportion and in the same manner.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates
The interest of each shareholder of the Corporation shall be evidenced by certificates representing shares of stock of the Corporation, certifying the number of shares represented thereby, and shall be in such form not inconsistent with the governing statute of the Corporation as the Board of Directors may from time to time prescribe.
The certificates of stock shall be signed by the Chairman of the Board of Directors or the President and by the Secretary or Assistant Secretary and sealed with the corporate seal or an engraved or printed facsimile thereof. The signatures of such officers upon a certificate may be facsimile if the certificate is manually signed on behalf of a transfer agent or a registrar other than the Corporation itself or one of its employees. In the event that any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such before such certificate is issued, it may be issued by the Corporation with the same effect as if such officer had not ceased to be such at the time of the issue.
Each certificate or share shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered to the Corporation for transfer shall be canceled, and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in the case of a lost, destroyed or mutilated certificate, a new certificate may be issued upon such terms and with indemnity to the Corporation as the Board of Directors may prescribe.
Section 2. Contents
Each certificate representing shares shall state:
a. That the Corporation is organized pursuant to an Act of Congress;
b. The name of the person to whom issued;
c. The number and class of shares, and the designation of the series, if any, which such certificate represents;
d. The par value of each share represented by such certificate;
e. The provisions by which such shares may be redeemed; and
f. That the shares represented shall not have any preemptive rights to purchase unissued or treasury shares of the Corporation.
Each certificate representing shares of preferred stock shall state upon the face thereof the annual dividend rate for such shares, and shall state upon the reverse side thereof the powers, preferences and relative and other special rights and the qualifications, limitations and restrictions applicable to such shares of preferred stock.
No certificate shall be issued for any share until such share is fully paid.
Section 3. Transfer
Transfer of shares of the Corporation shall be made only on the stock
transfer books of the Corporation by the holder of record thereof or by his
legal representative, who shall furnish proper evidence of the authority to
transfer, or by his attorney thereto authorized by power of attorney duly
executed and filed with the Secretary of the Corporation, and on surrender for
cancellation of the certificate for such shares.
The person in whose name shares stand on the books of the Corporation shall
be deemed by the Corporation to be the owner thereof for all purposes.
Section 4. Records
The Corporation shall keep at its principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number of shares held by each. Any person who shall be the holder of at least five percent of the aggregate number of shares of any class of common stock of the Corporation shall upon written demand stating the purpose therefor, have the right to examine, in person, or by agent or attorney, duly authorized in writing, at any reasonable time or times, for any proper purpose, the Corporation's record of shareholders and minutes of meetings of the shareholders and the Board of Directors, and to make extracts therefrom.
ARTICLE VIII
INDEMNIFICATION
Section 1. Authorization
The Corporation shall, to the extent permitted by law, indemnify any person who was or is a party, whether as a plaintiff acting with the approval of the Board of Directors or as a defendant, or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, by reason of the fact that he or she is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Any such person shall be indemnified by the Corporation to the extent he or she is successful in the action, suit or proceeding. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal proceeding, had reasonable cause to believe that his or her conduct was unlawful.
Section 2. Procedure
Any indemnification under this Article shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification is proper in the circumstances because the officer, director, employee or agent has met the applicable standard of conduct set forth in this Article. Such determination shall be made by a majority vote of the members of the Board of Directors who were not parties to such action, suit or proceeding. If all members of the Board of Directors were parties to such action, suit or proceeding, such determination shall be made either (a) by legal counsel or (b) by the shareholders at the next meeting of shareholders. In any case under this Article, the Board or shareholders are authorized to obtain the opinion of independent legal counsel.
Section 3. Advance Payments
Expenses, including attorneys' fees, incurred in defending a civil, criminal, administrative or investigative action, suit or proceeding, whether formal or informal, shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided in section 2 of this Article upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount only if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation.
Section 4. Other Rights to Indemnification
The indemnification provided in this Article shall not be deemed exclusive of any other rights to which the director, officer, employee or agent may be entitled under any by-law, agreement, vote of shareholders or disinterested directors or otherwise. The indemnification provided by this Article shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person.
Section 5. Indemnification Insurance
The Corporation, pursuant to a resolution of the Corporation, may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her in any such capacity or arising out of his status as such whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article.
ARTICLE IX
CONTRACTS, LOANS, CHECKS, DEPOSITS AND STATEMENTS
Section 1. Contracts
The Board of Directors may authorize the Chairman or officers of the Corporation to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances.
Section 2. Loans
No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances.
Section 3. Checks, Drafts, etc.
All checks, drafts or other orders for the payment of money, notes or other evidence of indebtedness issued in the name of the Corporation shall be signed by the Chairman or officers of the Corporation and in such manner as shall from time to time be determined by a resolution of the Board of Directors.
Section 4. Deposits
All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation at such banks, trust companies or other depositories as the Board of Directors may select.
Section 5. Investments
The Board of Directors may authorize the Chairman or officers of the Corporation to invest the funds of the Corporation in such securities and in such manner as shall from time to time be determined by a resolution of the Board of Directors.
ARTICLE X
FACSIMILE SIGNATURES
The Board of Directors may by resolution authorize the use of facsimile signatures in lieu of manual signatures.
ARTICLE XI
AMENDMENTS
These By-Laws may be altered, amended or repealed and new by-laws, consistent with the governing statute, may be adopted by the majority vote of the Board of Directors.
Exhibit 31.1
CERTIFICATION
I, Henry D. Edelman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Federal
Agricultural Mortgage Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 9, 2004
/s/ Henry D. Edelman
----------------------------
Henry D. Edelman
Chief Executive Officer
|
Exhibit 31.2
CERTIFICATION
I, Nancy E. Corsiglia, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Federal Agricultural Mortgage Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 9, 2004
/s/ Nancy E. Corsiglia
----------------------------
Nancy E. Corsiglia
Chief Financial Officer
|
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of the Federal Agricultural Mortgage Corporation (the "Corporation") for the quarterly period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Henry D. Edelman, Chief Executive Officer of the Corporation, and Nancy E. Corsiglia, Chief Financial Officer of the Corporation, each hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his or her knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
/s/ Henry D. Edelman ------------------------- Henry D. Edelman Chief Executive Officer /s/ Nancy E. Corsiglia ------------------------- Nancy E. Corsiglia Chief Financial Officer Date: August 9, 2004 |
Exhibit 10.11.2
AMENDED AND RESTATED
between
FEDERAL AGRICULTURAL MORTGAGE CORPORATION,
as Owner/Master Servicer
and
ZIONS FIRST NATIONAL BANK
as Central Servicer
dated as of
May 1, 2004
AMENDED AND RESTATED MASTER CENTRAL SERVICING AGREEMENT
THIS AMENDED AND RESTATED MASTER CENTRAL SERVICING AGREEMENT (this "Agreement") entered into as of May 1, 2004, between the Federal Agricultural Mortgage Corporation, a federally chartered instrumentality of the United States and an institution of the Farm Credit System ("Farmer Mac") and Zions First National Bank, a national bank (the "Central Servicer").
WITNESSETH
WHEREAS, Farmer Mac is the beneficial owner of certain agricultural real estate mortgage loans and Master Servicer with respect to certain other agricultural real estate mortgage loans; and
WHEREAS, Farmer Mac and the Central Servicer have agreed that the Central Servicer is to service on behalf of Farmer Mac certain of such agricultural real estate mortgage loans (the "Qualified Loans") to be identified on the Schedule of Qualified Loans (as hereinafter defined).
NOW, THEREFORE, in consideration of these premises, the parties agree as follows:
ARTICLE I
DEFINED TERMS
Section 1.01 Defined Terms. All capitalized terms used but not defined herein have the meanings assigned to them in the Seller/Servicer Guide and the following terms shall have the following meanings:
"Amount Held for Future Distribution": As to any Remittance Date, the total of all amounts held in the Collection Account at the close of business on such Remittance Date on account of (i) Installment Payments due after the preceding Due Date and (ii) prepayments received after the preceding Due Date.
"Appraisal Standards": The appraisal standards established by Farmer Mac and set forth in the Seller/Servicer Guide.
"Appraised Value": The appraised value of a Mortgaged Property based upon the appraisal conducted in accordance with the Appraisal Standards less than one year prior to Farmer Mac's acquisition of the Qualified Loan.
"Borrower": The obligor under a Qualified Loan.
"Business Day": Any other day than (i) a Saturday or a Sunday, (ii) a day on which banking institutions in the States of Minnesota, New York or Utah are required or authorized by law to be closed or (iii) a day on which Farmer Mac is closed.
"Central Servicer": Zions First National Bank, and its permitted successors and assigns.
"Central Servicer's Report": A report (which shall be in electronic machine readable form) of the Central Servicer to Farmer Mac and Farmer Mac's designee, if any, conforming to Section 4.01.
"Closing Date": The date that Central Servicer commences servicing a Qualified Loan.
"Collection Account": The Eligible Account or Accounts created and maintained pursuant to Section 3.02. Funds required to be deposited in the Collection Account shall be held in trust for Farmer Mac.
"Collection Period": The Collection Period with respect to any Remittance Date includes the second Business Day of the month preceding the Remittance Date, through the first Business Day of the month of the Remittance Date.
"Delinquency Advance": As to any Remittance Date, the amounts specified in the definition of Delinquency Advance Requirement.
"Delinquency Advance Requirement": The amount, if any, equal to the total of all Installment Payments (with each interest component thereof being adjusted to interest at the applicable Net Mortgage Rate) on the Qualified Loans (including, for this purpose, REO Qualified Loans) that were due on or prior to the preceding Due Date, and such Installment Payments were not the subject of any previous unreimbursed Delinquency Advance and were known by the Central Servicer to be past due (irrespective of any moratorium, waiver or other postponement) as of the close of business on the related Remittance Date.
"Due Date": As to any Qualified Loan, any date upon which a scheduled installment of principal and interest on such Qualified Loan is due in accordance with the terms of the related Mortgage Note.
"Eligible Account": An account that is either (i) maintained with a
depository institution the obligations of which would qualify as Permitted
Investments pursuant to clause (iii) of the definition thereof, (ii) an account
or accounts the deposits in which are fully insured by the Federal Deposit
Insurance Corporation or (iii) an account or accounts in a depository
institution acting in its fiduciary capacity in which the deposits in such
accounts are held in trust and are invested in an account as described in (i) or
(ii) above or in Permitted Investments. Funds deposited in each Eligible Account
shall be held in trust pending application in accordance with the provisions of
this Agreement.
"Eligible Substitute Mortgaged Property": A Mortgaged Property that is substituted for an Existing Mortgaged Property pursuant to Section 3.02(a) which, as evidenced by a Servicing Officer's certificate delivered to Farmer Mac, shall:
(i) secure the same Qualified Loan that such Existing Mortgaged Property secures; and
(ii) on the date of substitution, have a current appraised value at least equal to the Appraised Value of such Existing Mortgaged Property.
"Environmental Review Report": The report required to be prepared pursuant to the Seller/Servicer Guide prior to the foreclosure or other conversion of any defaulted Qualified Loan.
"Environmental Statute": Any Federal, state or local law, ordinance, rule or regulation including, but not limited to, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended; the Hazardous Materials Transportation Act, as amended; the Resource Conservation and Recovery Act, as amended; and any regulations adopted and publications promulgated pursuant to each of the foregoing.
"Existing Mortgaged Property": A Mortgaged Property that is replaced by an Eligible Substitute Mortgaged Property pursuant to Section 3.02(a).
"Farmer Mac": The Federal Agricultural Mortgage Corporation, a federally chartered institution of the Farm Credit System and instrumentality of the United States, or any successor corporation or entity or Farmer Mac's designee. The term Farmer Mac, when used to refer to the entity owning the Qualified Loans, shall also include any entity designated by Farmer Mac to be the holder of the Qualified Loans.
"Field Servicer": Any Person acting as a Field Servicer pursuant to the Seller/Servicer Guide.
"Field Servicing Fee Rate": As to any Qualified Loan, the per annum rate identified as the Field Servicing Fee Rate in the Schedule of Qualified Loans.
"Hazardous Materials": Any flammable explosives, radioactive materials or any other materials, wastes or substances defined as hazardous materials, hazardous wastes or hazardous or toxic substances by any Environmental Statute or by any Federal, state or local governmental authority having or claiming jurisdiction over the Mortgaged Property.
"Independent": When used with respect to any specified Person, such a
Person who (i) is in fact independent of the Seller and the Central Servicer,
(ii) does not have any direct financial interest or any material indirect
financial interest in the Seller or the Central Servicer or in an affiliate
thereof, and (iii) is not connected with the Seller or the Central Servicer as
an officer, employee, promoter, underwriter, partner, director or person
performing similar functions.
"Installment Payment": As to any Qualified Loan and any Due Date, any payment of principal and/or interest thereon in accordance with the amortization schedule of such Qualified Loan (after adjustment for any curtailments occurring prior to the Due Date but before any adjustment to such amortization schedule by reason of any bankruptcy or similar proceeding or any moratorium or similar waiver or grace period).
"Insurance Proceeds": Proceeds paid to Farmer Mac or the Central Servicer (including any Field Servicer) by any insurer pursuant to any insurance policy covering a Qualified Loan or Mortgaged Property, reduced by any expenses incurred by Farmer Mac or the Central Servicer (including any Field Servicer) in connection with the collection of such Insurance Proceeds and not otherwise reimbursed to Farmer Mac or the Central Servicer, such expenses including, without limitation, legal fees and expenses.
"Insured Expenses": Expenses covered by any insurance policy covering a Qualified Loan or Mortgaged Property that are paid by or on behalf of Farmer Mac or the Central Servicer.
"Liquidated Qualified Loan": Any defaulted Qualified Loan (including any REO Qualified Loan) as to which the Central Servicer has determined that all amounts it expects to recover from or on account of such Qualified Loan have been recovered and have been deposited into the Collection Account or REO Account or otherwise appropriately distributed.
"Liquidation Expenses": Expenses incurred by or on behalf of Farmer Mac or the Central Servicer in connection with the liquidation of any defaulted Qualified Loan, including, without limitation, legal fees and expenses, brokerage commissions paid to third parties, any unreimbursed amounts expended pursuant to Sections 3.05(a) (for hazard insurance), 3.07(a) (for environmental reports) and 3.07(e)(REO expenses) (to the extent such amounts are reimbursable under the terms of such Sections) respecting the related Qualified Loan and any related and unreimbursed expenditures for real estate and conveyance taxes or for property restoration or preservation.
"Liquidation Proceeds": Cash (including Insurance Proceeds) received in connection with the liquidation of defaulted Qualified Loans (excluding REO Qualified Loans).
"Loan-to-Value Ratio": As of any date, the fraction, expressed as a percentage, the numerator of which is the principal balance of the related Qualified Loan at the date of determination and the denominator of which is the Appraised Value of the related Mortgaged Property as of the date of the appraisal performed in accordance with the Appraisal Standards.
"Mortgage": A mortgage, deed of trust or other instrument that constitutes a first lien on an interest in real property securing a Mortgage Note.
"Mortgage File": The legal documents (including the Mortgage Note, Mortgage, assignment of the Mortgage, evidence of title to the Mortgaged Property and any additional security documents) relating to a Qualified Loan.
"Mortgage Note": The originally executed note or other evidence of indebtedness evidencing the indebtedness of a Borrower under a Qualified Loan.
"Mortgage Rate": As to any Qualified Loan, the rate of interest borne by the related Mortgage Note.
"Mortgage Servicing Documents": Originals or copies of the custodial documents, servicing documents, escrow documents, if any, the original appraisal, including any updates thereto, which was the basis for the Appraised Value, and all other documents, records, and tapes necessary for prudent servicing in accordance with the Central Servicer's standards for mortgage loan servicing, and such other papers and documents, tax receipts, insurance policies, insurance premium receipts, water stock certificates, ledger sheets, payment records, insurance claim files and correspondence, foreclosure files and correspondence, current and historical computerized data files and other papers and records of whatever kind or description.
"Mortgaged Property": The property securing a Qualified Loan.
"Net Liquidation Proceeds": As to any Liquidated Qualified Loan, Liquidation Proceeds net of Liquidation Expenses.
"Net Mortgage Rate": As to each Qualified Loan, the Mortgage Rate less the sum of (a) the Servicing Fee Rate and (b) the Field Servicing Fee Rate.
"Permitted Investments": One or more of the following, but only to the extent permitted by applicable regulations:
(i) obligations of, or guaranteed as to principal and interest by, Farmer Mac or the United States or any agency or instrumentality thereof;
(ii) repurchase agreements on obligations specified in clause
(i), which repurchase agreements will mature not later than the day
preceding the immediately following Remittance Date, provided that (a)
the unsecured short-term obligations of the party agreeing to
repurchase such obligations are at the time rated not less than A-1 by
Standard & Poor's and not less than Prime-1 by Moody's, (b) such
repurchase agreements are effected with a primary dealer recognized by
a Federal Reserve Bank or (c) such repurchase agreements are secured
by obligations specified in clause (i) above at not less than 102% of
market value determined on a daily basis;
(iii) demand and time deposits in, certificates of deposit of, or bankers' acceptances maturing in not more than 60 days and issued by, any depository institution or trust company incorporated under the laws of the United States of America or any state thereof and subject to supervision and examination by federal and/or state banking authorities, so long as at the time of such investment or contractual commitment providing for such investment the commercial paper or other short-term debt obligations of such depository institution or trust company (or, in the case of a depository institution that is the principal subsidiary of a holding company, the commercial paper or other short-term obligations of such holding company) have a rating of not less than A-1 from Standard & Poor's and a rating of not less than Prime-1 from Moody's;
(iv) commercial paper (having remaining maturities of not more than 60 days) of any corporation incorporated under the laws of the United States or any state thereof, which on the date of acquisition has been rated not less than A-1 from Standard & Poor's and not less than Prime-1 by Moody's; and
(v) securities bearing interest or sold at a discount issued by any corporation incorporated under the laws of the United States of America or any state thereof if such securities are rated in the highest long-term unsecured rating categories at the time of investment or the contractual commitment providing for such investment by Standard & Poor's and Moody's; provided, however, that securities issued by any particular corporation will not be Permitted Investments to the extent that investment therein will cause the then outstanding principal amount of securities issued by such corporation and held as part of the Collection Account to exceed 10% of the outstanding principal balance of the Qualified Loans being serviced under this Agreement (it being understood that the entity directing the investment shall be responsible for compliance with the foregoing restriction on investments);
(vi) units of a taxable money-market portfolio rated "P-1" by Moody's and "AAAm" by Standard & Poor's and restricted to investments in obligations issued or guaranteed by the United States of America or entities whose obligations are backed by the full faith and credit of the United States of America and repurchase agreements collateralized by such obligations;
(vii) units of a taxable money-market portfolio restricted to
investments which would be `Permitted Investments' under paragraphs
(i) through (vi) of this definition of `Permitted Investments'; and
(viii) other obligations or securities that are acceptable to (and specified in writing by) Farmer Mac.
The foregoing is qualified to the extent that no instrument described above shall be a Permitted Investment if such instrument evidences either (x) a right to receive only interest payments with respect to the obligations underlying such instrument or (y) both principal and interest payments derived from obligations underlying such instrument and the interest and principal payments with respect to such instrument provide a yield to maturity of greater than 120% of the yield to maturity at par of such underlying obligations.
"Person": Any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.
"Principal Prepayment": Any payment (other than an Installment Payment) or other recovery of principal on a Qualified Loan that is received in advance of its scheduled Due Date.
"Principal Prepayment in Full": Any payment received on a Qualified Loan that is in excess of the installment of principal and interest due thereon in an amount sufficient to pay the entire principal balance of such Qualified Loan.
"Purchase Price": With respect to any Qualified Loan to be purchased on any date pursuant to Section 3.07(g), an amount equal to the sum of (i) 100% of the unpaid principal balance thereof as shown on the Schedule of Qualified Loans less any principal payments made in respect of such Qualified Loan; (ii) the unpaid accrued interest at the Net Mortgage Rate on the unpaid principal balance thereof from the Due Date to which interest was last paid by the Borrower to the next Due Date for such Qualified Loan; and (iii) if the date of purchase by the Central Servicer occurs after the Qualified Loan has been securitized, any Yield Maintenance Amount that would be payable under the terms of the related Mortgage Note as if a Principal Prepayment in Full were made on the date of purchase by the Central Servicer and such Yield Maintenance Amount were calculated based on interest accruing at the Net Mortgage Rate less the sum of (x) the Guarantee Fee Rate and (y) the Trustee Fee Rate (each of the Guarantee Fee Rate and the Trustee Fee Rate having the meaning given such term in the applicable securitization documents).
"Qualified Loan Receipts": With respect to any Collection Period, an amount equal to (a) the sum of (i) the amount attributable to the Qualified Loans that is on deposit in the Collection Account as of the close of business on the following Remittance Date, including Borrower payments, and Liquidation Proceeds and any amount deposited in the Collection Account after the preceding Remittance Date in respect of defaulted Qualified Loans purchased by the Central Servicer pursuant to Section 3.07(g) and (ii) any amount on deposit in the Collection Account on the Due Date(s) in such Collection Period in respect of the repurchase of any Qualified Loan repurchased by the seller thereof, reduced by (b) the sum of (i) any Amount Held for Future Distribution and (ii) all amounts permitted to be retained by the Central Servicer pursuant to Section 3.02 or withdrawn by the Central Servicer from the Collection Account in respect of the Qualified Loans pursuant to clauses (ii) and (iii) of Section 3.04(a).
"Qualified Loans": As defined in the recitals.
"Recourse Obligation": A Mortgage Note that permits the mortgagee thereunder to seek a deficiency judgment that is enforceable under applicable state law.
"Remittance Account": The account or accounts established by Farmer Mac into which the Central Servicer will make deposits on each Remittance Date.
"Remittance Date": As to any Collection Period, the 15th day (or if such 15th day is not a Business Day, the next succeeding Business Day) of the month in which such Collection Period ends.
"REO Account": The account established by the Central Servicer in which it shall segregate all funds collected and received (including REO Proceeds) and record all funds paid through advances of the Central Servicer in connection with the operation or sale of any REO Qualified Loans separate and apart from its own funds and general assets and held in trust for the benefit of Farmer Mac, which shall be an eligible account and may be located in the same account as the Collection Account, but for which separate records (or entries) shall be maintained. Except that, so long as Zions First National Bank is the Central Servicer and maintains a financial strength rating of at least a D according to Moody's Investor Service, the REO Account may be an account maintained on the books and records of the Central Servicer. The balance of this account is to be remitted to Farmer Mac by the Central Servicer or reimbursed by Farmer Mac to the Central Servicer on a monthly basis.
"REO Proceeds": Proceeds received in respect of any REO Qualified Loan (including, without limitation, proceeds from the rental and sale of the related Mortgaged Property).
"REO Property": Any Mortgaged Property that has been acquired by Farmer Mac
(or an assignee of Farmer Mac and as to which Farmer Mac is the master servicer)
by foreclosure, deed-in-lieu of foreclosure or otherwise.
"REO Qualified Loan": Any Qualified Loan that is not a Liquidated Qualified Loan and as to which the related Mortgaged Property is held by Farmer Mac (or an assignee of Farmer Mac and as to which Farmer Mac is the master servicer).
"Schedule of Qualified Loans": The list of Qualified Loans the servicing of which has been assigned by Farmer Mac to the Central Servicer on the applicable Closing Date.
"Seller/Servicer Guide": The publication entitled "Federal Agricultural Mortgage Corporation Seller/Servicer Guide," release dated 2004, as modified by any guide update or bulletin or as replaced by any other publication of Farmer Mac identified by Farmer Mac as a "Servicing Guide."
"Servicing Advance Account": The account established on the Central Servicer's books and records by the Central Servicer in which it shall record all funds paid through advances of the Central Servicer in connection with the Qualified Loans. All recoveries of such advances from the Borrower or reimbursements of such advances by Farmer Mac shall also be recorded to this account. The account may be located in the same account as the Collection Account, but as to which separate records (or entries) shall be maintained. The balance of this account is to be remitted to Farmer Mac by the Central Servicer or reimbursed by Farmer Mac to the Central Servicer on a monthly basis.
"Servicing Agreement": Any agreement directly between the Central Servicer and a Subservicer for such Subservicer to provide services required to be performed by Central Servicer. A Servicing Agreement does not relieve the Central Servicer of any of its duties or obligations under this Agreement.
* "Servicing Fee Rate": [material omitted pursuant to a request for confidential treatment and filed separately with the SEC]
"Servicing Officer": Any officer of the Central Servicer involved in, or responsible for, the administration and servicing of the Qualified Loans whose name and specimen signature appears on a list of servicing officers furnished to Farmer Mac by the Central Servicer on the Closing Date, as such list may from time to time be amended by delivery of written notice by an existing Servicing Officer.
"Subservicers": Any person or entity with whom Central Servicer has a contract to provide services or responsibilities on behalf of Central Servicer.
"Standard Hazard Insurance Policy": A standard fire insurance policy with extended coverage, which shall provide standard coverage against loss by fire, lightning, windstorm, hail, explosion, riot not attending a strike, civil commotion, aircraft, vehicles, smoke, vandalism or malicious mischief.
"Yield Maintenance Amount": As to any Qualified Loan, the amount payable by the Borrower thereunder in connection with a Principal Prepayment thereof (whether voluntary or involuntary) or other acceleration by the legal holder thereof upon a default by such Borrower thereunder, as specified in the Mortgage Note.
ARTICLE II
MORTGAGE SERVICING DOCUMENTS
Section 2.01 Mortgage Servicing Documents. Not later than a reasonable time after each Closing Date, the Central Servicer shall be in possession of the Mortgage Servicing Documents with respect to each Qualified Loan. To the extent such Mortgage Servicing Documents are not in the possession of the Central Servicer, the Central Servicer will immediately notify Farmer Mac or its designee in writing of the missing documents.
ARTICLE III
CENTRAL SERVICING OF QUALIFIED LOANS
Section 3.01. Central Servicer to Act as Servicer.
(a) Commencing with each Closing Date, the Central Servicer, acting alone and/or through Field Servicers shall service the Qualified Loans (including REO Qualified Loans) identified in the related Schedule of Qualified Loans in conformity with this Agreement and the Seller/Servicer Guide as applied and shall have full power and authority to do any and all things which it may deem necessary or desirable in connection with such servicing.
(b) Without limiting the generality of the foregoing, the Central Servicer is hereby authorized and empowered by Farmer Mac when the Central Servicer believes it appropriate, in its best judgment, but consistent with and subject to the terms of this Agreement, to execute and deliver on behalf of Farmer Mac, any and all instruments of satisfaction or cancellation, or of partial or full release or discharge and all other comparable instruments, with respect to the Qualified Loans and with respect to the Mortgaged Properties. Farmer Mac shall cause the Central Servicer to be furnished from time to time with such Powers of Attorney and other documents necessary or appropriate to enable the Central Servicer to service and administer the Qualified Loans upon the request of the Central Servicer. The Central Servicer shall provide Farmer Mac or its designee with the form of any such Power(s) of Attorney or other document(s) (reasonably acceptable to Farmer Mac) and Farmer Mac agrees to cause such Power(s) of Attorney or other documents to be executed and returned promptly after hard copy receipt thereof by Farmer Mac or its designee. Farmer Mac acknowledges and understands that the Central Servicer may submit Power(s) of Attorney to Farmer Mac or its designee on an annual basis for recording each year in accordance with local law requirements, and Farmer Mac agrees to cause such Power(s) of Attorney to be executed and returned as provided in the preceding sentence.
Section 3.02. Collection of Certain Qualified Loan Payments; Collection Account.
(a) The Central Servicer shall, consistent with this Agreement and, to the extent not inconsistent with the Seller/Servicer Guide, in accordance with customary industry standards for agricultural mortgage loan servicing, make reasonable efforts to collect all payments called for under the terms and provisions of the Qualified Loans. The Central Servicer may in its discretion waive, postpone, reschedule, modify or otherwise compromise the terms of payment of any Qualified Loan so long as any such waiver, postponement, rescheduling, modification or compromise shall not be inconsistent with this Agreement, or be consented to in advance in writing by Farmer Mac. Except as provided in Section 3.14, no such arrangement shall alter or modify the amortization schedule of such Qualified Loan for purposes of calculating any Delinquency Advance Requirement in respect thereof without the prior written consent of Farmer Mac, unless otherwise provided in the Seller/Servicer Guide or unless such modification is required in the related promissory note. In addition, the Central Servicer may in its discretion permit the substitution of an Eligible Substitute Mortgaged Property for an Existing Mortgaged Property so long as the Mortgage Note relating to the Qualified Loan that the Existing Mortgaged Property secures is a Recourse Obligation. The Central Servicer may waive, in whole or in part, the obligation of a Borrower to pay a Yield Maintenance Amount only with the prior written consent of Farmer Mac.
(b) The Central Servicer shall establish and maintain a Collection Account in its name for the benefit of Farmer Mac (and for which Farmer Mac shall bear any costs and expenses incurred with respect to withdrawals with respect to Remittance Date) in which the Central Servicer shall deposit as promptly as practicable following receipt (but in no event later than one (1) Business Day following receipt) except as otherwise specifically provided herein, the following payments and collections received by it subsequent to the Closing Date (other than in respect of principal and interest on the Qualified Loans due on or before the Closing Date):
(i) All payments on account of principal on the Qualified Loans;
(ii) All payments on account of interest on the Qualified Loans adjusted, in each case, to interest at the applicable Net Mortgage Rate;
(iii) Net Liquidation Proceeds and Insurance Proceeds (other than Insurance Proceeds to be applied to the restoration or repair of the related Mortgaged Property or released to the Borrower in accordance with the Central Servicer's normal servicing procedures) net of any amounts permitted to be withheld by the Central Servicer as servicing compensation;
(iv) All proceeds of any Qualified Loans purchased by the Central Servicer or repurchased by the seller of such Qualified Loan;
(v) All Yield Maintenance Amounts paid by Borrowers;
(vi) Any deposit required by the second paragraph of Section 3.05(a); and
(vii) Any late charge or interest on the Qualified Loans accruing at a default rate related to delinquent Installment Payments.
The foregoing requirements for deposit in the Collection Account shall be exclusive, it being understood and agreed that, without limiting the generality of the foregoing, payments or collections in the nature of assumption fees or other service charges imposed upon Borrowers in connection with servicing the Qualified Loans need not be deposited by the Central Servicer in the Collection Account. In the event the Central Servicer shall deposit in the Collection Account any amount not required to be deposited therein, it may at any time withdraw such amount from the Collection Account, any provision herein to the contrary notwithstanding.
(c) The Central Servicer shall cause the institution with which the Collection Account is maintained to invest the funds in the Collection Account attributable to the Qualified Loans in those Permitted Investments specified in writing by Farmer Mac which shall mature in immediately available funds not later than the day preceding the next Remittance Date and shall not be sold or disposed of prior to maturity. All earnings and gains realized from any such investments in the Collection Account shall be for the benefit of Farmer Mac. The amount of any losses or expenses incurred in connection with the investment of amounts in the Collection Account shall be deducted from the amount to be distributed to Farmer Mac.
(d) The Central Servicer shall give notice to Farmer Mac of the location of the Collection Account, and of any change in the location thereof, prior to the use thereof.
Section 3.03. Payment of Taxes, Assessments and Other Items; Advances by Central Servicer.
(a) The Central Servicer in accordance with the Seller/Servicer Guide shall use its best efforts to cause the Borrowers to pay any taxes, assessments, Standard Hazard Insurance Policy premiums, or other charges with respect to which the failure to pay would result in a lien on the related Mortgaged Property by operation of law or comparable items relating to the Mortgaged Properties. In the event Borrowers have not paid such amounts and collecting such payments is the responsibility of Field Servicers not under contract with Central Servicer, Central Servicer shall notify Farmer Mac of such delinquency and Farmer Mac shall then take any reasonable actions with respect to such Field Servicers. Central Servicer will cooperate with Farmer Mac in resolving the issues.
(b) The Central Servicer shall advance the payments referred to in subsection (a) that are not timely paid by the Borrowers on the date when the tax, premium or other cost for which such payment is intended is due, but the Central Servicer shall be required so to advance only (x) to the extent necessary, in the good faith judgment of the Central Servicer, to protect Farmer Mac against any loss and (y) so long as in the good faith judgment of the Central Servicer, such advances ultimately would be recoverable from payments (other than Installment Payments) made by the Borrower or from Liquidation Proceeds. Farmer Mac agrees to reimburse the Central Servicer in the amount of such advances promptly on a monthly basis, within 15 days of receipt of a statement of such advances from the Central Servicer.
Section 3.04. Permitted Withdrawals from the Collection Account; Maintenance of Accounting Records.
(a) The Central Servicer may, from time to time as provided herein, make withdrawals from the Collection Account for the following purposes:
(i) to make distributions to Farmer Mac on each Remittance Date; and
(ii) at any time to withdraw any amount deposited in the Collection Account that was not required to be deposited therein;
(b) (i) The Central Servicer shall keep and maintain or cause to be kept and maintained separate accounting, on a Qualified Loan-by-Qualified Loan basis, for the purpose of providing Farmer Mac or its designee with the information necessary for the preparation of such reports as may be requested by Farmer Mac.
(ii) Unless Farmer Mac shall otherwise accept possession of the
records with respect to any Qualified Loan, the Central Servicer shall
maintain the records with respect to such Qualified Loan for five
years after the earliest of the date such loan: (x) is paid in full;
(y) becomes a Liquidated Qualified Loan, and (z) is no longer serviced
by the Central Servicer; except that, if at the time the Qualified
Loan is no longer serviced by the Central Servicer, Farmer Mac either
owns such Qualified Loan or is the guarantor of securities
representing interests in or which are backed by such Qualified Loan,
the Central Servicer shall deliver the related records to the
appropriate successor central servicer.
Section 3.05. Maintenance of Hazard Insurance and Errors and Omissions and Fidelity Coverage.
(a) The Central Servicer, in accordance with the Seller/Servicer Guide,
shall cause to be maintained for each Qualified Loan a Standard Hazard Insurance
Policy insuring against loss or damage to the insurable improvements included in
the Appraised Value in an amount not less than the value assigned to such
improvements in the related appraisal. The Central Servicer shall also cause to
be maintained on property acquired upon foreclosure, or deed in lieu of
foreclosure, of any Qualified Loan, a Standard Hazard Insurance Policy in an
amount at least equal to the amount necessary to avoid the application of any
co-insurance clause contained in the related hazard insurance policy. Pursuant
to Section 3.02, any amounts collected by the Central Servicer under any such
policies (other than amounts to be applied to the restoration or repair of the
related Mortgaged Property or property thus acquired or amounts released to the
Borrower in accordance with the Central Servicer's normal servicing procedures)
shall be deposited in the Collection Account, subject to withdrawal pursuant to
Section 3.04. Farmer Mac shall reimburse the Central Services on a monthly
basis, within 15 days of receipt of an invoice for such costs, any direct
premium cost incurred by the Central Servicer in maintaining any such insurance.
No earthquake or other additional insurance is to be required of any Borrower or
maintained on property acquired in respect of a Qualified Loan other than
pursuant to such laws and regulations applicable to such Borrower as shall at
any time be in force and as shall require such additional insurance.
If the Central Servicer shall maintain a blanket policy issued by an insurer having a Moody's financial strength rating of A3 or higher and insuring against hazard losses on all of the Qualified Loans, it shall conclusively be deemed to have satisfied its obligation as set forth in this Section 3.05(a). Such policy may contain a deductible clause, in which case, if there shall not have been maintained on the related Mortgaged Property or acquired property an insurance policy complying with the first sentence of the first paragraph of this Section 3.05(a), and there shall have been a loss that would have been covered by such a policy had it been maintained, the Central Servicer shall be required to deposit from its own funds into the Collection Account the amount not otherwise payable under the blanket policy because of such deductible clause.
(b) The Central Servicer shall obtain and maintain at its own (non-reimbursable) expense and keep in full force and effect throughout the term of this Agreement a blanket fidelity bond and an errors and omissions insurance policy (which errors and omissions insurance policy shall provide coverage in accordance with the Seller/Servicer Guide) covering the Central Servicer's officers and employees and other persons acting on behalf of the Central Servicer in connection with its activities under this Agreement, except that such policies need not specifically insure against the acts of Field Servicers, except to the extent the Field Servicer is receiving payments on Qualified Loans, or executing documents under a power of attorney granted by the Central Servicer. In the event that any such required bond or policy ceases to be in effect, the Central Servicer shall obtain a comparable replacement bond or policy from an issuer or insurer, as the case may be, providing such coverage as shall satisfy the requirements set forth in the Seller/Servicer Guide. Coverage of the Central Servicer under a policy or bond obtained by an Affiliate of the Central Servicer and providing the coverage required by this Section 3.05(b) shall satisfy the requirements of this Section 3.05(b).
Section 3.06. Enforcement of Due-on-Sale Clauses; Assumption Agreements.
(a) When any Mortgaged Property is conveyed by the Borrower, the Central Servicer may, but shall not be required to, enforce any due-on-sale or due-on-encumbrance clause contained in any Mortgage Note or Mortgage, in accordance with the provisions of such Mortgage Note or Mortgage and in the best interests of Farmer Mac, and may approve the assumption of the Mortgage Note by the transferee of the Mortgaged Property; provided, however, that after giving due effect to any such additional encumbrance, the loan-to-value ratio of the related Qualified Loan is not in excess of the Loan-to-Value Ratio thereof as of the Closing Date.
(b) Unless the Central Servicer has a Power of Attorney pursuant to which the Central Servicer may execute the documents, in any case in which a Mortgaged Property is to be conveyed to a Person by a Borrower, and such Person is to enter into an assumption agreement or substitution agreement or supplement to the Mortgage Note or Mortgage, which requires the signature of Farmer Mac (or its designee), or if an instrument of release to be signed by Farmer Mac (or its designee) is required releasing the Borrower from liability on the Qualified Loan, the Central Servicer shall deliver or cause to be delivered to Farmer Mac (or its designee) for signature the assumption agreement with the Person to whom the Mortgaged Property is to be conveyed and such substitution agreement or supplement to the Mortgage Note or Mortgage or other instruments as are reasonable or necessary to carry out the terms of the Mortgage Note or Mortgage or otherwise to comply with any applicable laws regarding assumptions or the transfer of the Mortgaged Property to such Person. If the Central Servicer has a relevant Power of Attorney, the Central Servicer shall execute any required documents in the event a Borrower is to convey a Mortgaged Property to a third party which requires an assumption agreement, a substitution of liability agreement, an instrument releasing the Borrower from liability on the Qualified Loan, or a supplement to the Mortgage Note or Mortgage, or any other instruments that are reasonable or necessary to carry out the terms of the Mortgage Note or Mortgage or otherwise to comply with any applicable laws regarding assumptions or the transfer of the Mortgaged Property to such third party provided that:
(i) a Servicing Officer has examined and approved such documents as to form and substance,
(ii) the execution and delivery thereof will not conflict with or violate any terms of this Agreement;
(iii)subsequent to the closing of the transaction involving the assumption or transfer (i) the Qualified Loan will continue to be secured by a first mortgage lien pursuant to the terms of the Mortgage and (ii) no material term (including, but not limited to, the Mortgage Rate, the amount of any Installment Payment and any term affecting the amount or timing of payment) of the Qualified Loan will be altered and the term of the Qualified Loan will not be increased; and
(iv) if the seller/transferor of the Mortgaged Property is to be released from liability on the Qualified Loan, the Central Servicer has evaluated the creditworthiness of the buyer/transferee and has determined that if the buyer/transferee were applying for the Qualified Loan being assumed, such loan would be a Qualified Loan, and such release will not adversely affect the collectibility of the Qualified Loan (based on the Central Servicer's good faith determination).
If Farmer Mac (or its designee) is executing the documents, the Central Servicer shall also deliver or cause to be delivered to Farmer Mac with the required documents a letter explaining the nature of such documents and the reason or reasons why Farmer Mac's (or its designee's) signature is required. With such letter, the Central Servicer shall deliver to Farmer Mac a certificate of a Servicing Officer in form reasonably satisfactory to Farmer Mac certifying to items (i) through (iv) above. Upon receipt of and in reliance upon such certificate, Farmer Mac (or its designee) shall execute any necessary instruments for such assumption or substitution of liability.
Upon the closing of the transactions contemplated by such documents, the Central Servicer shall cause the originals of the assumption agreement, the release (if any), or the modification or supplement to the Mortgage Note or Mortgage to be delivered to Farmer Mac or its assigns, designees or agents.
(c) The Central Servicer shall be entitled to approve a request from a Borrower for the granting of an easement on the related Mortgaged Property in favor of another Person, any alteration or demolition of the related Mortgaged Property or other similar matters if (A) it has determined, exercising its good faith business judgment in the same manner as it would if it were the owner of the related Qualified Loan, that (i) the security for such Qualified Loan would not be materially adversely affected thereby; (ii) the timely and full collectibility of such Qualified Loan would not be adversely affected thereby; and (iii) as a result of such easement, alteration, demolition or other similar matter, the loan-to-value ratio would not be in excess of the Loan-to-Value Ratio with respect to such Qualified Loan as of the Closing Date; and (B) it follows the requirements and procedures therefor as set forth in the Seller/Servicer Guide, if applicable.
Section 3.07. Realization Upon Defaulted Qualified Loans.
(a)
(i) Notwithstanding anything to the contrary in this Agreement, the Central Servicer shall not, on behalf of Farmer Mac, obtain title to a Mortgaged Property as a result of foreclosure or otherwise, and shall not otherwise acquire possession of, or take any other action with respect to, any Mortgaged Property, if, as a result of any such action, Farmer Mac would be considered to hold title to, to be a "mortgagee-in-possession" of, or to be an "owner" or "operator" of, such Mortgaged Property within the meaning of any Environmental Statute or a "discharger" or "responsible party" thereunder, unless the Central Servicer has prepared or caused to be prepared an Environmental Review Report and obtained any consents in connection therewith as shall be required by the Seller/Servicer Guide.
(ii) If the Environmental Review Report discloses any adverse information with respect to any Mortgaged Property or if any questions required to be answered in the Environmental Review Report cannot be answered, the Central Servicer shall either (a) recommend to Farmer Mac in writing that foreclosure, trustee's sale or a deed-in-lieu of foreclosure should be delayed or abandoned, stating the reasons for the Central Servicer's conclusions and attaching a copy of Part I of the Environmental Review Report or (b) recommend to Farmer Mac that a further Environmental Review be conducted and, at the express written request of Farmer Mac, conduct such further Environmental Review(as such terms are defined in the Seller/Servicer Guide).
(iii)If the Environmental Review Report or Phase II of the Environmental Review discloses the presence, disposal, escape, seepage, leakage, spillage, discharge, emission, release or threatened release of any Hazardous Materials on, from or affecting the Mortgaged Property and if the cost of eliminating such Hazardous Materials exceeds the potential recovery upon liquidation of the related Qualified Loan the Central Servicer shall not allow such Qualified Loan to become an REO Qualified Loan and shall take such action as it deems to be in the best interest of Farmer Mac, including, if the Central Servicer deems it so appropriate, and after making reasonable efforts to locate a purchaser, the release of all or a portion of the lien of the related Mortgage.
(b) The Central Servicer shall foreclose upon or otherwise comparably convert the ownership of Mortgaged Properties securing such of the Qualified Loans as come into and continue in default and as to which no arrangements consistent with this Agreement and the Seller/Servicer Guide have been made for collection of delinquent payments pursuant to Section 3.02. In connection with such foreclosure or other conversion, and in connection with any restoration of any Mortgaged Property after foreclosure or conversion and before disposal thereof, the Central Servicer shall follow such practices and procedures as it shall deem, in its best judgment, necessary or advisable in accordance with applicable law and as shall be required or permitted by this Agreement and the Seller/Servicer Guide. The foregoing is subject to the proviso that the Central Servicer shall not be authorized to incur expenses in connection with any foreclosure or conversion, or towards the restoration of any property, unless it shall determine in good faith that such conversion, foreclosure and/or restoration will increase the proceeds of liquidation of the Qualified Loan to Farmer Mac after reimbursement for the expenses therefor. In the event that the Central Servicer makes such a determination, it shall advance any Liquidation Expenses from its own funds. Any Liquidation Expenses incurred by the Central Servicer in accordance with the foregoing shall be reimbursable to the Central Servicer promptly by Farmer Mac on a monthly basis.
(c) In the event that title to any Mortgaged Property is acquired for the benefit of Farmer Mac (or Farmer Mac's assignee or designee) in foreclosure, by delivery of a deed-in-lieu of foreclosure or otherwise, the named grantee of the deed or certificate of sale shall be "US Bank National Association as Custodian/Trustee" or such successor custodian/trustee as identified by Farmer Mac. The Central Servicer, on behalf of Farmer Mac, shall use its best efforts to dispose of any REO Property in a reasonably expeditious manner and otherwise in accordance with any applicable Environmental Statute.
(d) The Central Servicer shall separately account for all funds collected and received in connection with the operation of any REO Property.
(e) The Central Servicer shall have full power and authority, subject only to the specific requirements and prohibitions of this Agreement, to do any and all things in connection with any REO Property as are consistent with typical industry standards, or as otherwise described in the Seller/Servicer Guide, and for such period as the Central Servicer deems to be in the best interests of Farmer Mac. In connection therewith, the Central Servicer shall remit to Farmer Mac on a monthly basis, all revenues received by it with respect to the related REO Property minus any amounts advanced by the Central Servicer for the proper operation, management and maintenance of the related REO Property including:
(i) all insurance premiums due and payable in respect of any REO Property;
(ii) all real estate taxes and assessments in respect of any REO Property that may result in the imposition of a lien thereon; and
(iii) all costs, expenses and management fees necessary to maintain and operate or cause to be sold such REO Property.
To the extent that the amount advanced by the Central Servicer on a monthly basis exceeds the amount of revenues received by the Central Servicer with respect to the related REO properties on a monthly basis, Farmer Mac will reimburse the Central Servicer for such outstanding advances on a monthly basis within 15 days of receipt of a invoice for such advances from the Central Servicer.
(f) The Central Servicer on behalf of Farmer Mac may contract with any Independent contractor for the operation and management of any REO Property, provided that:
(i) the terms and conditions of any such contract shall not be inconsistent with the terms of this Agreement;
(ii) any such contract shall require, or shall be administered to require, that the Independent contractor remit all related revenues (net of such costs and expenses) to the Central Servicer as soon as practicable.
(iii) none of the provisions of this Section 3.07(e) relating to any such contract or to actions taken through any such Independent contractor shall be deemed to relieve the Central Servicer of any of its duties and obligations to Farmer Mac with respect to the operation and management of any such REO Property; and
(iv) the Central Servicer shall be obligated with respect thereto to the same extent as if it alone were performing all duties and obligations in connection with the operation and management of such REO Property.
The Central Servicer shall be entitled to enter into any agreement with any Independent contractor performing services for it related to its duties and obligations hereunder for indemnification of the Central Servicer by such Independent contractor, and nothing in this Agreement shall be deemed to limit or modify such indemnification. The Central Servicer (provided it acts as an independent contractor with respect to properties held by other entities) or any Independent contractor shall be entitled to a fee, based on the prevailing market rate (determined after consultation with Farmer Mac), for the operation and management of any REO Property. If such fee is not covered by gross revenues from the related REO Property, the Central Servicer or other Independent contractor shall be paid by Farmer Mac for all fees owed it. If Central Servicer is acting as an Independent contractor as described in the paragraph, any fees payable to Central Servicer as set forth in this paragraph shall be in addition to those set forth in Section 3.09 herein.
(g) Notwithstanding anything in this Agreement to the contrary, the Central Servicer shall have the right but not the obligation to purchase any Qualified Loan from Farmer Mac at such time as such Qualified Loan comes into and continues in default for a period of at least 90 days. If the Central Servicer exercises its right so to purchase, the Central Servicer shall deposit the Purchase Price with respect to such defaulted Qualified Loan into the Collection Account not later than the Remittance Date next succeeding the Collection Period during which the Central Servicer notifies Farmer Mac of its intention to purchase such defaulted Qualified Loan.
(h) If applicable state law permits an action for a deficiency judgment, the Central Servicer shall, exercising its good faith business judgment in the same manner as it would if it were the owner of the related Qualified Loan, make a recommendation to Farmer Mac as to whether to seek a deficiency judgment or enforce any applicable additional security documents following foreclosure, and shall follow Farmer Mac's direction in such matter.
(i) The Central Servicer shall neither be required to take nor to omit to take any action in any case where such action or omission, in its good faith business judgment, would cause it to be liable under an Environmental Statute. If the Central Servicer determines that any action or omission would so subject it to such liability, it shall promptly notify Farmer Mac.
Section 3.08. Farmer Mac to Cooperate; Release of Mortgage Files.
(a) Upon receipt of the payment in full of any Qualified Loan, or upon the receipt by the Central Servicer of a notification that payment in full will be escrowed in a manner customary for such purposes, the Central Servicer shall immediately notify Farmer Mac (or its designee) by a certification of a Servicing Officer in form reasonably acceptable to Farmer Mac (which certification shall include a statement to the effect that all amounts received or to be received in connection with such payment required to be deposited in the Collection Account pursuant to Section 3.02 have been or will be so deposited) and shall request delivery to it of the Mortgage File. Upon receipt of such certification and request, Farmer Mac shall cause the related Mortgage File to be released to the Central Servicer. Farmer Mac shall cause the Mortgage File to be released and such other documents or instruments in accordance with this Section 3.08 to be delivered promptly (generally within 2 Business Days) after receipt by Farmer Mac, or its designee, of the foregoing request. The Central Servicer, acting pursuant to a Power of Attorney, shall prepare and deliver any reconveyance, deed of reconveyance or release or satisfaction of mortgage or such instrument releasing or reassigning the lien of the Mortgage prepared by the Central Servicer, together with the Mortgage Note and written evidence of cancellation thereon. No expenses incurred in connection with recording any instrument of satisfaction or deed of reconveyance shall be chargeable to the Collection Account.
(b) From time to time as is appropriate for the servicing or foreclosure of any Qualified Loan, Farmer Mac or its designees, agents or assigns, shall cause the related Mortgage File or any document therein to be delivered to the Central Servicer upon Farmer Mac's receipt of a request for release (in form satisfactory to Farmer Mac) from the Central Servicer requesting delivery of such file or document. Farmer Mac shall cause such release promptly (generally within 2 Business Days after receipt by Farmer Mac of the foregoing request for release. The Central Servicer shall return each Mortgage File or any document therein so released to Farmer Mac when the need therefor by the Central Servicer no longer exists, unless (i) the Qualified Loan has been liquidated and the Liquidation Proceeds relating to the Qualified Loan have been deposited in the Collection Account or (ii) the Mortgage File or such document has been delivered to any attorney, or to a public trustee or other public official as required by law, for purposes of initiating or pursuing legal action or other proceedings for the foreclosure of the Mortgaged Property either judicially or nonjudicially, and the Central Servicer has delivered to Farmer Mac the name and address of the Person to which such Mortgage File or such document was delivered and the purpose or purposes of such delivery. In the event of the liquidation of a Qualified Loan, Farmer Mac shall cause the appropriate request for release to be delivered to the Central Servicer upon deposit of the related Liquidation Proceeds in the Collection Account and the Central Servicer's request for delivery of the request for release.
(c) If the Central Servicer is not executing such documents pursuant to a Power of attorney, Farmer Mac or its designee shall execute and delivery to the Central Servicer any court pleadings, requests for trustee's sale or other documents prepared by the Central Servicer and necessary to the foreclosure or Farmer Mac's sale, bankruptcy sale or work out settlement in respect of a Mortgaged Property or to any legal action brought to obtain judgment against any Borrower on the Mortgage Note, Mortgage or Additional Collateral Documents or to obtain a deficiency judgment, or to enforce any other remedies or rights provided by the Mortgage Note, Mortgage or Additional Collateral Documents or otherwise available at law or in equity. Together with such documents or pleadings, the Central Servicer shall deliver to Farmer Mac, or its designee, a certificate of a Servicing Officer requesting that such pleadings or documents be caused to be executed by Farmer Mac or its designee and certifying as to the reason such documents or pleadings are required and that the execution and delivery thereof will not invalidate any insurance coverage under any required insurance policy or invalidate or otherwise affect the lien of the Mortgage, except for the termination of such a lien upon completion of the foreclosure or trustee's sale.
Section 3.09. Servicing and Other Compensation.
(a) The Central Servicer, as compensation for its activities and obligations hereunder, shall be entitled to withhold from each payment on account of interest on a Qualified Loan the amount of interest calculated at the Servicing Fee Rate to the extent, if any, that the interest component of the payment received is in excess of interest calculated at the Net Mortgage Rate.
(b) The Central Servicer shall also be entitled to additional servicing compensation in the form of assumption fees and other service charges (exclusive of late charges and default interest) imposed upon Borrowers and collected from Borrowers or recovered from related Liquidation Proceeds in connection with servicing the Qualified Loans.
(c) In the event Farmer Mac imposes additional requirements on Central Servicer, and the Central Servicer's costs of servicing the Qualified Loans increase materially as a result of such additional requirements, the parties agree to negotiate in good faith, an appropriate adjustment to the servicing compensation to be received by the Central Servicer.
(d) The Central Servicer shall be required to pay all expenses incurred by it in connection with its servicing activities hereunder and shall not be entitled to reimbursement therefor except as specifically provided in this Agreement.
(ii) REO BASE FEES
(a) The following provisions regarding fees shall be effective as of January 1, 2003.
(i) REO Servicing Fee. The amount payable to the Central Servicer for REO servicing fees shall be 40 basis points per annum. The basis for the REO servicing fee is the outstanding principal balance of the related Qualified Loan at the time it becomes an REO Qualified Loan.
(ii) REO Disposition Fee. In the event that Central Servicer disposes of the REO Property without a real estate agent, broker or other third party commissioned salesperson, the amount payable to the Central Servicer for REO disposition fees shall be 5 percent of the actual sales price.
(iii) REO Disposition Broker's Fees. The REO Disposition Broker's Fee is defined as the amount of the broker's fee for disposition of REO properties sold. The amount payable for an REO Disposition Broker's Fee shall be up to six percent (6%) of the sales price, provided that Central Servicer may negotiate a fee to an outside broker of less than six percent (6%) and retain the difference between the fee actually paid and five percent (5%). The basis for the REO Disposition Broker's Fees is the gross sales price for such REO Property.
Section 3.10. Access to Certain Documentation Regarding the Qualified Loans.
(a) Upon the prior written request of Farmer Mac received reasonably in advance, the Central Servicer shall provide reasonable access to representatives of Farmer Mac (including its assignee or designee) to documentation regarding the Qualified Loans during normal business hours at the offices of the Central Servicer designated by it. The Central Servicer shall permit such representatives to photocopy any such documentation and shall provide equipment for that purpose. The Central Servicer shall forward to Farmer Mac such reports as may be reasonably required by Farmer Mac with respect to delinquent Qualified Loans, which reports shall include information broken down by aging of delinquency, specifying the Qualified Loans included in each category.
(b) The Central Servicer shall maintain or cause to be maintained adequate books and records pertaining to each Qualified Loan serviced hereunder including, but not limited to, copies of all Mortgage Servicing Documents and any additional documentation customarily contained in an agricultural loan servicing file. The Central Servicer agrees that such documents shall be maintained until the earlier of (a) seven years after the maturity of the Qualified Loan; and (b) the date such documentation is transferred to a successor servicer that shall have assumed the Central Servicer's responsibilities and obligations in accordance with this Agreement. Such documentation may be in the form of microfilm, microfiche, ledger cards, magnetic media or other "machine readable" records, or any combination thereof.
Section 3.11. Compliance Statements. The Central Servicer will timely provide such assertion letters on compliance with Farmer Mac's servicing requirements and such attestation reports as Farmer Mac may require to reasonably complying with applicable laws and regulations.
Section 3.12. Submission of Independent Public Accountants' Reports.
(a) Within 120 days after the close of each fiscal year of the Central Servicer, beginning with the fiscal year ending in 1996, the Central Servicer shall deliver to Farmer Mac a copy of the report of Independent accountants respecting the Central Servicer's, or the Central Servicer's parent corporation's, consolidated financial statements for the preceding fiscal year.
Section 3.13. Inspection of the Mortgaged Properties. The Central Servicer shall cause each Mortgaged Property to be physically inspected as required in the Seller/Servicer Guide.
Section 3.14. Partial Releases. At the request of a Borrower, the Central Servicer, to the extent not inconsistent with the provisions of the Seller/Servicer Guide, may release a portion of any Mortgaged Property from the lien of the related Mortgage. At the Borrower's request, the Central Servicer will then reschedule the repayment of the remaining payments on the Qualified Loan to provide for the amortization of the remaining principal balance of the Qualified Loan, after taking into account the prepayment related to the partial release, over the remaining term of the Qualified Loan. Any prepayments (and any applicable Yield Maintenance Amounts) received by the Central Servicer pursuant to a partial release shall be deposited in the Collection Account and the prepayments shall be treated for all purposes of this Agreement as partial prepayments on the Qualified Loans.
Section 3.15. Servicing Agreements. The Central Servicer in its sole discretion may enter into or terminate Servicing Agreements with Subservicers or Field Servicers who satisfy the requirements set forth in the Securities Guide for a portion of the servicing of some or all of the Qualified Loans. References in this Agreement to actions taken or to be taken by the Central Servicer in servicing the Qualified Loans include actions taken or to be taken by a Subservicer or Field Servicer with whom the Central Servicer has directly contracted. A Servicing Agreement does not relieve the Central Servicer of any of its duties or obligations under this Agreement. Nothing herein shall be deemed to limit in any respect the discretion of the Central Servicer to modify or enter into different Servicing Agreements; provided, however, that any such amendments or different forms shall not violate the provisions of this Agreement or the Securities Guide.
Section 3.16. No Contractual Relationship Between Field Servicer and Farmer Mac.
(a) Any Servicing Agreement that may be entered into between a Field Servicer or a Subservicer and the Central Servicer shall be deemed to be between the Field Servicer or Subservicer and the Central Servicer alone. Farmer Mac shall not be deemed a party thereto and shall have no claims, rights, obligations, duties or liabilities with respect to the Central Servicer or any Field Servicer or Subservicer under such Servicing Agreements except as set forth in Section 3.19.
(b) If no Servicing Agreement is entered into with a Field Servicer, the
Central Servicer shall:
(i) direct and monitor the actions of the Field Servicer in
accordance with the provisions of this Agreement and the
Seller/Servicer Guide;
(ii) perform reasonable due diligence reviews of the Field
Service to ensure that the Field Servicer is performing all Field
Servicing obligations; and
(iii) shall report any deficiencies in Field Servicer performance
to Farmer Mac and cooperate with Farmer Mac in resolving such
deficiencies.
Section 3.17. Assumption or Termination of Field Servicing Agreements by Farmer Mac.
(a) In the event that the Central Servicer shall for any reason no longer be acting as such hereunder (including by reason of an Event of Default) and Farmer Mac or its designee shall have assumed the duties of the Central Servicer, Farmer Mac or such designee may, at Farmer Mac's sole discretion, thereupon assume all of the rights and obligations of the Central Servicer under each Servicing Agreement that may have been entered into. Each Servicing Agreement shall contain provisions allowing Farmer Mac to rescind such agreement without penalty in the event the Central Servicer shall no longer be acting as such. Farmer Mac, its designee or the successor servicer for Farmer Mac shall be deemed to have assumed all of the Central Servicer's interest therein and to have replaced the Central Servicer as a party to each Servicing Agreement to the same extent as if such agreement had been assigned to the assuming party, except that the Central Servicer shall not thereby be relieved of any liability or obligations under any Servicing Agreement which arose prior to the date each Servicing Agreement is deemed so assigned and assumed.
(b) In the event that the Central Servicer is no longer acting as such, the Central Servicer shall, upon request of Farmer Mac but at the expense of the Central Servicer: (i) deliver to the assuming party all documents and records held by the Central Servicer relating to each Servicing Agreement and the Qualified Loans then being serviced and an accounting of amounts collected and held by it; (ii) prepare, execute and deliver all documents and instruments and take all actions reasonably requested by Farmer Mac or its designee to effect the succession by Farmer Mac or its designee hereunder and the transfer of each Servicing Agreement to the assuming party; and (iii) and otherwise use its best efforts to effect the orderly and efficient succession hereunder and transfer of each Servicing Agreement to the assuming party.
(c) Notwithstanding anything set forth herein to the contrary, if the Central Servicer is also the Seller or Field Servicer of a Qualified Loan, Central Servicer shall continue to act as the Field Servicer of such Qualified Loan unless Farmer Mac has cause under the applicable agreements to terminate such status, even if Central Servicer is no longer acting as Central Servicer.
ARTICLE IV
PAYMENTS TO FARMER MAC AND REPORTS
Section 4.01. Central Servicer's Report; Remittance Reconciliation Report; Loan Servicing Report.
(a) Not later than the third Business Day of each calendar month, the Central Servicer shall deliver to Farmer Mac and Farmer Mac's designee, a Central Servicer's Report. Such Central Servicer's Report shall be in a machine-readable format in accordance with the tape specifications and other requirements set forth in Exhibit C hereto or in such other format or conform to such other specifications or requirements as Farmer Mac and the Central Servicer may agree.
(b) In addition to the information required under Section 4.01(a), the Central Servicer's Report shall contain such information as is reasonably requested by Farmer Mac, including, but not limited to the information described below.
(i) a listing of all Installment Payments (with the interest components thereof adjusted to interest at the applicable Net Mortgage Rates) on the Qualified Loans due on or prior to the preceding Due Date that were delinquent on the preceding Remittance Date;
(ii) Servicing Advances and REO Advances made by the Central Servicer on behalf of Farmer Mac during the preceding month ;
(iii) the amount of late charges and penalty interest deposited into the Collection Account during the preceding Collection Period;
(iv) an itemization of Delinquency Advances which were paid (whether as the result of a payment by the related Borrower or of the related Qualified Loan becoming a Liquidated Qualified Loan) during the preceding Collection Period;
(v) an itemization of Servicing Advances and REO Advances which were paid (whether as the result of a payment by the related Borrower or of the related Qualified Loan becoming a Liquidated Qualified Loan) during the preceding month;
(vi) a reconciliation of each custodial account (e.g., the Collection Account, as requested and REO Account and Servicing Advance Account);
(vii) a reconciliation of Scheduled Principal Balances to actual balances of the Qualified Loans as requested; and
(viii) such other information as Farmer Mac may from time to time request.
(c) On or before the tenth day of each calendar month (or if such tenth day is not a Business Day, the next succeeding Business Day), the Central Servicer will provide to Farmer Mac and its designee a Loan Servicing Report in form reasonably prescribed by Farmer Mac, which Loan Servicing Report will provide information (including proposed remedial action to be taken by the Central Servicer) with respect to: Qualified Loans which have been identified by Farmer Mac as "watch-listed" loans; delinquent Qualified Loans; Qualified Loans in foreclosure; REO Qualified Loans; and bankruptcy proceedings involving Borrowers.
(d) On a timely basis each month, the Central Servicer shall prepare, and make available to Farmer Mac or its designee upon request, a remittance reconciliation report.
Section 4.02. Remittance Account.
(a) On or before the Closing Date, Farmer Mac shall establish the Remittance Account and provide the Central Servicer with information concerning its location. The Central Servicer, on or before 10:00 A.M. Central Servicer's local time on each Remittance Date, shall deposit in same day funds an amount equal to the Qualified Loan Receipts for the preceding Collection Period.
Section 4.03. Reports of Foreclosures and Abandonment of Mortgaged Property.
(a) Each year, beginning in 1997, the Central Servicer shall make the
reports of foreclosures and abandonments of any Mortgaged Property required by
Section 6050J of the Internal Revenue Code and provide copies of such reports to
Farmer Mac. In order to facilitate this reporting process, the Central Servicer,
on or before the date required by law, shall provide to the Internal Revenue
Service and Farmer Mac reports relating to each instance occurring during the
previous calendar year in which the Central Servicer (i) on behalf of Farmer Mac
acquires an interest in a Mortgaged Property through foreclosure or other
comparable conversion in full or partial satisfaction of a Qualified Loan, or
(ii) knows or has reason to believe that a Mortgaged Property has been
abandoned. The reports from the Central Servicer shall be in form and substance
sufficient to meet the reporting requirements imposed by such Section 6050J.
(b) Within 30 days after disposition of any REO Property, the Central Servicer shall provide to Farmer Mac a statement of accounting for the related Mortgaged Property and REO Accounts; including without limitation (i) each category of deposit to, withdrawal from and investment earnings within such REO Account, (ii) the loan number of the related Qualified Loan, (iii) the date such Qualified Loan became a REO Qualified Loan by foreclosure, or by deed in lieu of foreclosure or otherwise, (iv) the date of such disposition, (v) the gross sales price and the related selling and other expenses, (vi) accrued interest, calculated from the date of acquisition to the disposition date, and (vii) such other information as Farmer Mac may reasonably request.
ARTICLE V
DEFAULT
Section 5.01. Events of Default. Event of Default, wherever used herein, means one of the following events:
(i) the Central Servicer shall fail to make any deposit (A) to the Remittance Account required by Section 4.02 or (B) to the Collection Account required by Section 3.02(a) and such failure shall continue unremedied for a period of one Business Day after the date upon which written notice of such failure, requiring the same to be remedied, shall have been given to the Central Servicer by Farmer Mac (or Farmer Mac's designee); or
(ii) the Central Servicer shall fail to observe or perform in any material respect any other of the covenants or agreements on the part of the Central Servicer contained in this Agreement and such failure shall continue unremedied for a period of 30 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Central Servicer by Farmer Mac; or
(iii) a decree or order of a court or agency or supervisory authority having jurisdiction in the premises in an involuntary case under any present or future federal or state bankruptcy, insolvency or similar law or appointing a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of its affairs, shall have been entered against the Central Servicer and such decree or order shall have remained in force undischarged or unstayed for a period of 90 days; or
(iv) the Central Servicer shall consent to the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshaling of assets and liabilities, or similar proceedings of, or relating to, the Central Servicer or of, or relating to, all or substantially all of the property of the Central Servicer; or
(v) the Central Servicer shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of, or commence a voluntary case under, any applicable insolvency or reorganization statute, make an assignment for the benefit of its creditors, or voluntarily suspend payment of its obligations; or
(vi) the Central Servicer shall fail at any time to meet Farmer Mac's standards for eligible agricultural real estate mortgage central servicers so that, in Farmer Mac's sole discretion, the Central Servicer's ability to comply with this Agreement, or the Seller/Servicer Guide within a reasonable period of time is adversely affected; or
(vii) a court of competent jurisdiction shall have found that the Central Servicer or any of its principal officers has committed an act of civil fraud or the Central Servicer or any of its principal officers shall have been convicted of any criminal act related to the Central Servicer's lending or mortgage selling or servicing activities or that, in Farmer Mac's sole discretion, adversely affects the Central Servicer's reputation or Farmer Mac's reputation or interests.
If an Event of Default shall occur, then, and in each and every case, so long as such Event of Default shall not have been remedied, Farmer Mac may, by notice in writing to the Central Servicer, terminate all of the rights and obligations of the Central Servicer under this Agreement and in and to the Qualified Loans and the proceeds thereof; provided, that any liability of the Central Servicer under this Agreement arising prior to such termination shall survive such termination. On or after the receipt by the Central Servicer of such written notice, all authority and power of the Central Servicer under this Agreement shall pass to and be vested in Farmer Mac; and, without limitation, Farmer Mac is hereby authorized and empowered to execute and deliver, on behalf of the Central Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments, and to do or accomplish all other acts or things necessary or appropriate to effect the purposes of such notice of termination, whether to complete the transfer and endorsement or assignment of the Qualified Loans and related documents, or otherwise. If an Event of Default shall occur and be continuing, the Central Servicer agrees to cooperate with Farmer Mac in effecting the termination of the Central Servicer's responsibilities and rights hereunder, including, without limitation, the transfer to Farmer Mac (or its designee) for administration by it of all cash amounts which shall at the time be on deposit in the Collection Account, the Servicing Advance Account and the REO Account or thereafter be received with respect to the Qualified Loans, the delivery to Farmer Mac (or its designee) of all documents and records requested by it to enable it to assume the Central Servicer's obligations hereunder and the reconciliation of all of the Qualified Loans, the Collection Account and the REO Account and the Servicing Advance Account, all at the cost of the Central Servicer. Farmer Mac or its designee shall pay over to the Central Servicer that portion of any future proceeds of the Qualified Loans, which, if the Central Servicer were at the time acting hereunder, it would be permitted to receive in consideration of, or in reimbursement for, previous services performed, or advances made, by it, net of any amounts owing from the Central Servicer to Farmer Mac.
ARTICLE VI
MISCELLANEOUS
Section 6.01 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of Farmer Mac, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive or any rights, remedies, powers or privileges provided by law.
Section 6.02 Counterparts. This Agreement may be executed in any number of separate counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument.
Section 6.03 Governing Law. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, FEDERAL LAW. TO THE EXTENT FEDERAL LAW INCORPORATES STATE LAW, THAT STATE LAW SHALL BE THE LAWS OF THE STATE OF NEW YORK.
Section 6.04 Notices. All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given (a) when delivered by hand, (b) two business days after it is mailed, certified or registered, return receipt requested, with postage prepaid, (c) when sent by telex, telegram or telecopy (with receipt confirmed) or (d) one business day after it is sent by Express Mail, FedEx or other express delivery service, as follows:
(a) if to the Central Servicer, to it at:
Zions First National Bank Zions Agricultural Finance 10 East South Temple, Ste. 1300 Salt Lake City, UT 84111-1923 Attention: Patrick Floyd 277-K Telephone Number: (801) 524-8997 Facsimile Number (801) 594-8229
(b) if to Farmer Mac, to it at:
Federal Agricultural Mortgage Corporation
1133 Twenty-First St., N.W.
Suite 600
Washington, DC 20036
Attention: Vice President - General Counsel
Telecopy Number: 202-872-7713
or to such other persons, addresses and telecopier numbers as a party shall specify as to itself by notice in writing to the other party.
Section 6.05 Survival and Termination of Agreement. All covenants, agreements, representations and warranties made herein and in any certificate, document or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement until the later of the receipt by Farmer Mac or its assignee of payment in full in respect of all Qualified Loans and the satisfaction of all of the Mortgages.
Section 6.06 Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto with respect to its subject matter, and supersedes all previous understandings, written or oral, with respect thereto. This Agreement may only be amended by a written agreement between the parties.
Section 6.07 Waiver of Jury Trial. The Central Servicer and Farmer Mac hereby irrevocably and unconditionally waive trial by jury in any legal action or preceding relating to this Agreement.
Section 6.08 Severability. Any provision of this Agreement that is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or non-authorization without invalidating the remaining provisions hereof or thereof or affecting the validity, enforceability or legality of any such provision in any other jurisdiction.
Section 6.09 Assignability.
(a) Except as herein contemplated, this Agreement shall not be assigned by either of the parties hereto without the prior written consent of the other party; provided, however, that Farmer Mac may assign this Agreement to any affiliate of Farmer Mac or the holder of the Qualified Loans without prior notice or consent of the Central Servicer.
(b) For purposes of this Section 6.09 only, it is agreed that a "Change in Control" of a party shall be deemed an attempted assignment or transfer prohibited by this Section. Change in Control shall mean
(i) consummation of a reorganization, merger, or consolidation unless immediately after such reorganization, merger, or consolidation more than 75 percent of outstanding shares of common stock of that party or 75 percent of the combined voting power of the then outstanding securities of that party is beneficially owned by the same persons who owned such stock or securities immediately prior to the reorganization, merger, or consolidation; or
(ii) the sale or other disposition of all or substantially all of the assets of either party
(c) Except as stated in (a) above, any attempted assignment or transfer contrary to the provisions of this Section 6.09 shall be null, void, and of no force nor effect.
Section 6.10 Third Party Beneficiaries. Any assignee or designee of Farmer Mac, including an assignee holding the Qualified Loans for the benefit of holders of securities guaranteed by Farmer Mac, is a third party beneficiary to this Agreement entitled to enforce any representations and warranties, indemnities and obligations of the parties. Except as otherwise provided, the parties to this Agreement hereby manifest their intent that no third party other than such assignee or designee, including an assignee for the benefit of such holders of securities, shall be deemed a third party beneficiary of this Agreement, and specifically that the Borrowers are not third party beneficiaries of this Agreement.
Section 6.11 Arbitration.
Arbitration Disclosures.
1. ARBITRATION IS FINAL AND BINDING ON THE PARTIES AND SUBJECT TO ONLY VERY
LIMITED REVIEW BY A COURT.
2. IN ARBITRATION THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT,
INCLUDING THEIR RIGHT TO A JURY TRIAL.
3. DISCOVERY IN ARBITRATION IS MORE LIMITED THAN DISCOVERY IN COURT.
4. ARBITRATORS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL REASONING
IN THEIR AWARDS. THE RIGHT TO APPEAL OR SEEK MODIFICATION OF ARBITRATORS'
RULINGS IS VERY LIMITED.
5. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS AFFILIATED
WITH THE BANKING INDUSTRY.
6. ARBITRATION WILL APPLY TO ALL DISPUTES BETWEEN THE PARTIES, NOT JUST THOSE
CONCERNING THIS AGREEMENT.
7. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR THE
AMERICAN ARBITRATION ASSOCIATION.
(a) Any claim or controversy ("Dispute") between or among the parties and their employees, agents, affiliates, and assigns, including, but not limited to, Disputes arising out of or relating to this agreement, this arbitration provision ("arbitration clause"), or any related agreements or instruments relating hereto or delivered in connection herewith ("Related Agreements"), and including, but not limited to, a Dispute based on or arising from an alleged tort, shall at the request of any party be resolved by binding arbitration in accordance with the applicable arbitration rules of the American Arbitration Association (the "Administrator"). The provisions of this arbitration clause shall survive any termination, amendment, or expiration of this agreement or Related Agreements. The provisions of this arbitration clause shall supersede any prior arbitration agreement between or among the parties.
(b) The arbitration proceedings shall be conducted in a city mutually agreed by the parties. Absent such an agreement, arbitration will be conducted in Salt Lake City, Utah or such other place as may be determined by the Administrator. The Administrator and the arbitrator(s) shall have the authority to the extent practicable to take any action to require the arbitration proceeding to be completed and the arbitrator(s)' award issued within 150 days of the filing of the Dispute with the Administrator. The arbitrator(s) shall have the authority to impose sanctions on any party that fails to comply with time periods imposed by the Administrator or the arbitrator(s), including the sanction of summarily dismissing any Dispute or defense with prejudice. The arbitrator(s) shall have the authority to resolve any Dispute regarding the terms of this agreement, this arbitration clause, or Related Agreements, including any claim or controversy regarding the arbitrability of any Dispute. All limitations periods applicable to any Dispute or defense, whether by statute or agreement, shall apply to any arbitration proceeding hereunder and the arbitrator(s) shall have the authority to decide whether any Dispute or defense is barred by a limitations period and, if so, to summarily enter an award dismissing any Dispute or defense on that basis. The doctrines of compulsory counterclaim, res judicata, and collateral estoppel shall apply to any arbitration proceeding hereunder so that a party must state as a counterclaim in the arbitration proceeding any claim or controversy which arises out of the transaction or occurrence that is the subject matter of the Dispute. The arbitrator(s) may in the arbitrator(s)' discretion and at the request of any party: (1) consolidate in a single arbitration proceeding any other claim arising out of the same transaction involving another party to that transaction that is bound by an arbitration clause with Lender, such as borrowers, guarantors, sureties, and owners of collateral; and (2) consolidate or administer multiple arbitration claims or controversies as a class action in accordance with the provisions of Rule 23 of the Federal Rules of Civil Procedure.
(c) The arbitrator(s) shall be selected in accordance with the rules of the Administrator from panels maintained by the Administrator. A single arbitrator shall have expertise in the subject matter of the Dispute. Where three arbitrators conduct an arbitration proceeding, the Dispute shall be decided by a majority vote of the three arbitrators, at least one of whom must have expertise in the subject matter of the Dispute and at least one of whom must be a practicing attorney. The arbitrator(s) shall award to the prevailing party recovery of all costs and fees (including attorneys' fees and costs, arbitration administration fees and costs, and arbitrator(s)' fees). The arbitrator(s), either during the pendency of the arbitration proceeding or as part of the arbitration award, also may grant provisional or ancillary remedies including but not limited to an award of injunctive relief, foreclosure, sequestration, attachment, replevin, garnishment, or the appointment of a receiver.
(d) Judgement upon an arbitration award may be entered in any court having jurisdiction, subject to the following limitation: the arbitration award is binding upon the parties only if the amount does not exceed Four Million Dollars ($4,000,000.00); if the award exceeds that limit, either party may demand the right to a court trial. Such a demand must be filed with the Administrator within 30 days following the date of the arbitration award; if such a demand is not made within that time period, the amount of the arbitration award shall be binding. The computation of the total amount of an arbitration award shall include amounts awarded for attorneys' fees and costs, arbitration administration fees and costs, and arbitrator(s)' fees.
(e) No provision of this arbitration clause, nor the exercise of any rights hereunder, shall limit the right of any party to: (1) judicially or non-judicially foreclose against any real or personal property collateral or other security; (2) exercise self-help remedies, including but not limited to repossession and setoff rights; or (3) obtain from a court having jurisdiction thereover any provisional or ancillary remedies including but not limited to injunctive relief, foreclosure, sequestration, attachment, replevin, garnishment, or the appointment of a receiver. Such rights can be exercised at any time, before or after initiation of an arbitration proceeding, except to the extent such action is contrary to the arbitration award. The exercise of such rights shall not constitute a waiver of the right to submit any Dispute to arbitration, and any claim or controversy related to the exercise of such rights shall be a Dispute to be resolved under the provisions of this arbitration clause. Any party may initiate arbitration with the Administrator. If any party desires to arbitrate a Dispute asserted against such party in a complaint, counterclaim, cross-claim, or third-party complaint thereto, or in an answer or other reply to any such pleading, such party must make an appropriate motion to the trial court seeking to compel arbitration, which motion must be filed with the court within 45 days of service of the pleading, or amendment thereto, setting forth such Dispute. If arbitration is compelled after commencement of litigation of a Dispute, the party obtaining an order compelling arbitration shall commence arbitration and pay the Administrator's filing fees and costs within 45 days of entry of such order. Failure to do so shall constitute an agreement to proceed with litigation and waiver of the right to arbitrate. In any arbitration commenced by a consumer regarding a consumer Dispute, Lender shall pay one half of the Administrator's filing fee, up to $250.
(f) Notwithstanding the applicability of any other law to this agreement, the arbitration clause, or Related Agreements between or among the parties, the Federal Arbitration Act, 9 U.S.C. Section 1 et seq., shall apply to the construction and interpretation of this arbitration clause. If any provision of this arbitration clause should be determined to be unenforceable, all other provisions of this arbitration clause shall remain in full force and effect.
IN WITNESS WHEREOF, FarmerMac and the Central Servicer have caused their names to be signed hereto by their respective officers, duly authorized and their respective corporate seals, duly attested, to be hereunto affixed, all as of the first day of May, 2004.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
By: /s/ Michael P. Morris ---------------------------------------------- Name: Michael P. Morris Title: Vice President - Agricultural Credit |
ZIONS FIRST NATIONAL BANK,
Central Servicer
By: /s/ Patrick M. Floyd ----------------------------- Name: Patrick M. Floyd Title: Senior Vice President |