-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GHFodLvTsZ3iN2CdWbJn1vasvpnHCn32imLZIP42kgCzeoNfA22JbpxFVSpHaR+d qdf8FherRlHj3DS/uzSZkA== 0000845877-96-000018.txt : 20040503 0000845877-96-000018.hdr.sgml : 20040503 19960401083200 ACCESSION NUMBER: 0000845877-96-000018 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 DATE AS OF CHANGE: 20020327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERAL AGRICULTURAL MORTGAGE CORP CENTRAL INDEX KEY: 0000845877 STANDARD INDUSTRIAL CLASSIFICATION: FEDERAL & FEDERALLY-SPONSORED CREDIT AGENCIES [6111] IRS NUMBER: 521578738 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17440 FILM NUMBER: 96542298 BUSINESS ADDRESS: STREET 1: 1133 21ST STREET, N.W. STREET 2: STE 600 CITY: WASHINGTON STATE: DC ZIP: 20036 BUSINESS PHONE: 2028727700 MAIL ADDRESS: STREET 1: 1133 21ST STREET, N.W. STREET 2: SUITE 600 CITY: WASHINGTON STATE: DC ZIP: 20036 10-K 1 As filed with the Securities and Exchange Commission on March 29, 1996 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____. 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 ___________________________________ (State or other jurisdiction of incorporation or organization) 52-1578738 _______________________________________ (I.R.S. employer identification Number) 919 18th Street, N.W., Suite 200, Washington, D.C. 20006 ___________________________________________ ________________________ (Address of principal exeuctive offices) (Zip code) (202) 872-7700 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Voting Common Stock Class B Voting Common Stock Class C Non-Voting Common Stock 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 twelve months (or 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. 229.405) is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- K or any amendment to this Form 10-K. [ ] The aggregate market values of the Class A Voting Common Stock and Class C Non-Voting Common Stock held by non-affiliates of the Registrant were $3,601,250 and $8,956,665, respectively, based upon the average bid and asked prices for the respective classes on March 25, 1996 as quoted by the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). The aggregate market value of the Class B Voting Common Stock is not ascertainable due to the absence of publicly available quotations or prices with respect to the Class B Voting Common Stock as a result of the limited market for, and infrequency of trades in, Class B Voting Common Stock and the fact that any such trades are privately negotiated transactions. There were 670,000 shares of Class A Voting Common Stock, 593,401 shares of Class B Voting Common Stock, and 1,214,463 shares of Class C Non-Voting Common Stock outstanding as of March 25, 1996. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement to be filed on or about April 29, 1996 in connection with the Annual Meeting of Stockholders to be held on June 13, 1996 (portions of which are incorporated by reference into Part III of this Annual Report on Form 10-K). _______________________ PART I ITEM 1. BUSINESS GENERAL The Federal Agricultural Mortgage Corporation ("Farmer Mac" or the "Registrant") is a federally chartered instrumentality of the United States established by Title VIII of the Farm Credit Act of 1971(12 U.S.C. 2279aa et seq.), as amended most recently by the Farm Credit System Reform Act of 1996, P.L. 104- 105 (the "1996 Act") (collectively, the "Act"). Farmer Mac was established primarily to attract new capital for the financing of agricultural real estate and rural housing loans and to provide liquidity to agricultural real estate and rural housing lenders. Farmer Mac is intended to aid the development of a secondary market for agricultural real estate and rural housing loans (each, a "Qualified Loan") made by participating originators (each, an "Originator"), pooled by eligible agricultural mortgage marketing facilities, including Farmer Mac (each, a "Pooler"), and secured by first liens on agricultural real estate, including rural housing, by guaranteeing the timely payment of principal and interest on obligations ("Farmer Mac I Securities") backed by, and securities representing interests in, such loans (the "Farmer Mac I Program"). See "Farmer Mac Guarantee Program _ Farmer Mac I." Farmer Mac also purchases portions ("Guaranteed Portions") of farm ownership, operating, business and industry and certain other loans guaranteed by the United States acting through the Secretary of Agriculture pursuant to the Consolidated Farm and Rural Development Act and may issue certificates ("Farmer Mac II Securities") representing interests in pools of Guaranteed Portions (the "Farmer Mac II Program"). See "Farmer Mac Guarantee Program _ Farmer Mac II." Farmer Mac I Securities and Farmer Mac II Securities are collectively referred to herein as "Farmer Mac Guaranteed Securities." Farmer Mac is authorized to borrow up to $1.5 billion from the Secretary of the Treasury, subject to certain conditions, to enable it to fulfill its guarantee obligations. See "Farmer Mac's Borrowing Authority from the U.S. Treasury." The 1996 Act significantly changed Farmer Mac's statutory charter by, among other things, authorizing Farmer Mac to act as a Pooler, purchase Qualified Loans directly from Originators and issue securities backed by those loans without the prior statute's requirement to create a minimum 10% subordinated interest or reserve; and delaying for three years the prior statute's imposition of higher regulatory capital requirements. For a detailed discussion of the changes to Farmer Mac's charter as a result of the 1996 Act, see "Recent Legislative Revisions to Farmer Mac's Statutory Charter." For an overview of 1995, as well as a discussion of Farmer Mac's plans regarding the implementation of the new authorities in the 1996 Act, see "Management's Discussion and Analysis of Financial Condition and Results of Operations _ 1995 Overview." Farmer Mac obtained its initial operating capital through the sale of 670,000 Class A Units and 500,301 Class B Units in its initial public offering in December 1988. A Class A Unit consisted of one share of Class A Voting Common Stock and one share of Class C Non-Voting Common Stock. A Class B Unit consisted of one share of Class B Voting Common Stock and one share of Class C Non-Voting Common Stock. In accordance with the terms of the initial public offering, each Unit separated into its component shares in November 1993. Additional shares of Class B Voting Common Stock and Class C Non-Voting Common Stock were recently issued to Western Farm Credit Bank ("WFCB") pursuant to a Strategic Alliance Agreement between WFCB and Farmer Mac. See "Farmer Mac Guarantee Program _ Farmer Mac I _ Transactions Under Farmer Mac I Program." As a result of these issuances, there are currently outstanding 670,000 shares of Class A Voting Common Stock, 593,401 shares of Class B Voting Common Stock and 1,214,463 shares of Class C Non-Voting Common Stock. On March 14, 1996, Farmer Mac announced that it had reached an agreement in principle to sell 320,000 newly issued shares of Class A Voting Common Stock to Zions First National Bank, Salt Lake City, Utah ("Zions") at a price of $8.00 per share. If that transaction is consummated on April 10, 1996, as currently anticipated, there would be outstanding 990,000 shares of Class A Voting Common Stock, of which Zions would own approximately 33%. See "Farmer Mac Guarantee Program _ Financing _ Future Stock Issuances." The Class A Voting Common Stock and the Class B Voting Common Stock are herein called the "Voting Common Stock." The Voting Common Stock and the Class C Non- Voting Common Stock are herein called the "Common Stock." Funding for Farmer Mac's operations has been derived from income from operations and expenditures of capital. Farmer Mac intends to fund its operations out of income therefrom, primarily from the fees it charges for issuing its guarantee on Farmer Mac Guaranteed Securities; interest income on investments; and revenues it may derive from its authority to function as a Pooler. Farmer Mac's Board of Directors (the "Board") has authorized the issuance of up to $1.5 billion in outstanding aggregate principal amount of notes having maturities of not more than nine months ("Discount Notes") and notes having maturities of nine months or more ("Medium-Term Notes" and, together with the Discount Notes, the "Notes"). See "Farmer Mac Guarantee Program _ Financing." As of December 31, 1995, Farmer Mac had outstanding $132.8 million of Discount Notes and $358.7 million of Medium-Term Notes, net of unamortized debt issuance costs, discounts and premiums. Farmer Mac may also obtain capital from future issuances of common stock (both voting and non-voting) or preferred stock. Farmer Mac expects to consummate the Class A stock sale to Zions, which will generate $2.56 million in new capital, and anticipates one or more additional issuances of common or preferred stock, or both, within the next two years to further increase its capital as required under the 1996 Act. Any such issuances may be significantly dilutive of the interests of one or more classes of stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Review" and "Recent Legislative Revisions to Farmer Mac's Statutory Charter." The Farm Credit Administration ("FCA"), acting through the Office of Secondary Market Oversight, has general regulatory and enforcement authority over Farmer Mac, including the authority to promulgate rules and regulations governing the activities of Farmer Mac and to apply its general enforcement powers to Farmer Mac and its activities. Farmer Mac is required to meet certain minimum and critical capital requirements established in the Act, some of which had been scheduled to increase significantly in December 1996. The 1996 Act revised and delayed these changes by establishing a transition period in which Farmer Mac has the opportunity to implement its new legislative authorities before higher minimum and critical capital requirements are fully effective. For a discussion of the capital requirements and Farmer Mac's capital, see "Recent Legislative Revisions to Farmer Mac's Statutory Charter;" "Government Regulation of Farmer Mac" and Note 3 to the Financial Statements. Although Farmer Mac is an institution of the Farm Credit System, it is not liable for any debt or obligation of any other institution of the Farm Credit System (a "System Institution"). Neither the Farm Credit System nor any other individual System Institution is liable for any debt or obligation of Farmer Mac. Farmer Mac employs 16 persons, all located at its principal executive offices at 919 18th Street, N.W., Suite 200, Washington, D.C. 20006. Its telephone number is (202) 872-7700. FARMER MAC GUARANTEE PROGRAM FARMER MAC I Prior to the enactment of the 1996 Act on February 10, 1996, Farmer Mac was not authorized to purchase or pool Qualified Loans (with the exception of Guaranteed Portions discussed under "_Farmer Mac II"). Rather, it functioned purely as a guarantor of securities backed by a pool of Qualified Loans and supported by a statutorily mandated 10% Subordinated Interest or Reserve (as discussed below). Without the authority to purchase or pool, Farmer Mac's involvement with the pooling process, particularly the Pooler's mix of loan products and rates, marketing activities and loan securitization decisions, was statutorily restricted. Under the new authorities of the 1996 Act and consistent with the intent of Congress in passing that legislation, Farmer Mac anticipates functioning in a manner similar to Fannie Mae and Freddie Mac, government-sponsored enterprises that maintain secondary markets for residential and multifamily loans. In that regard, Farmer Mac expects to purchase Qualified Loans for cash on either a servicing released or servicing retained basis and, when economically justifiable, to issue Farmer Mac I Securities backed thereby; to offer Originators the option of "swapping" Qualified Loans for Farmer Mac I Securities; and to make available to interested parties a facility through which Pools of Qualified Loans (or Farmer Mac I Securities) could be securitized for sale into the capital markets. The actual structure of each of these programs is currently under development; the timing of the availability of these programs is discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations _ 1995 Overview." Guarantee General. Under its statutory charter, Farmer Mac is authorized to guarantee the timely payment of interest and principal on Farmer Mac I Securities and, under the 1996 Act, to issue Farmer Mac I Securities. It does not guarantee the repayment of any Qualified Loan. Prior to the 1996 Act, Farmer Mac's authority to place its guarantee on securities was conditioned on the creation by the Pooler or the Originators, or both, of a reserve ("Reserve") for losses in, or a subordinated "first loss" interest ("Subordinated Interest") in, each pool of Qualified Loans (a "Pool") equal to at least 10% of the outstanding initial principal amount of the Qualified Loans in the Pool. The exact amount of the Reserve or Subordinated Interest was determined by Farmer Mac on a Pool-by-Pool basis. Farmer Mac could not be called upon to make a guarantee payment unless the amounts then available to be drawn pursuant to the Reserve or Subordinated Interest for distribution on the Farmer Mac I Securities had been so drawn. Under the new authorities in the 1996 Act, there are no statutorily required Reserves or Subordinated Interests; thus, Farmer Mac is now authorized (and expects) to guarantee 100% of the payment of interest and principal on Farmer Mac I Securities without a Reserve or Subordinated Interest. On a Pool-by-Pool basis, Farmer Mac may require some form of credit support for its guarantee of securities backed by certain Pools. In anticipation of issuing "first loss guarantees," Farmer Mac is in the process of developing a guarantee fee model to determine the appropriate guarantee fees for various risk profiles, including those of newly originated and existing Qualified Loans, the latter of which may, depending upon seasoning, performance data and Farmer Mac's assessment of the existence of other positive characteristics, result in a negotiated guarantee fee below the level for new originations. Management expects that the fee charged for issuing a first loss guarantee will exceed the fee for the issuance of a guarantee supported by a Subordinated Interest. In connection with the issuance of the Farmer Mac Securities Guide, the detailed policies and procedures manual developed to inform potential participants in the Farmer Mac I Program (prior to the 1996 Act) how to originate, pool and issue Farmer Mac I Securities, Farmer Mac prescribed the Underwriting, Appraisal and Diversification Standards for Qualified Loans, as well as eligibility criteria for Poolers and Originators. See "Underwriting and Appraisal Standards," "Pool Standards," "Poolers" and " Originators." Those standards are currently under review to determine what changes, if any, should be made in light of the new authorities in the 1996 Act. See "Management's Discussion and Analysis of Financial Condition and Results of Operations _ 1995 Overview." Linked Portfolio Transactions. In certain transactions in the Farmer Mac I Program prior to the enactment of the 1996 Act, a Farmer Mac subsidiary purchased Farmer Mac I Securities from Poolers. Farmer Mac issued Notes approximately equal to the principal amount of a corresponding series of Farmer Mac I Securities and provided the proceeds of the issuance of such Notes to its subsidiary in the amount necessary to fund the purchase of the Farmer Mac I Securities. Payments on the Farmer Mac I Securities were distributed to Farmer Mac by its subsidiary and used by Farmer Mac to make payments on the Notes. See "Financing." This program was known as the "Linked Portfolio Strategy" or "LPS." The Linked Portfolio Strategy has been offered to Poolers that have agreed to provide to Farmer Mac pool level or loan level "yield maintenance" compensation for the reinvestment risk associated with prepayments on the mortgage loans underlying the Farmer Mac I Securities purchased in LPS transactions ("Linked Portfolio Assets"), unless and except to the extent the Linked Portfolio Assets were purchased with the proceeds of callable debt. "Yield maintenance" payments represent amounts in addition to the principal prepaid on the mortgage loans underlying the Linked Portfolio Assets. These amounts, when reinvested together with the prepaid principal, could be expected to generate substantially the same cash flows that would have been generated by the Linked Portfolio Assets had the underlying mortgage loans not prepaid. While yield maintenance payments are recognized as income when the mortgage loans underlying the Linked Portfolio Assets prepay, in accordance with generally accepted accounting principles, such payments must be reinvested at or near U.S. Treasury rates for securities of corresponding maturity to generate the incremental future cash flows needed to satisfy future maturities of Notes issued in connection with the purchase of the Linked Portfolio Assets. Three LPS transactions have been consummated under the Farmer Mac I Program using the Linked Portfolio Strategy. See "Transactions Under Farmer Mac I Program." Management intends to reduce Farmer Mac's use of LPS transactions in the future because of the regulatory capital costs associated with those transactions, which are "on balance sheet" for accounting and regulatory purposes, and because of competitive price levels in the relevant markets and the broader authorities granted to Farmer Mac in the 1996 Act. Funding. Farmer Mac intends that the primary sources of funding for the payment of claims, if any, made under guarantees will be the fees Farmer Mac receives for providing its guarantees, together with the proceeds of Farmer Mac's initial public offering of its stock and any other equity offerings by Farmer Mac. A portion of the guarantee fees received is set aside by Farmer Mac as an allowance for losses arising from its guarantee activities. Among other things, this allowance must be exhausted before Farmer Mac may issue obligations to the Secretary of the Treasury against the $1.5 billion Farmer Mac is authorized to borrow from the Secretary of the Treasury pursuant to the Act. The Secretary of the Treasury must purchase obligations issued by Farmer Mac not later than 10 business days after receipt and acceptance by the Secretary of the Treasury of a certification by Farmer Mac in the form prescribed by the Act. See "Farmer Mac's Borrowing Authority from the U.S. Treasury" for a description of the material terms of such certification and obligations. Originators Farmer Mac has established minimum eligibility standards relating to the characteristics and underwriting and appraisal practices of Originators. See " Underwriting and Appraisal Standards." An Originator may be a System Institution, bank, insurance company, business and industrial development company, savings and loan association, association of agricultural producers, agricultural cooperative, commercial finance company, trust company, credit union, or other entity that originates and services agricultural or rural residential mortgage loans, and owns directly or indirectly the required minimum number of shares of Voting Common Stock. See " Ownership Requirements." Originators are also generally required to maintain a fidelity bond and either an errors and omissions, mortgage impairment or mortgagee interest policy providing coverage in the amount set forth in the Farmer Mac Securities Guide. Poolers Farmer Mac has developed standards of eligibility for certification of Poolers that are set forth in detail in the Securities Guide. In general, a Pooler other than Farmer Mac must: (i) Have capital of at least $2,000,000 or 0.20% of pooled loans, whichever is greater, in a form acceptable to Farmer Mac. Assets acceptable to Farmer Mac in determining capital are those having real economic value and liquidity which are reported on the applicant's audited financial statements in accordance with generally accepted accounting principles. A Pooler must also meet or exceed the capital standards established by its regulatory agency or agencies (if any). (ii) Adopt, as appropriate, agricultural or rural housing mortgage loan underwriting, appraisal and servicing standards that meet or exceed the standards set by Farmer Mac. (iii) Adopt appropriate minimum standards and procedures for agricultural or rural housing mortgage loan administration and disclosure to borrowers in conformity with uniform standards established by Farmer Mac concerning the terms and rights applicable to Qualified Loans. The minimum standards for loan administration are set forth in the Securities Guide and include standards for collecting principal and interest payments from the borrowers, collecting tax and insurance escrow payments if required by the terms of the mortgage, maintaining proper financial records, making proper and timely reports and remittances and resolving delinquencies through workouts, foreclosures or other measures. The Securities Guide requires annual loan statements to be sent to borrowers, including a summary of tax and insurance escrows, interest paid, remaining principal balances and other credits and charges to the borrowers' accounts. (iv) Adopt appropriate minimum requirements for Pools and related Farmer Mac I Securities and securities administration that meet or exceed the requirements adopted by Farmer Mac. (v) Maintain insurance coverage in the amount set forth in the Securities Guide. (vi) Own the requisite number of shares of Voting Common Stock. See " Ownership Requirements." (vii) Securitize a minimum volume of Qualified Loans annually in the Farmer Mac I Program in order to retain its Pooler certification. In addition, the Act sets forth the following minimum eligibility requirements for Poolers: a Pooler must: (i) be a System Institution or a corporation, association or trust organized under the laws of the United States or of any state; (ii) have, as one of its purposes, the sale or resale of Farmer Mac I Securities; (iii) demonstrate, by providing evidence of relevant experience to Farmer Mac that, directly or through approved contractors, it has managerial ability in underwriting, servicing and marketing agricultural or rural residential mortgage loans; and (iv) agree to allow officers or employees of Farmer Mac to have access to its records and facilities for the purpose of examining its operations. The certification of a Pooler is effective for a period set by Farmer Mac, not to exceed five years, and may be revoked after notice and an opportunity for a hearing by Farmer Mac if the Pooler no longer meets the requirements established by Farmer Mac. As of December 31, 1995, there were three Poolers certified by Farmer Mac. Two Poolers provided commitments to meet the 1995 minimum volume securitization threshold requirement established by Farmer Mac's Board for continued certification as a Pooler, but the third did not, and its Pooler status was accordingly revoked. As a result of the 1996 Act, all Originators will be eligible to sell Qualified Loans directly to Farmer Mac, but only Poolers will be eligible to act as or designate central servicers for the Pools they form. Over time, Farmer Mac pricing for the purchase of Qualified Loans may become more favorable than that offered by Poolers, and it is unlikely that Poolers will be able to offer pricing more favorable than that offered by Farmer Mac. Moreover, Farmer Mac intends to certify new Poolers only on the basis of its independent determination of a need for additional Poolers and its evaluation of the commitment of each new Pooler to the Farmer Mac program. Factors will include, without limitation, the business plans of the Pooler applicants and the size and nature of their initial transactions with Farmer Mac. Ownership Requirements General. There are minimum Voting Common Stock ownership requirements ("Ownership Requirements") for both Originators and Poolers, subject to certain exceptions. Class B Voting Common Stock is held by System Institutions; Class A Voting Common Stock is held by entities other than System Institutions. Class B holders must own at least 100 shares of Voting Common Stock to be considered as Originators. There are Ownership Requirements for each of four categories of Class A holders to be considered as Originators. "Small Institutions" must own at least 100 shares of Voting Common Stock. "Intermediate Institutions" must own at least 200 shares of Voting Common Stock. "Large Institutions" must own at least 500 shares of Voting Common Stock. "Major Institutions" must own at least 2,000 shares of Voting Common Stock. Small Institutions have not more than $50,000,000 in assets. Intermediate Institutions have more than $50,000,000, but not more than $100,000,000 in assets. Large Institutions have more than $100,000,000 and not more than $500,000,000 in assets. Major Institutions have more than $500,000,000 in assets. In determining the size of an institution for eligibility as an Originator and compliance with the Ownership Requirements, "related corporations" within the meaning of Section 318 of the Internal Revenue Code of 1986, as amended, will be treated as a single entity. Only a holder owning at least 5,000 shares of Voting Common Stock will be eligible to be a Pooler. Once a holder has purchased the requisite amount of Voting Common Stock, all "related corporations" (as so defined), will be deemed to have met the Ownership Requirements. The determination of an institution's size for eligibility as an Originator and compliance with the Ownership Requirements will be made at the time of its sale of any loan to a Pooler. The Act provides that no stockholder may own, directly or indirectly, more than thirty-three percent (33%) of the Class A Voting Common Stock. There are no restrictions on the maximum purchase or holding of Class B Voting Common Stock. In connection with the Board's agreement in principle to sell Class A Voting Common Stock to Zions, the Board eliminated a corporate policy, adopted in 1988 to facilitate a broad distribution of stock in Farmer Mac's initial public offering, that limited the amount of Class A Voting Common Stock that could be purchased or held by a stockholder to no more than 10 percent. Exceptions. The Ownership Requirements do not apply to those Originators or Poolers that cannot purchase shares of Voting Common Stock because of legal restrictions on their ownership of such shares, provided that such participants undertake to make the minimum purchases, if and when such restrictions are withdrawn. These Ownership Requirements also do not apply to eligible participants that Farmer Mac may determine by resolution need not comply with the requirements. Farmer Mac would consider waiving Ownership Requirements for an eligible participant whose purchase of Voting Common Stock is not barred by legal restrictions but is, as a practical matter, virtually impossible. For example, a state or local government agricultural or rural housing finance agency that is not legally barred from owning Voting Common Stock but which is unable to obtain funds to purchase such stock might be permitted to become a participant if it met all other eligibility standards and its participation were deemed to be in the best interests of Farmer Mac. No such waiver resolution has been requested by a potential participant. Farmer Mac reserves the right, in its sole discretion, to change the Ownership Requirements for Poolers, Originators that are Class B holders, or any of the four categories of Originators that are Class A holders in order to permit maximum participation in Farmer Mac's programs. No such changes to the Ownership Requirements have been made. Qualified Loans General. A Qualified Loan must be secured by a fee simple mortgage or a minimum 50-year leasehold mortgage, with status as a first lien on Agricultural Real Estate or Rural Housing (as defined below) that is located within the United States. A Qualified Loan must also be an obligation of: (i) a citizen or national of the United States or an alien lawfully admitted for permanent residence in the United States; or (ii) a private corporation or partnership whose members, stockholders or partners holding a majority interest in the corporation or partnership are individuals described in clause (i). A Qualified Loan must also be an obligation of a person, corporation or partnership having farming experience or other indicia of creditworthiness sufficient to indicate a reasonable likelihood of repayment of the loan according to its terms. A Qualified Loan may be an existing or newly originated mortgage loan that conforms to the requirements set forth in the Securities Guide. Agricultural Real Estate and Rural Housing. Qualified Loans are secured either by Agricultural Real Estate or by Rural Housing. Agricultural Real Estate is defined in the Securities Guide as a parcel or parcels of land, which may be improved by buildings or other structures permanently affixed to the parcel or parcels, that (a) are used for the production of one or more agricultural commodities; and (b) consist of a minimum of five acres or are used in producing minimum annual receipts of at least $5,000. In accordance with the Act, the principal amount of a Qualified Loan secured by Agricultural Real Estate may not exceed $3.3 million, which has been adjusted for inflation as of December 31, 1995, unless the Agricultural Real Estate consists of an aggregate of 1,000 acres or less. In light of its new status as a first loss guarantor, Farmer Mac has limited the maximum loan amount to $3.3 million, regardless of acreage. Rural Housing is defined in the Securities Guide as a one- to four-family, owner-occupied principal residence that is a moderately priced dwelling located in a community having a population of 2,500 or fewer inhabitants; the dwelling (excluding the land to which the dwelling is affixed) cannot have a purchase price or current appraised value of more than $133 thousand, which has been adjusted for inflation as of December 31, 1995, and must be located on land with reasonable legal access to a public road. In addition to the dwelling itself, a Rural Housing loan can be secured by land associated with the dwelling having an appraised value of no more than 50% of the total appraised value of the combined property. Underwriting and Appraisal Standards In connection with the promulgation of the original Farmer Mac Securities Guide, Farmer Mac established Underwriting and Appraisal Standards for Qualified Loans in an effort to reduce the risk of loss from defaults by borrowers and to provide guidance concerning management, administration and conduct of appraisals to all participants in the Farmer Mac I Program. As previously noted, those standards are currently under review to determine what changes, if any, should be made in light of the new authorities in the 1996 Act. The original Underwriting and Appraisal Standards were developed on the basis of industry norms for mortgage loans qualified to be sold in the secondary market, and were designed to assess the creditworthiness of the borrower as well as the value of the mortgaged properties relative to the amount of the Qualified Loan. In any transaction, Farmer Mac requires representations and warranties to ensure that the Qualified Loans conform to its standards and any other requirements it may impose from time to time. The current Underwriting Standards require, among other things, that the loan-to-value ratio for any Qualified Loan not exceed 70% (which Farmer Mac recently reduced from 75% in light of its new status as a first loss guarantor). In the case of Qualified Loans secured by Rural Housing, up to 85% of the appraised value of the property may be financed if the amount above 75% is covered by private mortgage insurance. In the case of newly originated Qualified Loans secured by Agricultural Real Estate, borrowers must also meet certain credit ratios, including: (i) a pro forma (after closing the new loan) debt-to-asset ratio of 50% or less; (ii) a pro forma cash flow debt service coverage ratio of not less than 1:1 on the subject property; (iii) a total debt service coverage ratio, computed on a pro forma basis, of not less than 1.25:1, including farm and non-farm income; and (iv) a ratio of current assets to current liabilities, computed on a pro forma basis, of not less than 1:1. In the case of existing loans, sustained loan performance is considered by Farmer Mac to be a reliable alternative indicator of a borrower's ability to pay the loan according to its terms. An existing loan generally will be eligible for purchase or inclusion in a Pool if it is at least five years old, has a loan-to-value ratio (based on an updated appraisal) of 60% or less, and there have been no payments more than 60 days past due during the three years prior to pooling and no material restructurings or modifications for credit reasons during the five years prior to pooling. The Underwriting Standards provide that Farmer Mac may, on a loan-by-loan basis, accept loans that do not conform to one or more of the Underwriting Standards when: (a) those loans exceed one or more of the Underwriting Standards to which they do conform to a degree that compensates for noncompliance with one or more other Standards; and (b) those loans are made to producers of particular agricultural commodities in a segment of agriculture in which such non-conformance and compensating strengths are typical of the financial condition of sound borrowers. The acceptance by Farmer Mac of loans that do not conform to one or more of the Underwriting Standards is not intended to provide a basis for waiving or lessening in any way the requirement that loans be of high quality in order to qualify for purchase or inclusion in a Pool. The entity that requests the acceptance by Farmer Mac of such loans bears the burden of convincing Farmer Mac that the loans meet both tests as set forth in clauses (a) and (b) above, and that the inclusion of such loans in a Pool will strengthen, not weaken, the overall performance of the Pool. For those reasons, Farmer Mac does not believe that inclusion of such loans in a particular Pool creates any additional risk to Farmer Mac as the guarantor of the related securities. The current Appraisal Standards for newly originated loans require, among other things, that the appraisal function be performed independently of the credit decision making process. The Appraisal Standards require the appraisal function to be conducted or administered by an individual meeting certain qualification criteria who (a) is not associated, except by the engagement for the appraisal, with the credit underwriters who make the loan decision, though both the appraiser and the credit underwriter may be directly or indirectly employed by a common employer; (b) receives no financial or professional benefit of any kind relative to the report content, valuation or credit decision made or based on the appraisal product; and (c) has no present or contemplated future direct or indirect interest in the appraised property. The Appraisal Standards also require uniform reporting of reliable and accurate estimates of the market value, market rent and net property income characteristics of the mortgaged property and the market forces relative thereto. Pool Standards General. In addition to reviewing the standards that each Qualified Loan must meet under its new authorities, Farmer Mac also is in the process of revising certain Pool standards. See "Management Discussion and Analysis of Financial Condition and Results of Operations _ 1995 Overview." Applicability of Borrower Rights Borrower rights which arise under state laws will continue to apply to those Qualified Loans originated in such states. A Pooler, including Farmer Mac, may not refuse to purchase and pool Qualified Loans originated in states that have established borrower rights laws merely due to the existence of such laws, though discounts or fees reasonably related to costs and expenses arising from such laws may be charged when purchasing such Qualified Loans for a Pool. Borrower rights applicable to System Institution borrowers under certain provisions of the Farm Credit Act of 1971 do not apply to Qualified Loans included in a Pool or purchased by Farmer Mac. Transactions Under Farmer Mac I Program To date, Farmer Mac has consummated seven guarantee transactions under the Farmer Mac I Program resulting in the guarantee by Farmer Mac of payments of principal and interest on approximately $748.1 million of Farmer Mac I Securities. Three of the transactions (representing approximately $461.0 million or 62% of the Farmer Mac I Securities issued) involved the Linked Portfolio Strategy; another was the first public offering of Farmer Mac Guaranteed Securities, and the other three transactions were private placements where both the guaranteed and unguaranteed securities were retained by the respective Poolers. As of December 31, 1995, approximately $359.1 million of Farmer Mac I Securities remained outstanding, including those from two transactions that closed in 1995. The final transaction under the "open window" pooling program initially developed and operated by Prudential Securities Incorporated ("Pru Securities") and Equitable Agri-Business, Inc. closed on May 12, 1995 and involved the issuance of approximately $37 million of Farmer Mac I Securities. Farmer Mac entered into a strategic alliance agreement with WFCB in November 1994, which was amended in January and December 1995 (collectively, the "Strategic Alliance Agreement"). Prior to announcing the opening of a program for new loan purchases, WFCB entered into a swap transaction with Farmer Mac in the first quarter of 1995 involving the exchange of $71.3 million aggregate principal amount of Agricultural Real Estate loans for Farmer Mac I Securities and unguaranteed subordinated securities. In accordance with the terms of the Strategic Alliance Agreement, WFCB received warrants to purchase 18,784 shares of Farmer Mac Class C Non-Voting Common Stock based on the amount by which the original aggregate principal balance of the loans in the swap transaction exceeded $50 million. The warrants are exercisable from time to time until February 28, 2005 at a purchase price per share equal to $7.67; the number of shares purchasable upon exercise of the warrants and the exercise price thereof are subject to adjustment pursuant to the anti-dilution provisions in the Strategic Alliance Agreement. No such warrants have yet been exercised. As part of the alliance, Farmer Mac and WFCB have jointly developed a pooling program. That program, operating as "The National AgriMortgage Funding" program and commonly referred to as "AgFunding," was publicly announced and commenced purchasing loans in the summer of 1995. Although no guarantee transactions were completed in 1995, an increasing network of participating lenders has been (and continues to be) assembled and WFCB has issued a commitment to deliver to Farmer Mac a minimum of $60 million of pooled loans for guarantee during the second quarter of 1996. The Strategic Alliance Agreement permits WFCB to sell obligations to Farmer Mac in an amount equal to the expenses of operating the AgFunding pooling program, but not to exceed $1.5 million in the aggregate. Those obligations are not recourse obligations of WFCB, but are repayable only from AgFunding's (and not WFCB's) profits. In connection with the sale of any such obligations, WFCB is required to invest in newly issued Farmer Mac Common Stock (up to $500,000 in Class B and the balance in Class C) in an amount equal to the principal amount of the obligations then being sold to Farmer Mac. Pursuant to the agreement, on January 23, 1996, WFCB: (i) purchased 93,100 shares of Farmer Mac Class B Voting Common Stock for a purchase price of $229,957 and 44,162 shares of Farmer Mac Class C Non-Voting Common Stock for a purchase price of $327,239; and (ii) sold to Farmer Mac its promissory note in the principal amount of $557,196. As a result of those purchases, WFCB currently owns approximately 25% of the outstanding Farmer Mac Class B Voting Common Stock and 8% of the outstanding Class C Non-Voting Common Stock. On June 20, 1995, Fannie Mae, AgFirst Farm Credit Bank ("AgFirst," created by a merger of the Farm Credit Bank of Columbia and the Farm Credit Bank of Baltimore) and Farmer Mac announced the opening of a joint pooling arrangement for Rural Housing loans pursuant to which AgFirst would pool eligible loans through the Farmer Mac I Program and the securities issued in connection therewith would be purchased by Fannie Mae under the terms of the arrangement. This announcement followed the completion of extensive development work in support of this program, the origin of which dates back to 1994, and, in management's opinion, represents a major achievement for Farmer Mac by associating its rural housing initiative with the well- established and more familiar Fannie Mae operation. No Rural Housing mortgage pool was formed by AgFirst during 1995, although marketing initiatives and lender approval efforts in support of the development of a pool have been (and continue to be) extensively pursued. In early 1996, AgFirst committed to Farmer Mac in writing its intention to securitize at least $100 million in Rural Housing loans during 1996 and agreed to pay Farmer Mac a monthly guarantee fee equivalent to the amount due on a $100 million pool for at least 12 months. FARMER MAC II General The Farmer Mac II Program is authorized under Sections 8.0(3) (12 U.S.C. 2279aa(3)) and 8.0(9) (12 U.S.C. 2279aa(9)) of the Act. Under those Sections: (i) the portion of a loan guaranteed (each such portion being referred to herein as a "Guaranteed Portion") by the Secretary of Agriculture pursuant to the Consolidated Farm and Rural Development Act (7 U.S.C. 1921 et seq.) (the "ConAct") is statutorily included in the definition of loans eligible as "Qualified Loans" for Farmer Mac secondary market programs; (ii) Guaranteed Portions are exempted from the underwriting, appraisal and repayment standards that all other Qualified Loans must meet and Pools of Guaranteed Portions are exempted from all diversification and internal credit enhancement (including Reserves and Subordinated Interests) required of Pools of Qualified Loans that are not Guaranteed Portions; and (iii) Farmer Mac is authorized to pool Guaranteed Portions and issue Farmer Mac II Securities backed by such Guaranteed Portions. United States Department of Agriculture Guaranteed Loan Programs The United States Department of Agriculture ("USDA"), acting through various agencies within USDA, currently administers the federal rural credit programs first developed in the mid-1930s. USDA makes direct loans and also issues guarantees for the Secretary of Agriculture on loans made by USDA-qualified loan originators (each, a "Lender") for various purposes. Under the Farmer Mac II Program, Farmer Mac purchases from Lenders and from others (collectively, "Sellers") the Guaranteed Portions of farm ownership loans, farm operating loans, business and industry loans and other loans that are guaranteed by the Secretary of Agriculture pursuant to the ConAct (collectively, the "Guaranteed Loans"). Guaranteed Portions, which represent up to 90% of the principal amount of Guaranteed Loans, are fully guaranteed as to principal and interest by USDA. USDA Guarantees. The maximum loss covered by a USDA guarantee can never exceed the lesser of: (i) 90% of principal and interest indebtedness on the Guaranteed Loan, any loan subsidy due, and 90% of principal and interest indebtedness on secured protective advances for protection and preservation of the related mortgaged property made with USDA authorization; and (ii) 90% of the principal advanced to or assumed by the borrower under the Guaranteed Loan and any interest due (including a loan subsidy). Each USDA guarantee is a full faith and credit obligation of the United States and is activated if a Lender fails to repurchase the Guaranteed Portion from the owner thereof (the "Owner") within thirty (30) days after written demand from the Owner when (a) the borrower under the Guaranteed Loan (the "Borrower") is in default not less than sixty (60) days in the payment of any principal or interest due on the Guaranteed Portion, or (b) the Lender has failed to remit to the Owner the payment made by the Borrower on the Guaranteed Portion or any related loan subsidy within thirty (30) days after the Lender's receipt thereof. If the Lender does not repurchase the Guaranteed Portion as provided above, USDA, as appropriate, is required to purchase the unpaid principal balance of the Guaranteed Portion together with accrued interest (including any loan subsidy) to the date of purchase, less the servicing fee, within thirty (30) days after written demand to USDA from the Owner. While the USDA guarantee will not cover the note interest to the Owner on Guaranteed Portions accruing after ninety (90) days from the date of the original demand letter of the Owner to the Lender requesting repurchase, procedures have been established to require prompt tendering of Guaranteed Portions. If in the opinion of the Lender (with the concurrence of USDA) or in the opinion of USDA, repurchase of the Guaranteed Portion is necessary to service adequately the related Guaranteed Loan, the Owner will sell the Guaranteed Portion to the Lender or USDA for an amount equal to the unpaid principal balance and accrued interest (including any loan subsidy) on such Guaranteed Portion less the Lender's servicing fee. Federal regulations prohibit the Lender from repurchasing Guaranteed Portions for arbitrage purposes. Lenders. All Guaranteed Loans must be originated and serviced by eligible Lenders. Under applicable regulations, all eligible Lenders must be subject to credit examination and supervision by either an agency of the United States or a state, must be in good standing with their licensing authorities and have met any licensing, loan making, loan servicing and other applicable requirements of the state in which the collateral for a Guaranteed Loan will be located. Each Lender must inform USDA, as applicable, that it qualifies as an eligible Lender and which agency or authority supervises it. Loan Servicing. The Lender on each Guaranteed Loan is required by regulation to retain the unguaranteed portion of the Guaranteed Loan (the "Unguaranteed Portion"), to service the entire underlying Guaranteed Loan, including the Guaranteed Portion, and to remain mortgagee and/or secured party of record. The Guaranteed Portion and the Unguaranteed Portion of the underlying Guaranteed Loan are to be secured by the same security with equal lien priority. The Guaranteed Portion cannot be paid later than or in any way be subordinated to the related Unguaranteed Portion. Farmer Mac II Guarantee In March 1995, Farmer Mac revised the Farmer Mac II Program such that it began purchasing Guaranteed Portions for retention in its portfolio under a master Farmer Mac II Guaranteed Security. Prior to that time, Farmer Mac purchased and pooled the Guaranteed Portions and arranged for the issuance of a series of Farmer Mac II Securities through a related trust. Farmer Mac guarantees only the timely payment of interest on and principal of the Farmer Mac II Securities. It does not guarantee the repayment of Guaranteed Portions. As discussed above, the Lenders are required under several regulations to retain the Unguaranteed Portions and service the loans. The Guaranteed Portions must meet the requirements of the appropriate USDA guaranteed loan program. Transactions Under Farmer Mac II Program As of December 31, 1995, Farmer Mac had issued and guaranteed approximately $184.8 million of Farmer Mac II Securities, of which approximately $143.3 million were outstanding as of December 31, 1995. Of the $143.3 million of Farmer Mac II Securities outstanding as of December 31, 1995, approximately $138.5 million are held by Farmer Mac. The remaining outstanding Farmer Mac II Securities are held by other investors. See Note 5 to the Financial Statements. FINANCING Guarantee Fees Farmer Mac intends to finance its operations primarily through guarantee fees it receives. The Comptroller General of the United States is required by the Act to review annually the actuarial soundness and reasonableness of such fees and to submit a report regarding the fees to Congress. Debt Issuances The Board has authorized the issuance of up to $1.5 billion of Notes, subject to periodic review of the adequacy of that level relative to Farmer Mac's borrowing requirements. Farmer Mac may issue Notes to obtain funds for the Farmer Mac I and Farmer Mac II Programs to cover transaction costs, guarantee payments and the costs of purchasing Guaranteed Portions, Qualified Loans and securities (including Farmer Mac Guaranteed Securities backed by Guaranteed Portions and/or Qualified Loans.) Farmer Mac also may issue Notes to fund business operations, including liquidity. The Notes may have maturities, bear interest and be redeemable prior to maturity, all as determined by Farmer Mac. Pending use of the proceeds of Notes issued for the above-described purposes, such proceeds will be invested in accordance with the policies established by the Board in the following investments: (1) securities and obligations issued or guaranteed by the United States Treasury ("Treasury Securities") or by agencies and instrumentalities of the United States government ("Agency Securities"), including those on which interest is payable at maturity ("zero coupon" or "strip" securities); (2) repurchase agreements for Treasury and Agency Securities; (3) commercial paper rated Al by Standard & Poor's Corporation and Pl by Moody's Investors Service, Inc.; (4) guaranteed investment contracts issued by banks or insurance companies that are rated AAA by Standard & Poor's Corporation and Moody's Investors Service, Inc.; (5) short-term borrowings between banks, known as "federal funds," provided that such banks have a rating of C or better from Thomson's BankWatch; (6) negotiable certificates of deposit and bankers acceptances issued by commercial banks and thrift institutions rated at least "B/C" by Thomson's BankWatch; and (7) corporate money market funds, such as the Merrill Lynch Institutional Fund and comparable funds, that invest in short-term diversified, high quality money market securities; and (8) asset-backed securities that are rated AAA. Any Notes issued will be repaid from the above-described investments, reimbursements of transaction costs, guarantee fees, payments on Farmer Mac Guaranteed Securities held in Farmer Mac's or its subsidiary's portfolio and from the proceeds of the sale of securities backed by Farmer Mac Guaranteed Securities or the issuance of additional Notes. See Note 9 to the Financial Statements for information on Farmer Mac's outstanding indebtedness. Profitability The profitability of Farmer Mac's operations will be determined largely by the volume of guarantee transactions in which it engages, the difference between income from guarantee fees and the amounts paid under its guarantees, the reinvestment of its guarantee fees, its net interest income, and its administrative expenses. Losses, if any, on guarantees will be affected by many general circumstances, including agricultural growing conditions, agricultural market conditions and the agricultural economy, and particular circumstances, including the quality of Farmer Mac credit underwriting, appraisals and loan servicing. Current volume has not generated income in excess of operating expenses and funding for Farmer Mac's operations has been derived from income from operations and expenditures of capital. Stockholders' equity has decreased as a result of the partial use of capital to fund operations. Farmer Mac intends to fund its future operations out of its income therefrom, primarily from the fees it charges for issuing its guarantee on Farmer Mac Guaranteed Securities; interest income on investments; and revenues it may derive from its authority to function as a Pooler. There can be no assurance, however, that the volume of future guarantee transactions will generate sufficient income to eliminate Farmer Mac's dependence on capital to fund operations. Under the 1996 Act, Farmer Mac is required to increase its capital to at least $25 million by February 1998 (or sooner if business volume increases substantially). The failure to raise capital to the required level would result in the suspension of Farmer Mac's ability to purchase new Qualified Loans or issue or guarantee new securities and could result in the appointment of a conservator or receiver or have other adverse effects on Farmer Mac's ability to continue to do business. There can be no assurance that business conditions will improve adequately to place Farmer Mac in a position to increase its capital within the required timeframe. For a discussion of Farmer Mac's capital requirements, see "Recent Legislative Revisions to Farmer Mac's Statutory Charter," "Government Regulation of Farmer Mac" and Note 3 to the Financial Statements. Significantly increased utilization of Farmer Mac's programs by its Class A and Class B stockholders will be necessary for Farmer Mac to become profitable and ultimately comply with the capital raising requirement and the higher capital requirements in the 1996 Act. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations _ Results of Operations." Future Stock Issuances Farmer Mac may issue its Voting Common Stock only to banks, other financial entities, insurance companies and System Institutions ("Holders") who are eligible to be Originators or Poolers. In addition to the outstanding Voting Common Stock and Class C Non-Voting Common Stock, Farmer Mac may issue non-voting common stock (which may include additional shares of Class C Non-Voting Common Stock) or preferred stock. The non-voting common stock may have, and the preferred stock would have, priority over the Voting Common Stock in payments of dividends and liquidation proceeds. Farmer Mac expects to consummate the Class A stock sale to Zions, which will generate $2.56 million in new capital, and anticipates one or more additional issuances of common or preferred stock, or both, within the next two years to increase capital as required by the new legislation. Any such issuances may be significantly dilutive of the interests of one or more classes of stock. See "Business _ General;" "Recent Legislative Revisions to Farmer Mac's Statutory Charter" and "Management's Discussion and Analysis of Financial Condition and Results of Operations _ 1995 Overview." Non-voting common stock, including any Class C Non-Voting Common Stock, and preferred stock, if and when issued, will be, and the Class C Non-Voting Common Stock currently outstanding is, freely transferable. The holders of any preferred stock would be paid in full at par value, plus all accrued dividends, before the holders of shares of Common Stock receive any payment upon liquidation, dissolution, or winding up of the business of Farmer Mac. Authority to Borrow from Treasury The Act authorizes Farmer Mac to borrow up to $1.5 billion from the Secretary of the Treasury, subject to certain conditions, to enable Farmer Mac to fulfill the obligations under its guarantee. Such debt would bear interest at a rate determined by the Secretary of the Treasury taking into consideration the average rate on outstanding marketable obligations of the United States as of the last day of the calendar month ending before the date of the purchase of such obligations and would be required to be repaid to the Treasury within a reasonable time. See "Farmer Mac's Borrowing Authority from the U.S. Treasury." Administrative Expenses Farmer Mac may impose charges or fees in reasonable amounts to recover the costs of administering its activities. Under the Act, Farmer Mac is authorized to require each Originator and Pooler to make nonrefundable capital contributions to meet the administrative expenses of Farmer Mac. Farmer Mac would issue shares of Voting Common Stock in exchange for such capital contributions. No such capital contributions have been required, and Farmer Mac has no present intention to exercise its statutory authority to require such contributions. FARMER MAC'S BORROWING AUTHORITY FROM THE U.S. TREASURY Farmer Mac may issue obligations to the Secretary of the Treasury in a cumulative amount not to exceed $1.5 billion. The proceeds of such obligations may be used solely for the purpose of fulfilling Farmer Mac's guarantee obligations under the Farmer Mac I and Farmer Mac II Programs. The Secretary of the Treasury is required to purchase such obligations of Farmer Mac if Farmer Mac certifies to the Secretary that: (i) a portion of the guarantee fees assessed by Farmer Mac (in an amount determined by Farmer Mac's Board to be necessary) has been set aside as a reserve against losses arising out of Farmer Mac's guarantee activities and such reserve has been exhausted; and (ii) the proceeds of the sale of such obligations are needed to fulfill Farmer Mac's obligations under its guarantee. The Secretary of the Treasury is required to purchase obligations issued by Farmer Mac in an amount determined by Farmer Mac to be sufficient to meet the guarantee liabilities of Farmer Mac not later than ten (10) business days after receipt and acceptance by the Secretary of the Farmer Mac certification described above. Such obligations would bear interest at a rate determined by the Secretary of the Treasury taking into consideration the average rate on outstanding marketable obligations of the United States as of the last day of the last calendar month ending before the date of the purchase of such obligation, and would be required to be repaid to the Treasury within a reasonable time. While the Act requires that any Farmer Mac obligations purchased by the Secretary must be repaid within a "reasonable time," the Act does not define or provide guidance as to the meaning of that phrase. Consequently, the terms of repayment would likely be determined through negotiations between Farmer Mac and the Treasury, and are unknown at this time. In the event that Farmer Mac were in default on the repayment of any such obligations, the Secretary of the Treasury would still be required to purchase additional obligations of Farmer Mac so long as the aggregate amount of all such obligations did not exceed $1.5 billion. The United States government does not guarantee payments due on Farmer Mac Guaranteed Securities, funds invested in the stock or Notes of Farmer Mac, the dividend payments on shares of such stock or the profitability of Farmer Mac. RECENT LEGISLATIVE REVISIONS TO FARMER MAC'S STATUTORY CHARTER GENERAL On February 10, 1996, President Clinton signed into law the Farm Credit System Reform Act of 1996, Pub. L. 104-105 (110 Stat. 162). Article I of the 1996 Act substantially amends the Farm Credit Act of 1971, in large part, by enacting into law certain changes to the Act recommended by Farmer Mac as part of the legislative initiative commenced in 1995. The Farmer Mac Board and management sought the changes on the belief that the development of the secondary market for agricultural and rural housing loans had been constrained by certain statutory restrictions on Farmer Mac's operations. Accordingly, the Board directed management to seek legislative amendments to Farmer Mac's statutory charter that would, among other things: (i) authorize Farmer Mac to act as a pooler of qualified loans; (ii) eliminate the mandatory subordinated interest or reserve that must be created in connection with Farmer Mac guarantee transactions; (iii) delay the implementation of higher minimum and critical capital requirements that were scheduled to take effect in December 1996; and (iv) delay the promulgation by FCA of any final risk-based capital regulation until no earlier than three years from the date of enactment of the 1996 Act. The 1996 Act enacted each of these changes, together with a number of other revisions, which are summarized below under "- Summary of Statutory Revisions." While the 1996 Act enacted the changes sought by Farmer Mac, there can be no assurance that the volume of any business generated under the revised charter will result in profitability for Farmer Mac or that Farmer Mac will be able to raise sufficient capital, either from retained earnings or from external financing sources, such as an offering of common or preferred stock, to comply with the new capital requirements of the 1996 Act as they become effective. SUMMARY OF STATUTORY REVISIONS Set forth below is a summary of the key provisions of the 1996 Act. Pooling Authority. The 1996 Act authorizes Farmer Mac to act as a Pooler of Qualified Loans under the Farmer Mac I Program, specifically providing Farmer Mac, or an affiliate, the authority and power to purchase Qualified Loans, borrow money to fund the purchase of Qualified Loans and issue Farmer Mac Guaranteed Securities representing interests in or obligations backed by such Qualified Loans. Elimination of Required Subordinated Interest or Reserve. Previous law required a minimum 10% cash reserve or subordinated interest to be maintained (or sold to investors) by the Originators or Poolers, or both, originating and assembling the loans in each Pool as a condition of Farmer Mac's guarantee of securities backed by those loans. The 1996 Act authorizes Farmer Mac to issue and guarantee securities backed by pools of Qualified Loans in the Farmer Mac I Program up to 100% of the principal amount of the Qualified Loans in each Pool. Capital. Extension of Capital Transition Period. The 1996 Act directs FCA, acting through the Director of the Office of Secondary Market Oversight (the "Director"), to promulgate risk- based capital regulations for Farmer Mac. The 1996 Act further provides that the public notice of proposed rulemaking to be issued by the Director in connection with establishing such risk-based capital regulations shall not be published for public comment until after the expiration of the three-year period commencing with the enactment of the 1996 Act (February 10, 1999). Prior to the enactment of the 1996 Act, the Act had provided that risk-based capital regulations for Farmer Mac were to have already been effective, although the Director had not promulgated any such regulations as of the date of enactment of the 1996 Act. Minimum Capitalization Level. Prior to the enactment of the 1996 Act, the minimum level of core capital required to be maintained by Farmer Mac was to increase in December 1996 from 0.45 percent to 2.50 percent of all assets owned ("on balance sheet") by Farmer Mac, while the amount required to be maintained against Guaranteed Securities not owned by Farmer Mac (or an Affiliate) and other "off-balance sheet obligations" of Farmer Mac was to remain at 0.45 percent. The 1996 Act imposes higher levels of core capital than the 2.50 percent in the Act, but provides a three-year transition period following the enactment of the 1996 Act before Farmer Mac is required to maintain the highest level of core capital. Under the 1996 Act, the highest minimum capital level for Farmer Mac will be an amount of core capital equal to the sum of 2.75 percent of Farmer Mac's aggregate on-balance sheet assets, as determined by generally accepted accounting principles, plus 0.75 percent of the aggregate off-balance sheet obligations of Farmer Mac, specifically including: (A) the unpaid principal balance of outstanding Guaranteed Securities; (B) instruments issued or guaranteed by Farmer Mac that are substantially equivalent to the securities described in category (A); and (C) other off-balance sheet obligations of Farmer Mac (the "highest minimum capital level"). During the transition period, Farmer Mac's minimum level of core capital will be: (A) prior to January 1, 1997, the sum of 0.45 percent of the aggregate off-balance sheet obligations of Farmer Mac, plus 0.45 percent of the sum of: (i) the aggregate on-balance sheet assets acquired under the Linked Portfolio Strategy; and (ii) the aggregate amount of Qualified Loans purchased and held by Farmer Mac (together, "designated assets"), plus 2.50 percent of on-balance sheet assets other than designated assets; (B) during the 1-year period ending December 31, 1997, the sum of 0.55 percent of the aggregate off-balance sheet obligations, plus 1.20 percent of designated assets, plus 2.55 percent of on-balance sheet assets other than designated assets; (C) during the 1-year period ending December 31, 1998, the sum of 0.65 percent of the aggregate off- balance sheet obligations, plus 1.95 percent of designated on-balance sheet assets, plus 2.65 percent of on-balance sheet assets other than designated assets; except that, if Farmer Mac's core capital is less than $25 million on January 1, 1998, the minimum capital level shall be the highest minimum capital level; and (D) on and after January 1, 1999, the highest minimum capital level. Critical Capital Level. The 1996 Act clarifies that Farmer Mac's critical capital level at any time shall be an amount of core capital equal to 50 percent of the total minimum capital requirement at that time. Recapitalization of Farmer Mac. The 1996 Act requires Farmer Mac to increase its total core capital to at least $25 million by February 10, 1998 or within 180 days after the end of the first calendar quarter that its aggregate on-balance sheet assets, plus outstanding off-balance sheet obligations, equal or exceed $2 billion, whichever occurs sooner. In raising capital, Farmer Mac is permitted to use its existing authorities to issue stock or any other recognized and legitimate means of raising core capital within its powers. If Farmer Mac fails to raise its core capital level within the applicable time frame provided for in the 1996 Act, it may not purchase new Qualified Loans or issue or guarantee new securities until its core capital level is increased to $25 million or more. The 1996 Act further provides that, during the three-year period following its enactment, Farmer Mac's on-balance sheet assets plus off-balance sheet obligations may not exceed $3 billion, unless and until its total core capital is at least $25 million. For a discussion of Farmer Mac's current capital condition, see "Government Regulation of Farmer Mac - Regulation - Capital Standards" and Note 3 to the Financial Statements. Liquidation of Farmer Mac. Voluntary Liquidation. The 1996 Act provides that Farmer Mac may voluntarily liquidate only with the consent of the FCA Board and in accordance with a plan of liquidation approved by the FCA Board. Involuntary Liquidation. Under the 1996 Act, the FCA Board may appoint a conservator or receiver for Farmer Mac under the circumstances specified in the general enforcement sections of the Farm Credit Act of 1971. With respect to the appointment of a conservator or receiver for Farmer Mac: (1) Farmer Mac shall be considered insolvent if it is unable to pay its debts as they fall due in the ordinary course of business; (2) a conservator may be appointed if Farmer Mac's authority to purchase Qualified Loans or to issue or guarantee securities is suspended by law (including, for example, if Farmer Mac failed to raise its core capital to the levels required under the 1996 Act within the applicable time frame provided for therein); and 3) a receiver may be appointed if: (A) Farmer Mac's authority to purchase Qualified Loans or to issue or guarantee securities is suspended or Farmer Mac is classified under certain enforcement levels, and the alternative actions available under the Farm Credit Act of 1971 are not satisfactory; and (B) the FCA determines that the appointment of a conservator would not be appropriate. Conservator or Receiver. The 1996 Act contains specific provisions with respect to the eligibility, compensation and functions of a conservator or receiver for Farmer Mac. A conservator or receiver may be: (A) the FCA or any government entity or employee, including the Farm Credit System Insurance Corporation; or (B) any person who has no claim against or financial interest in Farmer Mac, or any other basis for a conflict of interest, and has the financial and management expertise to direct the affairs of and to liquidate Farmer Mac if necessary. The conservator or receiver and employees thereof are entitled to compensation in amounts no greater than the compensation provided to federal employees for similar services, except that the FCA may pay higher rates, not in excess of the prevailing rates in the private sector, if it determines that is necessary to retain competent personnel. The conservator or receiver: (A) is authorized to contract with any government entity for the use of personnel, services and facilities on terms mutually agreed to between the parties and each such government entity is authorized to provide such; (B) may borrow such funds, from such sources, at such rates as the conservator or receiver determines to be necessary to meet the expenses or the liquidity needs of the conservatorship or receivership, if the conservator or receiver determines that it is likely there will be insufficient funds to pay the administrative expenses of the conservatorship or receivership or to fund maturing obligations thereof; (C) shall pay valid claims for the expenses of the conservatorship or receivership, including compensation and any loan made by the conservator or receiver, before paying any other claim against Farmer Mac, and may secure such claims as a first priority lien against such property of Farmer Mac as the receiver determines; (D) if not a federal entity or federal employee, shall not be personally liable for damages in tort or otherwise for acts or omissions in connection with carrying out the receivership except for gross negligence or intentional tortuous or criminal conduct; and (E) may be indemnified on such terms as the FCA considers appropriate. Within 30 days after the appointment of a conservator or receiver, Farmer Mac may seek an order in the U.S. District Court for the District of Columbia to require that the FCA remove the conservator or receiver, and, based on the merits of the case, the court shall either dismiss the action or direct the FCA to remove the conservator or receiver. On the commencement of such action, all other judicial proceedings to which Farmer Mac is a party shall be stayed pending the outcome of such action. The powers of the conservator or receiver shall be provided for in regulations to be issued by the FCA and those powers shall be comparable to the powers available to a conservator or receiver appointed for any other System Institution under the Farm Credit Act of 1971. No agreement which tends to diminish or defeat the right, title, or interest of the conservator or receiver in any assets acquired from Farmer Mac shall be valid against the conservator or receiver unless the agreement: (1) is in writing; (2) is executed by Farmer Mac and any person claiming an adverse interest under the agreement, contemporaneously with the acquisition of the asset by Farmer Mac; (3) is approved by the Farmer Mac Board, or an appropriate Board committee, and is recorded in the minutes of such; and (4) has been, continuously, from the time of its execution, an official record of Farmer Mac. Upon a determination by the receiver that the assets of Farmer Mac in receivership are inadequate to pay all valid claims against Farmer Mac, the receiver shall submit to the Secretary of the Treasury and to the House and Senate Agriculture Committees a report of the financial condition of the receivership. Farmer Mac's charter may be canceled and its authority to do business under the Act will terminate on such date as determined by the FCA Board, following the placement of Farmer Mac in receivership, but not later than the termination of the receivership and discharge of the receiver. The Office of Secondary Market Oversight within the FCA will be abolished and its authorities canceled 30 days after Farmer Mac's charter has been canceled by the FCA, but not later than the termination of the receivership and discharge of the receiver. Miscellaneous Amendments. The 1996 Act contains other provisions intended to improve the efficiency of Farmer Mac's operations or clarify other sections of the Act to conform them to the major amendments included in the 1996 Act. The more important provisions are summarized below. Rural Housing. The 1996 Act clarifies that the word "dwelling," as it is used in reference to the definition of "rural housing," refers only to the residential structure and not to the land on which it is affixed. Federal Reserve Banks. Federal Reserve Banks are now required to act as depositories and fiscal agents for Farmer Mac, whereas under previous law the Federal Reserve Banks were only authorized to do so. In addition, Farmer Mac is granted access to the Federal Reserve's book-entry system for purposes of issuing, settling and trading its securities. Previous law authorized, but did not require, the Department of the Treasury to permit book-entry access to Farmer Mac's securities. Recourse Loans. Previous law prohibited the inclusion of any loan with recourse to the originator in a Pool with respect to which Farmer Mac had issued a guarantee. The 1996 Act repealed this prohibition. Diversified Pools. The 1996 Act removed the requirement that each Pool of Qualified Loans be diverse both geographically and with respect to commodities produced. This change authorizes Farmer Mac to purchase individual Qualified Loans or small groups of Qualified Loans, either in its new capacity as a Pooler or as part of a transaction involving the swap of Guaranteed Securities for a portfolio of Qualified Loans, even if such purchases or transactions would not meet the pool diversification requirements contained in previous law. Preemption of State Usury Laws. The 1996 Act clarifies that State law limitations on prepayment penalties (either fixed or declining), yield maintenance premiums, or make-whole payment provisions charged, taken or received by an Originator or Pooler in connection with the full or partial prepayment of a loan are preempted by the Act. The 1996 Act also provides that any State usury law preempted by the Act shall not apply to an agricultural loan made in accordance with the Act for sale to Farmer Mac or another Pooler for inclusion in a Pool for which Farmer Mac has provided or has committed to provide a guarantee, so long as the loan is actually sold to Farmer Mac or included in such a Pool within 180 days after the date the loan was made. Borrower Stock. The 1996 Act provides that the requirements applicable to Farm Credit System borrowers to purchase voting stock or participation certificates in the System Institution lender when a loan is made will not apply if, at the time the loan is made, it is designated for sale into the secondary market; and, in the case of a loan made before the date of enactment of the 1996 Act that is sold into the secondary market, all outstanding voting stock or participation certificates held by the borrower on the loan will be retired. Borrowers Rights. The 1996 Act provides that borrowers' rights otherwise applicable to loans made by System Institutions shall not apply to a loan made by a System Institution lender on or after the date of enactment of the 1996 Act that is designated at the time it is made for sale into the secondary market. It further provides that, if a designated System Institution loan is not sold into the secondary market within 180 days after the date of the designation, all borrowers' rights provided for in the Farm Credit Act of 1971 shall become effective with respect to the loan, except that if such loan is thereafter sold into the secondary market the borrowers' rights shall not apply to the loan beginning on the date of the sale. GOVERNMENT REGULATION OF FARMER MAC GENERAL Public offerings of Farmer Mac Guaranteed Securities must be registered with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Act of 1933, as amended (the "1933 Act"). Farmer Mac is subject to the periodic reporting requirements of the Securities Exchange Act of 1934 (the "1934 Act") and, accordingly, files reports with the Commission pursuant thereto. REGULATION Office of Secondary Market Oversight. As an institution of the Farm Credit System, Farmer Mac is subject to the regulatory authority of the FCA. Through the Office of Secondary Market Oversight ("OSMO"), the FCA has general regulatory and enforcement authority over Farmer Mac, including the authority to promulgate rules and regulations governing the activities of Farmer Mac, and to apply its general enforcement powers to Farmer Mac and its activities. The Director of OSMO, who was selected by and reports to the FCA Board, is responsible for the examination of Farmer Mac and the general supervision of the safe and sound performance by Farmer Mac of the powers and duties vested in it by the Act. The Act requires an annual examination of the financial transactions of Farmer Mac and authorizes the FCA to assess Farmer Mac for the cost of its regulatory activities, including the cost of any examination. Farmer Mac is required to file quarterly reports of condition with the FCA, as well as copies of all documents filed with the Commission under the 1933 and 1934 Acts. Department of the Treasury. In connection with the passage of the 1996 Act, the Chairmen of the House and Senate Agriculture Committees requested the FCA, in a cooperative effort with the Department of the Treasury, to "monitor and review the operations and financial condition of Farmer Mac and to report in writing to the appropriate subcommittees of the House Agriculture Committee, the House Banking and Financial Services Committee and the Senate Agriculture, Nutrition and Forestry Committee at six-month intervals during the capital deferral period and beyond, if necessary." Comptroller General. The Act requires the Comptroller General of the United States to perform an annual review of the actuarial soundness and reasonableness of the guarantee fees established by Farmer Mac. Capital Standards. The Act, as amended by the 1996 Act, establishes three capital standards for Farmer Mac, as described in "Recent Legislative Revisions to Farmer Mac's Statutory Charter _ Summary of Statutory Revisions _ Capital." Farmer Mac's current minimum and critical capital requirements are based upon a percentage of on-balance sheet assets and a lower percentage of outstanding Farmer Mac Guaranteed Securities and assets acquired pursuant to the Linked Portfolio Strategy; each of these percentages will increase as the transition period is phased in. See Note 3 to the Financial Statements for a more specific discussion of the capital standards and Farmer Mac's current regulatory minimum capital position. At December 31, 1995, Farmer Mac's minimum and critical capital requirements were $4.7 million and $2.5 million, respectively, and its actual capital level was $11.7 million. If the fully-phased in (highest) minimum capital level had been in effect at December 31, 1995, Farmer Mac's actual capital would have been $3.1 million less than the requirement. The 1996 Act also provides that, prior to the promulgation of a risk-based capital regulation for Farmer Mac (which, as previously noted, cannot occur until after February 10, 1999), Farmer Mac shall be classified as within "level I" (the highest compliance level) of four enforcement levels so long as its capital equals or exceeds the minimum capital level provided for in the 1996 Act. See "Recent Legislative Revisions to Farmer Mac's Statutory Charter - Summary of Statutory Revisions - - Capital." Failure to comply with the minimum capital level in the 1996 Act would result in Farmer Mac being classified as within level III (below the minimum but above the critical capital level) or level IV (below the critical capital level). (Level II is not applicable prior to the promulgation of the risk-based capital regulation since it contemplates the failure to comply with the risk-based capital standard.) In the event that Farmer Mac is classifed as within level III or IV, the Act requires the Director to take a number of mandatory supervisory measures and provides the Director with discretionary authority to take various optional supervisory measures depending on the level in which Farmer Mac is classified. The mandatory measures applicable to level III include: requiring Farmer Mac to submit (and comply with) a capital restoration plan; prohibiting the payment of dividends if such payment would result in Farmer Mac being reclassified as within level IV and requiring the pre-approval of any dividend payment even if such payment would not result in reclassification as within level IV; and reclassifying Farmer Mac as within a lower level if it does not submit a capital restoration plan that is approved by the Director or the Director determines that Farmer Mac has failed to make, in good faith, reasonable efforts to comply with such a plan and fulfill the schedule for the plan approved by the Director. If Farmer Mac were classified as within level III, then, in addition to the foregoing mandatory supervisory measures, the Director could take any of the following discretionary supervisory measures: imposing limits on any increase in, or ordering the reduction of, any obligations of Farmer Mac, including off-balance sheet obligations; limiting or prohibiting asset growth or requiring the reduction of assets; requiring the acquisition of new capital in an amount sufficient to provide for reclassification as within a higher level; terminating, reducing or modifying any activity the Director determines creates excessive risk to Farmer Mac; or appointing a conservator or a receiver for Farmer Mac. The Act does not specify any supervisory measures, either mandatory or discretionary, to be taken by the Director in the event Farmer Mac were classified as within level IV. The Director has the discretionary authority to reclassify Farmer Mac to a level that is one level below its then current level (i.e., from level III to level IV) if the Director determines that Farmer Mac is engaging in any action not approved by the Director that could result in a rapid depletion of core capital or if the value of property subject to mortgages backing Farmer Mac-guaranteed securities has decreased significantly. ITEM 2. PROPERTIES On September 30, 1991, Farmer Mac entered into a long-term lease for its principal offices, which are located at 919 18th Street, N.W., Suite 200, Washington, D.C. 20006. The lease, which is for a term of ten years, covers approximately 7,500 square feet of office space. Farmer Mac has the option to terminate the lease at the end of the fifth lease year (January 1997) upon the payment of a termination fee of $400,000 (an amount representing approximately 20 months' rent). See Note 12 to the Financial Statements attached hereto. Farmer Mac's offices are suitable and adequate for its present needs and the rent paid by Farmer Mac under the lease is consistent with current market rates for comparable office space in the District of Columbia. Because full implementation of the new authorities granted to Farmer Mac in the 1996 Act may result in the expansion of Farmer Mac's staff and equipment and perhaps the need for larger facilities, Farmer Mac is considering alternatives to its current lease arrangement. ITEM 3. LEGAL PROCEEDINGS Farmer Mac is not a party to any pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Farmer Mac has three classes of common stock outstanding. Class A Voting Common Stock may be held only by banks, insurance companies and other financial institutions or similar entities that are not institutions of the Farm Credit System. Class B Voting Common Stock may be held only by institutions of the Farm Credit System. There are no ownership restrictions on the Class C Non-Voting Common Stock. The common stock was issued in Units and, until November 1993, traded as such. A Class A Unit consisted of one share of Class A Voting Common Stock and one share of Class C Non-Voting Common Stock. A Class B Unit consisted of one share of Class B Voting Common Stock and one share of Class C Non-Voting Common Stock. In accordance with the terms of the initial public offering, the Class C Non-Voting Common Stock separated from the Class A and Class B Units in November 1993. The Class A Units were quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") under the symbol "FAMCU" from their initial issuance and sale in December 1988 until November 23, 1993. The Class B Units were quoted on NASDAQ under the symbol "FAMCL" until September 1991; as a result of the limited market for Class B Voting Common Stock and the infrequency of trades therein, the Class B Units were delisted from NASDAQ in September 1991. Since then, Farmer Mac has been unaware of any publicly available quotations or prices with respect to the Class B Units or the Class B Voting Common Stock. The Class A and Class C Common Stock trade on the NASDAQ Small Cap Markets tier of the NASDAQ Stock Markets under the symbols "FAMCA" and "FAMCK," respectively. As of March 25, 1996, the high and low bid quotations as reported by NASDAQ for Class A Common Stock were $5.00 and the high and low bid quotations for Class C Common Stock were both $7.00. The information set forth below with respect to the Class A and Class C Common Stock represents the high and low bid quotations as reported by NASDAQ for the periods indicated. These prices are inter-dealer prices without adjustment for retail mark-ups, mark-downs, or commissions and may not represent actual transactions.
Class A Common Stock High Bid Low Bid ($ per share) 1994 First Quarter $4.75 $4.50 Second Quarter 5.00 4.75 Third Quarter 5.25 5.00 Fourth Quarter 5.25 4.50 1995 First Quarter $4.50 $4.50 Second Quarter 4.50 4.25 Third Quarter 4.25 3.75 Fourth Quarter 3.75 3.75 1996 First Quarter (through March 25) $5.00 $3.75 Class C Common Stock High Bid Low Bid ($ per share) 1994 First Quarter $4.75 $4.50 Second Quarter 5.00 4.75 Third Quarter 5.00 5.00 Fourth Quarter 5.00 4.50 1995 First Quarter $4.50 $4.50 Second Quarter 4.50 4.25 Third Quarter 4.25 4.25 Fourth Quarter 4.25 4.25 1996 First Quarter (through March 25) $7.00 $4.25
It is estimated that there were approximately 1,633 registered owners of the Class A Voting Common Stock outstanding, approximately 102 registered owners of the Class B Voting Common Stock outstanding and approximately 1,656 registered owners of the Class C Non-Voting Common Stock outstanding as of March 25, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for information on Farmer Mac's dividend policy. ITEM 6. SELECTED FINANCIAL DATA (dollars in thousands) [CAPTION] December 31, Summary of Financial 1995 1994 1993 1992 1991 Condition: (consolidated) (consolidated) (consolidated) (consolidated (consolidated) Investment Securities $ 63,281 $ 9,437 $ 5,503 $ 40,649 $12,486 Farmer Mac I and II Securities 417,169 367,994 398,380 444,226 2,276 Total assets 512,464 477,238 525,254 514,257 66,169 Debentures, notes and bonds, net: Due within one year 207,422 168,307 172,350 87,454 49,924 Due after one year 284,084 288,209 330,190 403,086 Total liabilities 500,752 465,019 511,703 500,030 50,595 Stockholders' equity 11,712 12,219 13,551 14,227 15,574 Selected Financial Ratios: Return on average assets (0.13%) (0.27%) (0.14%) (0.44%) (5.04%) Return on equity (5.41%) (10.34%) (4.99%) (9.46%) (16.44%) Average equity to assets 2.42% 2.57% 2.71% 4.63% 30.64%
Summary of Operations Operations: Year Ended December 31, 1995 1994 1993 1992 1991 (consolidated) (consolidated) (consolidated) (consolidated) (consolidated) (dollars in thousands, except per share amounts) Interest income $ 36,424 $ 31,712 $ 32,642 $ 20,154 $ 2,886 Interest expense 34,709 30,303 30,848 18,413 1,854 Net interest income 1,715 1,409 1,794 1,741 1,032 Guarantee fee income 1,166 1,050 1,203 932 28 Other expenses 3,699 3,968 3,976 4,151 3,828 Loss before extraordinary item (647) (1,332) (803) (1,347) (2,750) Extraordinary gain - - 127 - - Net loss (647) (1,332) (676) (1,347) (2,750) Loss per share before extraordinary item - - (0.34) - - Net loss per share (0.28) (0.57) (0.28) (0.58) (1.18)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial information at and for the twelve months ended December 31, 1995 and 1994 is consolidated to include the accounts of Farmer Mac and its two wholly owned subsidiaries, Farmer Mac Mortgage Securities Corporation ("FMMSC") and Farmer Mac Acceptance Corporation ("FMAC"). All material intercompany transactions have been eliminated in consolidation. 1995 OVERVIEW 1995 was an important year for Farmer Mac. Farmer Mac undertook a major legislative initiative that culminated in the passage by Congress in early 1996 of significant revisions to its statutory charter. Consequently, 1995 was the last year that Farmer Mac would be required to do business under, and that its financial performance would be evaluated on the basis of, the provisions of a charter that Farmer Mac's Board and management had concluded was seriously constraining the development of the secondary market for agricultural real estate and rural housing loans. The new legislation authorizes Farmer Mac to perform the functions of a Pooler in the secondary market, eliminates the requirement to create a minimum 10% subordinated interest or reserve requirement in connection with Farmer Mac guarantee transactions, and extends from December 1996 to December 1999 the statutory deadline for the full imposition of certain regulatory capital requirements applicable to Farmer Mac. The legislation requires Farmer Mac to increase its level of core capital to at least $25 million by February 1998 (or sooner if business volume increases substantially) or face suspension of its authority to conduct any new business. The legislation also made various statutory changes intended to further streamline program operations and clarify other ambiguous statutory provisions. For a detailed discussion of the changes to Farmer Mac's charter as a result of the 1996 Act, see "Recent Legislative Revisions to Farmer Mac's Statutory Charter." In addition to the passage of the legislation, there were other significant occurrences in 1995. In May, C. Eugene Branstool, President Clinton's nominee to be chairman of the Farmer Mac Board, was officially appointed to that position. He replaced John R. Dahl, who served in that post from 1988 until mid-1994. Other developments during the year included: the guarantee of two loan pools under the Farmer Mac I Program; the development of two active Farmer Mac I pooling programs for newly originated Qualified Loans, one for Agricultural Real Estate loans under the Strategic Alliance Agreement with WFCB and one for Rural Housing loans operated by AgFirst Farm Credit Bank; and the significant expansion of business volume through the Farmer Mac II Program. In addition, Farmer Mac consolidated its existing operations by decertifying poolers that failed to comply with minimum business volume guidelines established by the Board for the 1994 fiscal year, and focused its limited resources on supporting pooling programs operated by the remaining poolers and the Farmer Mac II Program. Financially, Farmer Mac reported a loss from operations during 1995 of $647 thousand, down significantly from the $1.3 million for 1994. Farmer Mac is in a transition period as a result of the favorable outcome of its legislative initiative. In particular, Farmer Mac is no longer subject to former charter provisions that had precluded it from dealing directly with Originators, and now has the authority, similar to that possessed by Fannie Mae and Freddie Mac, to function as an active Pooler. Farmer Mac is currently evaluating the manner in which it intends to exercise its new authorities under the 1996 Act by conducting analyses of the risks associated with such enhanced powers. One principal focus is upon its new status as a "first loss guarantor," since the legislation eliminated the former mandatory 10% subordinated interest or reserve requirement that was intended to absorb losses before the guarantee could be invoked. Another principal focus is upon the development of appropriate operating policies and procedures intended to assure the safe and sound operation of the program under the new authorities. The Board determined that implementation of those authorities should occur by following a two-phased approach. Phase I of the implementation process involves the development of a guarantee fee model. The work on this project began in late February and is scheduled to be completed by early April. The guarantee fee model developed by Farmer Mac will be evaluated and tested by an independent consultant before it is accepted for purposes of establishing guarantee fee levels for the program. Upon completion of Phase I, it is anticipated that Farmer Mac will proceed with the securitization of Pools presented by either of its existing Poolers and consider swap and securitization transactions involving seasoned loan portfolios that meet existing program requirements for loan performance and diversification. These efforts are also intended to support the efforts of the existing Poolers, AgFunding for Agricultural Real Estate loans and AgFirst for Rural Housing loans, to build loan volume through their pooling programs. Under Phase II of the implementation process, Farmer Mac plans to evaluate all aspects of its current program and develop new policies and procedures considered necessary for the full implementation of its newly authorized direct pooling program. This work presently is scheduled to be completed prior to the beginning of the fall mortgage lending season for Agricultural Real Estate loans. The major elements of this evaluation will include: review and refinement of credit scoring and underwriting and appraisal standards; analysis of diversification requirements and development of appropriate guidelines; and evaluation of outsourcing versus internalizing the performance of certain functions under the new structure, such as due diligence reviews, pipeline management and warehousing of loans during pool development, loan servicing, quality control, securitization, and marketing. Having achieved the legislative initiative undertaken in early 1995, Farmer Mac now faces the difficult challenge of implementing its new legislative authorities in the very competitive market for agricultural and rural home mortgages. Although those authorities give Farmer Mac the statutory flexibility to devise programs that operate under similar guidelines to those of Fannie Mae and Freddie Mac, this flexibility by no means ensures success of Farmer Mac's programs. A number of factors have constrained participation in Farmer Mac's programs to date, and caused its core business activities to be unprofitable. Those factors have included: the excess liquidity of many agricultural lenders; the attractiveness of loans (otherwise qualified under the Farmer Mac programs) as investments for their originators; the disinclination of many lenders to offer intermediate-term adjustable rate and long-term fixed rate agricultural real estate loans, as a result of the higher profitability associated with short-term lending; the lack of borrower demand for intermediate and long-term loans due to the lower interest rates generally associated with shorter term loans; various restrictive provisions in Farmer Mac's charter; and the unfavorable regulatory capital treatment afforded banks and System Institutions holding subordinated securities created in Farmer Mac transactions. Even though the 1996 Act has removed those charter provisions that Farmer Mac had concluded were constraining the operation of the secondary market, most of the other enumerated factors, over which Farmer Mac has little, if any, control, may continue to exist as Farmer Mac seeks to implement its new authorities. If those factors persist, they will affect Farmer Mac's ability to implement programs that generate the volume of loans necessary to achieve profitability and ultimately comply with the requirement to raise capital to higher levels by February 1998. Several positive developments have come from the legislation, including lower interest rates on loans offered in the pooling program operated by WFCB as a result of the elimination of the subordination requirement and corresponding increases in that program's loan volume, as well as an offer to purchase a substantial portion of Farmer Mac's Voting Common Stock. Despite these positive developments, and Farmer Mac's ongoing efforts as described above to prepare for the implementation of its new authorities under the 1996 Act, Farmer Mac's ability to operate profitably in the future remains uncertain. Turning to financial results for 1995, Farmer Mac reported a net loss of $647 thousand, which is a significant reduction from the net loss reported for the same period in 1994. This reduction in loss was primarily the result of increased net interest income and guarantee fee income and reduced administrative expenses. Farmer Mac's administrative expenses will increase as it begins to implement the new authorities in the 1996 Act. FINANCIAL REVIEW Balance Sheet - General. During 1995, Farmer Mac's assets grew by $35.3 million, from $477.2 million at December 31, 1994 to $512.5 million at December 31, 1995. The growth in assets primarily resulted from a growth in Farmer Mac I and II Securities and in investment securities. During 1995, Farmer Mac issued $56.2 million in securities under the Farmer Mac II Program, $55.9 million of which were purchased by Farmer Mac for investment purposes. Under the Farmer Mac I Program, Farmer Mac issued $101.0 million in Farmer Mac I Securities, $36.8 million of which were acquired for investment purposes. Farmer Mac I and II Securities. At December 31, 1995, Farmer Mac held $417.2 million of Farmer Mac I and II Securities, $278.6 million of which were in Farmer Mac I Securities and $138.5 million in Farmer Mac II Securities. At December 31, 1994, Farmer Mac held $368.0 million of Farmer Mac I and II Securities, $282.5 million of which were in Farmer Mac I Securities and $85.5 million of which were in Farmer Mac II Securities. The following table summarizes the amortized cost, fair value and weighted average yield of Farmer Mac I and II Securities by remaining contractual maturity as of December 31, 1995.
Maturity After 1 After 5 year years 10 through After Within through 10 10 1 year 5 years years years Total (dollars in thousands) Farmer Mac I Securities - Amortized cost _ $239,927 _ $38,698 $278,62 - Fair value _ 246,054 _ 40,819 286,873 - Yield _ 7.00% _ 7.42% 7.06% Farmer Mac II Securities - Amortized cost $230 16,937 39,854 81,523 138,544 - Fair value 231 16,878 40,210 82,848 140,167 - Yield 7.27% 6.62% 6.94% 6.94% 6.90% Total - Amortized cost $230 256,864 39,854 120,221 417,169 - Fair value 231 262,932 40,210 123,667 427,040 - Yield 7.27% 6.97% 6.94% 7.10% 7.01%
Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Investment Securities. The $53.8 million growth in investment securities from December 31, 1994 to December 31, 1995 resulted from management's decision to hold a portfolio of available-for-sale investment securities, comprised of agency mortgage-backed securities with floating rates. This portfolio is primarily funded with debt of comparable maturities. At December 31, 1995 and 1994, Farmer Mac's investment securities totaled $63.3 million and $9.4 million, respectively. The following table sets forth the amortized cost of Farmer Mac's investment securities by type and classification as of December 31, 1995 and 1994.
Amortized Cost December 31, December 31, 1995 1994 (in thousands) Held-to-maturity U.S. agency debt securities $2,000 $4,000 Mortgage-backed securities 5,419 5,437 Total $7,419 $9,437 Available-for-sale Mortgage-backed securities $55,722 _
The amortized cost, fair values, and weighted average interest rates of investment securities at December 31, 1995, by contractual maturity, were as set forth in the table below.
December 31, 1995 Amortized Fair Weighted Cost Value Average Rate (dollars in thousands) Held-to-maturity securities Due after 1 year through 5 years $ 2,000 $ 1,999 5.48% Due after 10 years 5,419 5,428 7.00% Total $ 7,419 $ 7,427 6.59% Available-for-sale securities Due after 10 years $55,722 $55,862 6.41%
Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Other investments. Other investments are primarily comprised of cash invested in a Guaranteed Investment Contract and Guaranteed Portions purchased under the Farmer Mac II Program. At December 31, 1995 and 1994, other investments totaled $2.3 million and $10.7 million, respectively. The weighted average rate of the other investments at December 31, 1995 was 6.15% and the weighted average remaining maturity was 3.3 years. Debentures, notes and bonds, net. At December 31, 1995, Farmer Mac had $491.5 million of Discount Notes and Medium-Term Notes (net of unamortized debt issuance costs, discounts and premiums) outstanding, an increase of $35.0 million over 1994. The increase in outstanding debt is primarily attributable to the purchase of Farmer Mac I and Farmer Mac II Securities for investment purposes. The following table presents, for the periods indicated, certain information regarding Farmer Mac's short term borrowings by type of borrowing. The Current Portion of Medium-Term Notes refers to those Medium-Term Notes maturing within the next twelve months, and includes $6.9 million of Medium-Term Notes with optional redemption provisions.
Maximum Effective Amount Effective Interest Rate Outstanding Interest Rate Balance at at end of during the during end of period period period period (dollars in thousands) December 31, 1995 Discount Notes $132,788 5.62% $297,341 5.80% Current Portion of Medium-Term Notes 74,634 6.65% 79,436 6.53% Total $207,422 December 31, 1994 Discount Notes $124,337 5.81% $124,337 4.32% Current Portion of Medium-Term Notes 43,970 5.94% 63,938 5.63% Total $168,307
Average Balances, Income and Expense, Yields and Rates. The following table presents, for the periods indicated, information regarding interest income on average interest earning assets and related yields, as well as interest expense on average interest bearing liabilities and related rates paid. The average balances were calculated by averaging month-end balances.
Year Ended December 31, 1995 1994 1993 __________________________ __________________________ ___________________________ Average Income/ Average Average Income/ Average Average Income/ Average Balances Expense Rate Balances Expense Rate Balances Expense Rate (dollars in thousands) Assets Earning assets: Farmer Mac I & II Securities $397,571 $29,097 7.32% $381,282 $26,627 6.98% $404,955 $29,120 7.19% Investments and cash equivalents 119,485 7,327 6.13% 100,864 5,085 5.04% 84,464 3,522 4.17% Total earning assets 517,056 36,424 7.05% 482,146 31,712 6.58% 489,419 32,642 6.67% Other assets 12,688 11,403 10,731 $529,744 $493,549 $500,150 Liabilities and Stockholder's Equity Interest-bearing liabilities Debentures, notes and bonds, net $510,853 $34,709 6.79% $473,387 $30,303 6.40% $478,679 $30,848 6.44% Other liabilities 7,124 7,286 7,915 Stockholders'equity 11,767 12,876 13,556 $529,744 $493,549 $500,150 Net interest income/spread $1,715 0.26% $ 1,409 0.18% $ 1,794 0.23% Net yield on interest earing assets 0.33% 0.29% 0.37%
Rate/Volume Analysis. The table below sets forth certain 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 (a) changes in volume (change in volume multiplied by old rate); (b) changes in rate (change in rate multiplied by old volume); and (c) the total. Combined rate/volume variances, a third element of the calculation, are allocated based on their relative size.
1995 vs. 1994 1994 vs. 1993 _______________________________ _________________________________ Increase or (Decrease) Due to Increase or (Decrease) Due to Rate Volume Total Rate Volume Total Income from interest- earning assets: Farmer Mac I and II Securities $ 1,307 $1,163 $2,470 $ (824) $(1,669) $(2,493) Investments 1 ,210 1,032 2,242 811 752 1,563 Total income from interest-earning assets: 2,517 2,195 4,712 (13) (917) (930) Expense on interest- bearing liabilities 1,925 2,481 4,406 (205) (340) (545) Change in net interest income $ 592 $ (286) $ 306 $ 192 $ (577) $ (385)
RESULTS OF OPERATIONS General. Farmer Mac reported a net loss in 1995 of $647 thousand, a decrease of $685 thousand or 51% from the loss reported in 1994. The decrease in loss is attributable to increased net interest income, a result of the shift from lower yielding to higher yielding interest earning assets, increased guarantee fee income from an increase in the level of outstanding Farmer Mac I and II Securities, and reduced expenses, a result of less pooler activity. The $1.3 million net loss reported in 1994 represents a $656 thousand increase in loss from 1993. The increase in loss from 1993 to 1994 primarily results from the reduction of yield maintenance income relative to the increased level of premium amortization, both of which occurred as a result of prepayments on the mortgage loans underlying Farmer Mac I Securities held by Farmer Mac and the higher interest rate environment in 1994 as compared to 1993. Farmer Mac recognized $1.9 million of interest income from yield maintenance payments in 1994, as compared to $3.6 million in 1993, and increased the level of premium amortization by $1.7 million in 1994, as compared to $2.2 million in 1993. Farmer Mac's future profitability will be affected not only by guarantee volume but also by any payments Farmer Mac must make on its guarantees; payments it must make on its Notes; the income it earns on its investment securities, its mortgage portfolio and other funds it is holding; and its administrative expenses. Losses, if any, on guarantees will be affected by many general circumstances, including agricultural growing conditions, agricultural market conditions and the agricultural economy, and particular circumstances, including the quality of Farmer Mac credit underwriting, appraisals and loan servicing. The primary sources of funding for the payment of claims made under guarantees are the fees Farmer Mac charges for providing its guarantees, together with Farmer Mac's loss allowance, invested capital and the proceeds of any other debt issuance. Even with the new legislative authorities, improvements in Farmer Mac's operating results ultimately will depend upon the volume of new guarantee transactions, which in turn, is dependent upon continued and significantly increased utilization of its programs by its Class A and Class B stockholders. Net Interest Income. Net interest income increased $306 thousand from 1994 to 1995, and decreased $385 thousand from 1993 to 1994. The increase in 1995 is largely attributable to an 8 basis point (0.08%) increase in the net interest spread, resulting from a shift in the composition of interest earning assets from lower yielding Farmer Mac I Securities to higher yielding Farmer Mac I and II Securities. The effective yield on the Farmer Mac I Securities has also increased from 1994 to 1995 as certain loans underlying the Farmer Mac I Securities have extended beyond their scheduled maturity date, thus providing interest to Farmer Mac until the payoff date, and increasing the effective yield. The $385 thousand decrease from 1993 to 1994 is largely the result of the $23.7 million or 6% decline in the average balances of the Farmer Mac I and II Securities. Although the average balance of investments and the average rate of investments increased 16.4 million and 87 basis points, respectively, from 1993 to 1994, these increases were not enough to offset the effects of the decline in the average balances of the Farmer Mac I and II Securities. In the absence of increased volume, Farmer Mac's interest expense, over time, may exceed its interest income as the composition of its debt portfolio shifts from shorter-term, lower costing debt to longer-term, higher costing debt while the earnings from its mortgage portfolio continue to be recognized on a level yield basis. The purchase of the mortgage portfolio was funded with a series of callable and non-callable debt issues, at an initial weighted average interest rate below the level yield of the interest earning assets. However, as the shorter-term, lower costing debt matures, the longer-term, higher costing debt will remain, thus increasing the weighted average interest rate of Farmer Mac's debt portfolio and decreasing net interest income. Interest Income. Interest income totaled $36.4 million, $31.7 million and $32.6 million for the years ended December 31, 1995, 1994 and 1993, respectively. The $4.7 million increase from 1994 to 1995 in interest income is attributable to a $34.9 million increase in the average amount of interest earning assets outstanding during 1995 as compared to 1994, a result of $43.6 million in net growth in the Farmer Mac II Program, and a 47 basis point (0.47%) increase in the average rate of interest earning assets from 1994 to 1995. The increase in the average rate of interest earning assets was due to an increase in market interest rates, a shift from lower coupon, more seasoned Farmer Mac I and II Securities to higher coupon, newly originated Farmer Mac I and II Securities, and an increase in the effective yield of Farmer Mac I Securities as a result of the extension of certain loans with balloon maturities underlying the Farmer Mac I Securities. In certain Pools, loans with balloon maturities are permitted to remain in the Pool up to two years after the scheduled maturity date. Farmer Mac and/or the holder of the Farmer Mac I Securities receives interest during that two-year period. With respect to other interest earning investments, Farmer Mac has changed the composition of the portfolio from lower yielding investments such as commercial paper to higher yielding investments such as floating rate mortgage-backed securities. The $930 thousand decrease in interest income from 1993 to 1994 is attributable to the $23.7 million decrease in the average balance of Farmer Mac I and II Securities, a result of principal repayments on the securities, and the $1.2 million reduction in interest income from the excess of the increased level of premium amortization over yield maintenance. Interest Expense. Interest expense for the years ended December 31, 1995, 1994 and 1993 totaled $34.7 million, $30.3 million, and $30.8 million, respectively. The $4.4 million increase from 1994 to 1995 in interest expense resulted from increases in the average amount and average cost of interest bearing liabilities. During 1995, Farmer Mac issued $2.8 billion (net of discount) of Discount Notes and $68.7 million of Medium- Term Notes and redeemed $2.8 billion of Discount Notes and $42.1 million of Medium-Term Notes. The $545 thousand decrease in interest expense from 1993 to 1994 is attributable to the decline in the average balance of interest bearing liabilities and the 4 basis point (0.04%) decline in the average cost of interest bearing liabilities. The greater concentration of shorter term, lower costing debt during 1994 lowered the overall cost of the total debt portfolio. Other Income. Other income totaled $1.3 million, $1.2 million, and $1.4 million for the years ended December 31, 1995, 1994 and 1993, respectively, an increase of $110 thousand from 1994 to 1995 and a decrease of $152 thousand from 1993 to 1994. Guarantee fee income, the principal component of other income, increased $116 thousand from 1994 to 1995 and decreased $153 thousand from 1993 to 1994. The changes in guarantee fee income for the comparable periods were attributable to the volume of guarantee transactions outstanding in each of the comparable periods. Miscellaneous income, the other component of other income, consisted primarily of transaction fees generated from the Farmer Mac II Program. Miscellaneous income decreased $6 thousand from 1994 to 1995 and increased $1 thousand from 1993 to 1994. The decrease in miscellaneous income from 1994 to 1995 resulted from a newly implemented policy of reducing transaction fees in the Farmer Mac II Program for large transactions. The increase from 1993 to 1994 was primarily the result of the level of issuances of Farmer Mac II Securities and purchases of Guaranteed Portions under the Farmer Mac II Program for the comparable periods. Total volume under the Farmer Mac II Program totaled $56.2 million in 1995, as compared to $46.9 million in 1994 and $49.9 million in 1993. Other Expenses. Other expenses totaled $3.7 million, $4.0 million and $4.0 million for the years ended December 31, 1995, 1994 and 1993, respectively, a decrease of $269 thousand from 1994 to 1995, and a decrease of $8 thousand from 1993 to 1994. The $269 thousand decrease from 1994 to 1995 is largely attributable to reductions in compensation and employee benefits, professional fees and administrative expenses, which was partially offset by an increase in insurance expense. Compensation and employee benefits totaled $1.9 million for 1995, a decrease of $106 thousand from the $2.0 million reported for 1994. The decrease resulted from a reduction in the amount of bonuses paid to management and the use of lower costing temporary employees during 1995. Professional fees, consisting primarily of legal, accounting and consulting fees, totaled $412 thousand for 1995, a decline of $155 thousand from the $567 thousand reported for 1994. The decrease resulted from non-recurring consulting and professional fees, including a marketing and an asset/liability management study, the transfer of trustees for the Farmer Mac II Program and the installation of a local area network, incurred in 1994. Administrative expenses totaled $360 thousand for 1995, a decrease of $88 thousand from the $448 thousand reported for 1994. The decrease in administrative expenses is attributable to a reduction in travel-related expenses and advertising costs, both of which resulted from less pooler activity. Insurance expense totaled $216 thousand for 1995, an increase of $75 thousand from the $141 thousand reported for 1994. The increase is attributable to an increase in Directors and Officers liability insurance coverage. Farmer Mac's other expenses will increase as it proceeds to implement the new authorities under the 1996 Act. As previously noted, the implementation process consists of a two-phased approach, and will likely involve the use of outside service providers and the hiring of additional employees. From 1993 to 1994, other expenses declined $8 thousand, primarily the result of a decrease in professional fees and an increase in compensation and employee benefits. Professional fees decreased $150 thousand from 1993 to 1994, primarily as a result of the elimination of outside legal services related to the Farmer Mac II Program. From 1993 through January 1994, Farmer Mac utilized the services of outside counsel to assist with the issuance of securities under the Farmer Mac II Program; however, beginning February 1, 1994, all of these services were performed by internal legal personnel. Compensation and employee benefits increased $119 thousand from 1993 to 1994, a result of increases in staffing, attributable mainly to greater internal staffing of the Farmer Mac II Program. During the latter half of 1993, Farmer Mac added two employees and, in the first quarter of 1994, added one employee. Extraordinary Gain. In 1993, the Corporation recognized an extraordinary gain of $127 thousand or $0.06 per share from the early extinguishment of $14.9 million of debt. Dividends. Farmer Mac has not paid and does not expect to pay dividends on its common stock in the near future. Dividends on the common stock are subject to determination and declaration by the Board. In February 1992, the Board adopted a policy stating that no dividends would be paid on Farmer Mac Voting or Non-Voting Common Stock until such time as Farmer Mac's stockholders' equity is at least equal to $22 million (the amount of gross proceeds raised by Farmer Mac in its initial common stock offering). Thereafter, up to 50% of accumulated net earnings may be paid out as dividends, provided that stockholders' equity remains at least equal to $22 million. No preference between holders of the Voting Common Stock and Class C Non-Voting Common Stock has been established relating to dividends. The ratio of dividends paid on each share of Class C Non-Voting Common Stock to each share of Voting Common Stock, however, will be three-to-one. Dividends paid to holders of Class A and Class B Voting Common Stock will be equal. RISK MANAGEMENT Interest rate risk management. Interest rate risk is the risk that interest rate changes could materially affect equity and earnings. Farmer Mac is subject to interest rate risk primarily as a result of the ability of borrowers to prepay their mortgages before the scheduled maturities. Mortgage prepayments can cause fluctuations in net interest income to the extent that they change the match of cashflows of Farmer Mac's assets and liabilities, as well as the amortization of certain deferred items. This risk is mitigated by yield maintenance provisions, when present, which require borrower and/or pooler payments to be made to Farmer Mac when the mortgage loans prepay. These payments are calculated such that, when reinvested with the prepaid principal, they should generate substantially the same cash flows that would have been generated by the mortgage-backed securities had the underlying mortgage loans not prepaid. The existence of these provisions reduces (but does not eliminate) Farmer Mac's exposure to reinvestment risk. Management has established policies and implemented interest rate risk management procedures to monitor its exposure to interest rate volatility from prepayments and reinvestment risk. Management performs sensitivity analyses of Farmer Mac's market value of equity and net interest income and calculates the duration gap of its assets and liabilities on an ongoing basis. These risk measures are reviewed regularly to determine the optimal asset and liability mix to limit Farmer Mac's exposure to interest rate risk. Farmer Mac's primary strategy to manage prepayment and reinvestment risk is to fund the Farmer Mac I and II Securities with a mix of short-term Discount Notes and callable and non- callable Medium-Term Notes. This funding mix is designed to match the expected cash flows of the mortgages underlying the Farmer Mac I and II Securities, while allowing Farmer Mac the ability to adjust debt maturities in response to prepayments. Credit risk management. Prior to enactment of the 1996 Act, the Board established a loss reserve policy for Farmer Mac, stipulating that ten percent (10%) of the guarantee fees earned from transactions in which Farmer Mac's guarantee is provided in the Farmer Mac I Program be set aside as a loss allowance. No loss allowance has been made specifically for the Farmer Mac II Program because the Guaranteed Portions are backed by the full faith and credit of the United States and are not materially exposed to credit losses. As of December 31, 1995, Farmer Mac's total loss allowance was $392 thousand, an increase of $97 thousand from December 31, 1994. This increase in the allowance for losses is attributable to the volume of guarantee fees received in 1995, as compared to 1994. See Note 7 to the Financial Statements. Future additions to this allowance will be charged to earnings and the amounts in the allowance account will be used to cover payments of any claims made under Farmer Mac guarantees. Farmer Mac considers the amounts in the allowance account to be adequate to cover its exposure to guarantee payments on existing Farmer Mac I Securities. Before Farmer Mac is required to make a guarantee payment on its existing Farmer Mac I Securities, full recourse must be taken against a reserve or subordinated interest initially established in an amount equal to at least ten percent (10%) of the initial pool balance. The main risk Farmer Mac bears is that this unguaranteed reserve or subordinated interest will be insufficient ultimately to cover timely payment of principal and interest to holders of Farmer Mac I Securities. To mitigate this risk, Farmer Mac has required all loans in a pool to meet standards with respect to loan-to-value ratios, other financial ratios, and diversification among crops and geographic locations represented. Farmer Mac subjects each pool submitted for guarantee under the Farmer Mac I Program to a "stress test" designed to analyze the pool's diversification and the sufficiency of the reserve or subordinated interest under simulated conditions of greatly increased foreclosures and losses. Farmer Mac only provides its guarantee on securities backed by pools that pass its stress test. As of December 31, 1995, the subordinated interests represented 10.0% of the outstanding balance of all Farmer Mac I Securities and subordinated interests; any losses incurred as a result of foreclosures may reduce the outstanding balance of the subordinated interests. As part of the overall review of its policies in light of the changes from the 1996 Act, Farmer Mac is currently evaluating the appropriateness of its loan loss reserve policy, particularly as a result of its new status as a first loss guarantor, and its underwriting standards. At December 31, 1995, a total of two loans aggregating $299 thousand were 90 days or more past due, three loans totaling $683 thousand were in foreclosure and title to two loans with an aggregate outstanding principal balance of $709 thousand had been acquired by the trust in the Farmer Mac I Program. The seven loans combined represent 0.5% of the aggregate principal amount of outstanding Farmer Mac I Securities at December 31, 1995. Management believes that no losses will be incurred by Farmer Mac as a result of the loans in foreclosure or the real estate owned by the trust. LIQUIDITY Farmer Mac's primary sources of liquidity are issuances of debt obligations, and principal and interest payments on mortgages underlying securities purchased by Farmer Mac under the Farmer Mac I and Farmer Mac II Programs. Although Farmer Mac's debt is not guaranteed by the U.S. government, the capital markets have treated its obligations as "federal agency" debt, allowing Farmer Mac to have ready access to funds at favorable rates. Funds from the issuance of Discount Notes and Medium-Term Notes may be used in the Farmer Mac I and Farmer Mac II Programs to cover transaction costs, guarantee payments and the costs of purchasing Guaranteed Portions, Qualified Loans and securities (including Farmer Mac Guaranteed Securities backed by Guaranteed Portions and/or Qualified Loans). Farmer Mac may also issue Notes to fund business operations, including liquidity. Farmer Mac also maintains a portfolio of cash equivalents, comprised of commercial paper, federal funds, and other short- term investments, to draw upon as necessary. At December 31, 1995 and 1994, Farmer Mac's cash and cash equivalents totaled $8.3 million and $73.1 million, respectively. CAPITAL RESOURCES The Act established capital requirements for Farmer Mac, which were modified by the 1996 Act. Certain types of assets and guarantees are required to be supported by specific amounts of "core capital." The Act further defines capital levels as "minimum" or "critical;" the 1996 Act phases in higher minimum capital requirements over a three-year transition period. Certain levels of enforcement are given to the FCA depending upon Farmer Mac's compliance with these capital levels. See "Recent Legislative Revisions to Farmer Mac's Statutory Charter - Summary of Statutory Changes - Capital" and "Government Regulation of Farmer Mac - Regulation - Capital Standards." As of December 31, 1995, Farmer Mac's minimum capital requirement was $4.7 million and its actual capital level was $11.7 million. At December 31, 1994, Farmer Mac's minimum capital requirement was $4.8 million, and its actual capital level was $12.2 million. See "Government Regulation of Farmer Mac" and Note 3 to the Financial Statements. In the opinion of management, Farmer Mac has sufficient liquidity and capital for the next twelve months. ACCOUNTING STANDARDS In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which prescribes the accounting and reporting for all stock-based compensation plans, including employee stock options, restricted stock, and stock appreciation rights. This statement does not require companies to change their existing accounting for employee stock options under APB Opinion No. 25, "Accounting for Stock Issued to Employees." Instead, the new rules encourage companies to recognize expense for stock-based awards based on their estimated fair value on the date of grant. Companies electing to continue following present accounting rules under APB No. 25 will be required to provide pro forma disclosures of what net income and earnings per share would have been had the new fair value method been used. This statement is effective as of January 1, 1996. Management does not believe that this statement will have a material impact on Farmer Mac's financial results. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Federal Agricultural Mortgage Corporation We have audited the accompanying consolidated balance sheets of the Federal Agricultural Mortgage Corporation ("Farmer Mac") and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of Farmer Mac's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 3, Farmer Mac has been unable to generate sufficient business volume to achieve profitability and therefore has reduced its capital by $10 million since its inception in 1988. On February 10, 1996, President Clinton signed legislation that, among other things, broadens the scope of Farmer Mac's permitted business activities, alters the timing of implementation as well as the nature of increased capital requirements, and expands the authorized enforcement powers of Farmer Mac's regulator. As of December 31, 1995, Farmer Mac was in compliance with all currently applicable regulatory capital requirements. However, higher capital requirements will be phased in between January 1, 1997 and January 1, 1999, with significantly higher capital requirements in effect no later than January 1, 1998. Farmer Mac's regulator has certain enforcement powers if Farmer Mac is unable to meet its capital standards, including the authority to require a capital restoration plan, restrict or prohibit payment of dividends, limit growth, restrict activities, and appoint a conservator or receiver. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Farmer Mac and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Washington, D.C. February 12, 1996, except as to Note 11, which is as of March 14, 1996
FEDERAL AGRICULTURAL MORTGAGE CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) December 31, 1995 1994 ASSETS: Cash and cash equivalents $ 8,336 $ 73,129 Interest receivable 15,572 14,023 Guarantee fees receivable 573 454 Investment securities (Note 4): Held-to-maturity, fair value of $7,427 and $8,681 at December 31, 1995 and 1994, respectively 7,419 9,437 Available-for-sale 55,862 -- Farmer Mac I & II Securities, fair value of $427,040 and $358,023 at December 31, 1995 and 1994, respectively (Note 5) 417,169 367,994 Other investments, fair value of $2,338 and $10,652 at December 31, 1995 and 1994, respectively (Note 6) 2,340 10,691 Farmer Mac I & II payments receivable 4,939 1,196 Office equipment, net (Note 8) 65 98 Prepaid expenses and other assets 189 216 TOTAL ASSETS $512,464 $477,238 LIABILITIES AND STOCKHOLDERS' EQUITY: LIABILITIES: Allowance for sold Farmer Mac I & II Securities (Note 7) $ 112 $ 81 Accounts payable and accrued expenses 740 972 Accrued interest payable 8,394 7,450 Debentures, notes and bonds, net: (Note 9) Due within one year 207,422 168,307 Due after one year 284,084 288,209 TOTAL LIABILITIES 500,752 465,019 STOCKHOLDERS' EQUITY (Note 10): Common stock: Class A Voting, $1 par value, no maximum authorization, 670,000 shares issued and outstanding 670 670 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, 1,170,301 shares issued and outstanding 1,170 1,170 Additional paid in capital 19,331 19,331 Unrealized gain on securities available available-for-sale 140 - _ Accumulated deficit (10,099) (9,452) TOTAL STOCKHOLDERS' EQUITY 11,712 12,219 Commitments (Note 11) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $512,464 $477,238 See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands, Except Per Share Amounts) December 31, 1995 1994 1993 INTEREST INCOME: Investments and cash equivalents $ 7,327 $ 5,085 $ 3,522 Farmer Mac I and II Securities 29,097 26,627 29,120 TOTAL INTEREST INCOME 36,424 31,712 32,642 INTEREST EXPENSE 34,709 30,303 30,848 NET INTEREST INCOME 1,715 1,409 1,794 OTHER INCOME: Guarantee fees 1,166 1,050 1,203 Miscellaneous 171 177 176 TOTAL OTHER INCOME 1,337 1,227 1,379 OTHER EXPENSES: Compensation and employee benefits 1,928 2,034 1,915 Professional fees 412 567 717 Insurance 216 141 141 Rent 166 179 162 Regulatory fees 289 302 306 Board of Directors fees and meeting expenses 328 297 301 Administrative 360 448 434 TOTAL OTHER EXPENSES 3,699 3,968 3,976 LOSS BEFORE EXTRAORDINARY ITEM (647) (1,332) (803) Extraordinary gain from early extinguishment of debt _ - 127 NET LOSS $ (647) $(1,332) $ (676) LOSS PER SHARE BEFORE EXTRAORDINARY ITEM $ _ $ - $(0.34) NET LOSS PER SHARE $ (0.28) $ (0.57) $(0.28) See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) December 31, ____________________________________ 1995 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES: Loss from Operations $ (647) $ (1,332) $ (676) Adjustments to reconcile net loss to cash provided by operating activities: Amortization of premium on Farmer Mac I and II Securities 4,791 6,554 11,074 Discount Note amortization 9,522 4,807 1,174 (Increase) decrease in guarantee fees receivable (119) 66 (285) (Increase) decrease in interest receivable (1,549) 1,484 1,567 (Increase) decrease in Farmer Mac I & II payments receivable (3,743) (690) 2,631 Decrease (increase) in prepaid expenses and other assets 27 (127) 79 Amortization of debt issuance costs 203 245 313 (Decrease) increase in accounts payable and accrued expenses (232) 200 311 Increase (decrease) in accrued interest payable 944 (882) (670) Provision for losses on Farmer Mac I Program 97 93 115 Gain on early extinguishment of debt - - (127) Other (49) (41) (201) Net cash provided by operating activities 9,245 10,377 15,305 CASH FLOWS FROM INVESTING ACTIVITIES: Farmer Mac I & II purchases (104,674) (47,712) (38,730) Purchases of investments (78,865) (44,905) (119,370) Proceeds from maturity of investments 33,496 65,408 123,253 Proceeds from Farmer Mac I & II principal repayments 50,641 65,212 76,852 Purchases of office equipment (7) (40) (44) Net cash (used) provided by investing activities (99,409) 37,963 41,961 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Medium- Term Notes 68,536 - 11,718 Payments to redeem Medium-Term Notes (42,095) (67,915) (77,395) Proceeds from issuance of Discount Notes 2,785,917 775,437 153,425 Discount notes redeemed (2,786,987) (758,500) (77,000) Net cash provided (used) by financing activities 25,371 (50,978) 10,748 Net (decrease) increase in cash and cash equivalents (64,793) (2,638) 68,014 Cash and cash equivalents at beginning of period 73,129 75,767 7,753 Cash and cash equivalents at end of period $ 8,336 $ 73,129 $ 75,767 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 24,146 $ 26,229 $ 31,012 Income Taxes _ _ _ See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1. ORGANIZATION The Federal Agricultural Mortgage Corporation ("Farmer Mac" or the "Company"), a federally chartered instrumentality of the United States, was established pursuant to Title VIII of the Farm Credit Act of 1971 (the "Charter Act") to attract new capital for the financing of agricultural real estate and rural housing loans and to provide liquidity to agricultural and rural housing lenders. Farmer Mac is intended to aid the development of a secondary market for certain loans secured by a first lien on agricultural real estate or rural housing ("Qualified Loans") by providing guarantees for securities representing interests in, or obligations backed by, pools of such loans. This program is known as the "Farmer Mac I Program." The Food, Agriculture, Conservation and Trade Act of 1990 (the "1990 Act") authorized Farmer Mac to purchase portions ("Guaranteed Portions") of loans guaranteed by the United States Department of Agriculture (the "USDA") and to issue and guarantee securities backed by such Guaranteed Portions. This program is known as the "Farmer Mac II Program." Eligible sellers are any participating lenders in the USDA guaranteed loan program or subsequent holders of Guaranteed Portions. There is no Farmer Mac stock ownership requirement for participation in the Farmer Mac II Program as there is in the Farmer Mac I Program. The Food, Agriculture, Conservation and Trade Act Amendments of 1991 (the "1991 Act") clarified Farmer Mac's authority to issue debt obligations for the purpose of purchasing Guaranteed Portions and guaranteed securities issued under the Farmer Mac I and Farmer Mac II Programs ("Securities") and maintaining reasonable amounts for business operations (including liquidity) relating to its activities. This is known as the Linked Portfolio Strategy. In 1991, Farmer Mac formed Farmer Mac Mortgage Securities Corporation, a wholly owned subsidiary incorporated under the laws of the State of Delaware. The principal activities of the subsidiary are: (i) to deal in Farmer Mac I and Farmer Mac II Securities and issue securities representing interests in, or obligations backed by, Farmer Mac I and Farmer Mac II Securities and Guaranteed Portions; and (ii) to incur indebtedness in connection with its activities. Farmer Mac Mortgage Securities Corporation commenced business in 1992. In 1992, Farmer Mac formed Farmer Mac Acceptance Corporation, a wholly owned subsidiary incorporated under the laws of the State of Delaware. The principal purpose of the subsidiary is to act as the registrant under registration statements to be filed with the Securities and Exchange Commission in connection with the registration of Securities under the Federal securities laws. Farmer Mac Acceptance Corporation commenced business in May 1992. The Farm Credit System Reform Act of 1996 (the "1996 Act"), enacted on February 10, 1996, substantially changed the manner in which Farmer Mac is authorized to do business. The 1996 Act: (i) authorizes Farmer Mac to act in the capacity of a Pooler for Qualified Loans under the Farmer Mac I Program; (ii) eliminates the previously mandated 10% minimum cash reserve or subordinated interest; (iii) delays the implementation of higher minimum and critical capital requirements, originally scheduled to be effective December 13, 1996; (iv) delays the promulgation by the Farm Credit Administration (the "FCA") of any final risk-based capital regulation; (v) requires Farmer Mac to recapitalize within two years of enactment of the 1996 Act (or sooner if business volume increases substantially); and (vi) expands the authorized enforcement powers of the FCA. Apart from these significant changes to Farmer Mac's authorities, the 1996 Act contains other provisions intended to improve the efficiency of Farmer Mac's operations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following comprises the significant accounting policies which Farmer Mac follows in preparing and presenting its financial statements: (a) Principles of Consolidation The consolidated financial statements include the accounts of Farmer Mac and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. (b) Cash Equivalents Farmer Mac considers highly liquid investment securities with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at amortized cost, which approximates market value. (c) Farmer Mac I and II Securities and Investment Securities Farmer Mac I and II Securities and investment securities which Farmer Mac has the positive intent and ability to hold to maturity are classified as held-to-maturity. Such securities are carried at cost, adjusted for unamortized premiums and unearned discounts. Premiums are amortized and discounts are accreted to interest income using the interest method over the remaining period to contractual maturity, adjusted, in the case of mortgage- backed securities, for actual prepayments. Other Farmer Mac I and II Securities and investment securities for which Farmer Mac does not have the positive intent to hold to maturity have been classified as available-for-sale and are carried at estimated fair value. Unrealized gains and losses are reported as a separate component of stockholders' equity. (d) Yield Maintenance Income Farmer Mac receives yield maintenance payments when mortgage loans underlying certain Farmer Mac I Securities prepay. These payments are designed to minimize Farmer Mac's exposure to reinvestment risk and are calculated such that, when reinvested with the prepaid principal, they should generate substantially the same cash flows that would have been generated by the Farmer Mac I and II Securities had the underlying mortgage loans not prepaid. Income from yield maintenance payments is recognized when the mortgage loans prepay and is classified as interest income in the statements of operations. Farmer Mac recognized $842 thousand, $1.9 million and $3.6 million in yield maintenance income in 1995, 1994 and 1993, respectively. During the fourth quarter of 1993, Farmer Mac received the information necessary to calculate yield maintenance payments on partial prepayments of certain mortgage loans, which resulted in the recognition of $1.6 million in yield maintenance income during 1993. (e) Loss Per Share The actual number of Class A, Class B and Class C shares outstanding at December 31, 1995, 1994 and 1993 was 2,340,602. Loss per share is calculated using the actual number of common shares outstanding for the year. (f) Office Equipment Office equipment is stated at cost less accumulated depreciation. Depreciation is computed on a straight line basis over the estimated useful lives of the related assets as follows: Estimated Lives Furniture and fixtures 10 Years Computer equipment and software 3 Years Other equipment 5 Years (g) Income Taxes Deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Management has established a valuation allowance for 100 percent of the net deferred assets. (h) Guarantee Fees Farmer Mac recognizes guarantee fees as income when earned. Farmer Mac recognizes the portion of guarantee fees generated by Farmer Mac I and II Securities held in portfolio as guarantee fee income (rather than interest income) in its statements of operations. Approximately $934 thousand, $905 thousand and $971 thousand of guarantee fees in 1995, 1994 and 1993, respectively, relate to Farmer Mac I and II Securities held in portfolio. (i) Allowance for Losses An allowance has been established for potential losses under the Farmer Mac I Program equal to a percentage of guarantee fees earned. Farmer Mac considers the amount of the allowance adequate to cover its exposure to guarantee payments in the Farmer Mac I Program. Before Farmer Mac is required to make a guarantee payment on pools existing at December 31, 1995, full recourse must be taken against the then-required reserve or subordinated interest equal to at least ten percent (10%) of the original Pool balance. Farmer Mac has not established an allowance for the Farmer Mac II Program because Farmer Mac's credit exposure on Farmer Mac II Securities is covered by the "full faith and credit" of the United States by virtue of the USDA guarantee of the principal and interest thereon. (j) Debt Issuance Costs Debt issuance costs are deferred and amortized over the estimated life of the related debt. (k) Reclassifications Certain reclassifications of prior year information were made to conform with the 1995 presentation. 3. REGULATORY CAPITAL Since its inception in 1988, Farmer Mac has not generated sufficient business volume to achieve profitability, resulting in net losses that have reduced its capital. Farmer Mac's retained earnings have decreased $10.1 million since inception, including $647 thousand, $1.3 million and $676 thousand during the years ended December 31, 1995, 1994 and 1993, respectively. The 1991 Act established capital requirements for Farmer Mac. Certain types of assets and guarantee obligations are required to be supported by specific amounts of "core capital." That legislation further defined capital levels as "minimum" or "critical." The FCA has been given certain enforcement powers if Farmer Mac is unable to meet its minimum and critical capital requirements. These include requiring a capital restoration plan, restricting or prohibiting payment of dividends, limiting growth, restricting activities, and appointing a conservator. At December 31, 1995, Farmer Mac was in compliance with all currently applicable regulatory capital requirements. Current Regulatory Requirements At December 31, 1995, the minimum capital level for Farmer Mac was the amount of capital equal to the sum of: (1) 2.50% of the aggregate on-balance sheet assets of Farmer Mac, other than assets acquired under the Linked Portfolio Strategy, as determined in accordance with generally accepted accounting principles; (2) 0.45% of the unpaid principal balance of outstanding securities guaranteed by Farmer Mac and backed by pools of Qualified Loans and substantially equivalent instruments issued or guaranteed by Farmer Mac and other off-balance sheet obligations of Farmer Mac; and (3) 0.45% of any aggregate assets of Farmer Mac acquired pursuant to the Linked Portfolio Strategy. Critical capital levels are approximately one-half of the minimum capital levels for comparable assets. The following is an analysis of Farmer Mac's minimum capital requirements at December 31, 1995 and 1994 (dollars in thousands):
Required Required Minimum Minimum Capital Capital December 31, December 31, December 31, December 31, 1995 1995 1994 1994 (Unaudited) (Unaudited) On-balance sheet assets $ 95,295 $ 2,382 $ 109,244 $ 2,731 Off-balance sheet assets 99,573 448 98,610 444 Assets acquired under the Linked Portfolio Strategy 417,169 1,877 367,994 1,656 TOTAL MINIMUM CAPITAL REQUIRED 4,707 4,831 ACTUAL CAPITAL 11,712 12,219 EXCESS CAPITAL $ 7,005 $ 7,388
Revisions to Regulatory Requirements The 1996 Act, effective February 10, 1996, not only broadened the scope of Farmer Mac's permitted business activities (Note 1), but also altered its capital requirements. Prior to the enactment of the 1996 Act, the minimum level of core capital required to be maintained by Farmer Mac was to increase on December 13, 1996 to 2.50% of all assets owned by Farmer Mac (on-balance sheet assets), while the amount required to be maintained against off- balance sheet guaranteed securities and other off-balance sheet obligations was to remain at 0.45%. The 1996 Act delayed the imposition of these requirements, established a new minimum capital requirement and provided a three-year transition period following the enactment of the 1996 Act to reach the new minimum capital requirement. The amount of minimum capital Farmer Mac is required to hold under the 1996 Act is as follows: (a) prior to January 1, 1997, the sum of 0.45% of off-balance sheet obligations of Farmer Mac, plus 0.45% of the sum of: (i) the aggregate on-balance sheet assets acquired under the Linked Portfolio Strategy; and (ii) the aggregate amount of loans purchased and held by Farmer Mac (together, "designated assets"), plus 2.50 percent of on-balance sheet assets other than designated assets; (b) during the 1-year period ending December 31, 1997, the sum of 0.55% of the aggregate off-balance sheet obligations, plus 1.20 percent of designated assets, plus 2.55 percent of on-balance sheet assets other than designated assets; (c) during the 1-year period ending December 31, 1998, the sum of 0.65 percent of the aggregate off-balance sheet obligations, plus 1.95 percent of designated on-balance sheet assets, plus 2.65% of on-balance sheet assets other than designated assets; except that, if Farmer Mac's core capital is less than $25 million on January 1, 1998, the minimum capital level shall be as stated in (d); and (d) on and after January 1, 1999, 2.75% of Farmer Mac's aggregate on-balance sheet assets, plus 0.75% of aggregate off-balance sheet obligations. If the fully-phased in standard under the 1996 Act (as specified in clause (d) above) had been in effect at December 31, 1995, Farmer Mac's actual capital would have been less than the total minimum capital required by $3.1 million. The 1996 Act also provides that Farmer Mac must increase its total core capital to at least $25 million by the earlier of February 10, 1998, or within 180 days after the end of the first calendar quarter that its aggregate on-balance sheet assets, plus outstanding off-balance sheet obligations, equal or exceed $2 billion. The 1996 Act further provides that Farmer Mac's on- balance sheet assets plus off-balance sheet obligations may not exceed $3 billion, unless and until its total core capital is at least $25 million. Under the 1996 Act, if the Company fails to meet the recapitalization requirements within the applicable time, it may not purchase new loans or issue or guarantee additional securities until its core capital level is increased to the required level. Accordingly, if the $25 million recapitalization requirement had been in effect at December 31, 1995, Farmer Mac's actual capital would have been less than the required capital level by $13.3 million. In addition to the enforcement powers granted to FCA under the 1991 Act, the 1996 Act also provides FCA with the ability to appoint a receiver if Farmer Mac's authority to purchase loans or issue or guarantee securities is suspended or Farmer Mac is classified under certain enforcement levels and the FCA determines that the appointment of a conservator would not be appropriate. There is no assurance that Farmer Mac will be able to meet the higher capital requirements, when effective, or the $25 million recapitalization requirement. 4. INVESTMENT SECURITIES The amortized cost and fair values of investments in debt securities were as follows:
December 31, 1995 _____________________________________________ Amortized Unrealized Unrealized Fair Cost Gain Loss Value (in thousands) Held-to-maturity securities U.S. Agency Securities $ 2,000 $ - $ 1 $ 1,999 Mortgage-Backed Securities 5,419 9 - 5,428 Total $ 7,419 $ 9 $ 1 $ 7,427 Available-for-sale securities Mortgage-Backed securities 55,722 140 - 55,862 Total $ 55,722 $ 140 $ _ $ 55,862
December 31, 1994 _____________________________________________ Amortized Unrealized Unrealized Fair Cost Gain Loss Value (in thousands) Held-to-maturity securities U.S. Agency Debt Securities $4,000 $ 2 $ 22 $3,980 Mortgage-Backed Securities 5,437 - 736 4,701 Total $9,437 $ 2 $758 $8,681
The amortized cost and estimated fair value of debt securities by remaining contractual maturity at December 31, 1995 were as follows:
December 31, 1995 ___________________ Amortized Fair Cost Value (in thousands) Held-to-maturity securities Due after 1 year through 5 years $ 2,000 $ 1,999 Due after 10 years 5,419 5,428 Total $ 7,419 $ 7,427 Available-for-sale ecurities Due after 10 years $55,722 $55,862 Total $55,722 $55,862
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. During 1995 and 1994, there were no sales of investment securities. 5. FARMER MAC I and II SECURITIES The table sets forth the amortized costs and estimated fair values of the Farmer Mac I and II Securities at December 31, 1995 and 1994. Amortized Unrealized Unrealized Fair Cost Gain Loss Value (in thousands) December 31, 1995 Held-to-maturity securities Farmer Mac I Securities $278,625 $8,505 $ 257 $286,873 Farmer Mac II Securities 138,544 1,623 _ 140,167 Total $417,169 $10,128 $ 257 $427,040 December 31, 1994 Held-to-maturity securities Farmer Mac I securities $282,498 $ _ $ 6,595 $275,903 Farmer Mac II 85,496 _ 3,376 82,120 Total $367,994 $ _ $9,971 $358,023
There were no sales of Farmer Mac I or Farmer Mac II Securities during 1995, 1994 or 1993. The amortized cost and estimated fair value of Farmer Mac I and Farmer Mac II Securities by remaining contractual maturity at December 31, 1995 were as follows:
December 31, 1995 Amortized Fair Cost Value (in thousands) Due within 1 year $ 230 $ 231 Due after 1 year through 5 years 256,864 262,932 Due after 5 years through 10 years 39,854 40,210 Due after 10 years 120,221 123,667 Total $ 417,169 $ 427,040
Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Cost of Farmer Mac I and II Securities Farmer Mac I and II Securities are shown net of unamortized premium, deferred fees and the allowance for losses. The following table sets forth those components at December 31, 1995 and 1994:
1995 1994 ___________________ ___________________ Farmer Farmer Farmer Farmer Mac I Mac II Mac I Mac II (dollars in thousands) Outstanding Principal Balance $264,272 $138,520 $265,831 $85,490 Unamortized premium and deferred fees, net 14,633 24 16,881 6 Less: Allowance for Losses (280) _ (214) _ $278,62 $138,54 $282,498 $85,496
6. OTHER INVESTMENTS The following is a summary of other investments:
Amortized Unrealized Unrealized Fair Cost Gain Loss Value (in thousands) December 31, 1995 Cash Investment in Guaranteed Investment Contract $ 2,340 $ _ $ 2 $ 2,338 Total $ 2,340 $ _ $ 2 $ 2,338 December 31, 1994 Cash Investment in Guaranteed Investment Contract $ 1,290 $ 10 $ 10 $ 1,280 Farmer Mac II Guaranteed Portions $ 9,401 $ - $ 29 $ 9,372 Total $10,691 $ _ $ 39 $10,691 10,652
At December 31, 1995 and 1994, the remaining maturity of the cash investment in the guaranteed investment contract approximated 3.3 years and at December 31, 1994, the remaining maturity of the Farmer Mac II Guaranteed Portions was greater than 10 years. During 1995, 1994 and 1993, there were no sales of other investments. 7. ALLOWANCE FOR LOSSES Changes in the allowance for losses for 1995, 1994 and 1993 are summarized below:
On-Balance Off-Balance Sheet Sheet Farmer Mac I Farmer Mac I & II Securities & II Securities Total (in thousands) December 31, 1993 $ 142 $ 59 $ 201 Provision 72 22 94 December 31, 1994 214 81 295 Provision 66 31 97 December 31, 1995 $ 280 $ 112 $ 392
Farmer Mac has not incurred any losses to date. At December 31, 1995, $280 thousand of the allowance for losses related to securities issued under the Farmer Mac I Program and held in portfolio. Accordingly, the allowance is recorded as a component of "Farmer Mac I and II Securities" in the Consolidated Balance Sheets. 8. OFFICE EQUIPMENT Office equipment is summarized as follows:
December 31, 1995 1994 Furniture and fixtures $ 62 $ 60 Computer equipment and software 210 204 Other equipment 43 44 SUBTOTAL 315 308 Less accumulated depreciation (250) (210) TOTAL $ 65 $ 98
Depreciation expense for the years ended December 31, 1995, 1994 and 1993 totaled $40 thousand, $53 thousand and $62 thousand, respectively. 9. DEBENTURES, NOTES AND BONDS, NET Total debt outstanding at December 31, 1995 and 1994 amounted to $491.5 million and $456.5 million, net of unamortized discounts, premiums and issuance costs. The effective interest rate of total debt outstanding was 6.76% and 6.74% at December 31, 1995 and 1994, respectively. The average maturity of all debt outstanding at December 31, 1995 and 1994 was 2.9 years. Borrowings Due Within One Year As of December 31, 1995 and 1994, Farmer Mac's borrowings due within one year were as follows: Maximum Maximum Amount Amount Effective Effective Outstanding Outstanding Interst Rate Interest during the during the during the Balance Rate Period Period Period (dollars in thousands) December 31, 1995 Discount Notes $132,788 5.62% $297,341 $166,055 5.80% Current Portions of Medium-Term Note 74,634 6.65% 79,436 72,298 6.53% Total $207,422 December 31, 1994 Discount Notes $124,337 5.81% $124,337 $112,150 4.32% Current Portion of Medium-Term Note 43,970 5.94% 63,938 51,746 5.63% Total $168,307
The Current Portion of Medium-Term Notes refers to those Medium- Term Notes maturing within the next twelve months, and includes $6.9 million of Medium-Term Notes with optional redemption provisions. During 1993, Farmer Mac called $14.9 million of debt, resulting in an extraordinary gain of $127 thousand. Borrowings Due After One Year Borrowings due after one year are comprised of Medium-Term Notes. In accordance with its Medium-Term Note program, Farmer Mac issues, from time to time, unsecured notes with maturities from 9 months to 30 years from date of issue. The average cost of all Medium-Term Notes outstanding with maturities in excess of one year at December 31, 1995 and 1994 was 7.32% and 7.26%, respectively, with an average effective maturity of 5.0 years and 3.9 years, respectively. The following table sets forth the outstanding balances (net of any unamortized discounts, premiums and debt issuance costs), and effective interest rates of Farmer Mac's Medium-Term Notes due after one year at December 31, 1995 and 1994:
1995 1994 _________________________ ______________________ Effective Effective Interest Interest Balance Rate Balance Rate 1996 _ _ $ 68,399 6.70% 1997 $ 30,393 6.80% 27,657 6.83% 1998 58,038 6.87% 35,425 7.11% 1999 41,164 7.23% 38,107 7.27% 2000 46,090 7.44% 42,672 7.50% 2001 39,033 7.61% 36,578 7.66% Thereafter 69,366 7.72% 39,371 8.01% TOTAL $284,084 $288,209
Authority to Borrow from the Treasury of the United States The Charter Act authorizes, under certain conditions, Farmer Mac to borrow up to $1.5 billion from the Secretary of the Treasury, if necessary, to fulfill the obligations of Farmer Mac under any guarantee. The debt would bear interest at a rate determined by the Secretary of the Treasury based on the then current cost of funds to the United States. The debt is required to be repaid within a reasonable time. As of December 31, 1995, Farmer Mac had no such debt outstanding. 10. STOCKHOLDERS' EQUITY Common Stock Farmer Mac has three classes of common stock outstanding. Class A Voting Common Stock may be held only by banks, insurance companies and other financial institutions or entities that are not institutions of the Farm Credit System. Class B Voting Common Stock may be held only by institutions of the Farm Credit System. There are no ownership restrictions on the Class C Non- Voting Common Stock. In December 1988, Farmer Mac received $22,820,870, before expenses, in a sale of its common stock at $19.50 per unit, net of underwriting discount, in a unit offering of Class A Units and Class B Units. A Class A Unit consisted of one share of Class A Voting Common Stock and one share of Class C Non-Voting Common Stock. A Class B Unit consisted of one share of Class B Voting Common Stock and one share of Class C Non-Voting Common Stock. The rights of the Class A and Class B Voting Common Stock are identical, except with respect to election of directors. Pursuant to the terms of the offering, the Voting Common Stock and the Class C Non-Voting Common Stock included in the units separated in November 1993. Under the Charter Act, no holder of Class A Voting Common Stock may directly or indirectly be a beneficial owner of more than 33% of the outstanding shares of Class A Voting Common Stock. There are no restrictions on the maximum purchase or holdings of Class B Voting Common Stock. In 1991, the Board adopted a policy stating that no dividends would be paid on Farmer Mac Voting or Non-Voting Common Stock until such time as Farmer Mac's stockholders' equity is at least $22,000,000. Thereafter, no more than 50% of accumulated net earnings will be paid out as dividends. There is no preference established relating to dividends paid to holders of Voting Common Stock and Class C Non-Voting Common Stock. The ratio of any dividends paid on each share of Class C Non-Voting Common Stock to each share of Voting Common Stock will be three-to-one. Farmer Mac does not expect to pay dividends in the near future. In the event of liquidation of Farmer Mac, the ratio of any distributions to holders of Non-Voting Common Stock and holders of Voting Common Stock will be three-to-one. In November 1994, Farmer Mac and Western Farm Credit Bank, a Farm Credit System institution based in Sacramento, California ("WFCB"), entered into a five-year strategic alliance agreement pursuant to which WFCB agreed to establish and operate an agricultural loan pooling program open to all Farmer Mac stockholders. As part of its commitment to establish and operate the program, WFCB agreed to purchase Class C Non-Voting Common Stock to be issued by Farmer Mac in amounts equal to the costs and expense incurred (or expected to be incurred) in establishing and operating the program, up to a maximum amount of $1.5 million. The alliance agreement also provides for Farmer Mac, concurrently with the sale of stock to WFCB, to purchase from WFCB a note in a principal amount equal to the stock purchased by WFCB. The terms of the note provide for interest at market rates and repayment from the segregated assets and property, including profits, if any, of the strategic alliance and not from the assets and property of WFCB. In December 1995, the alliance was amended to permit WFCB to purchase up to $500,000 of Class B Voting Common Stock in partial satisfaction of its $1.5 million purchase commitment. On January 23, 1996, 93,100 shares of Class B Voting Common Stock and 44,162 shares of Class C Non-Voting Common Stock were issued for an aggregate purchase price of $557,196. Concurrently, Farmer Mac purchased a note from WFCB in the principal amount of $557,196. As part of its commitment to Farmer Mac, WFCB also agreed to submit at least $50 million of loans to Farmer Mac for guarantee in a "swap transaction," in return for which it would receive warrants to purchase additional Class C Non-Voting Common Stock in an amount based on the amount by which the original aggregate principal balance of the loans in the swap transaction exceeded $50 million. The swap transaction closed on February 22, 1995, with a pool containing approximately $71.3 million principal balance of loans. On January 31, 1996, Farmer Mac issued warrants to WFCB to purchase 18,784 shares of Class C Non-Voting Common Stock. The warrants, which are entitled to certain anti- dilution protections, have an exercise price of $7.67 per share and expire on February 28, 2005. Transactions in common stock, additional paid-in-capital and accumulated deficit accounts for the three years ended December 31, 1995 are summarized as follows:
Unrealized Gain (Loss) on Common Common Common Additional Available Stock Stock Stock Paid-in for Sale Accumulated Class A Class B Class C Capital Securities Deficit Total (dollars in thousands) Balance, December 31, 1992 $670 $500 $1,170 $ 19,331 $(7,444) $14,227 Loss for 1993 _ _ _ _ (676) (676) Balance, December 31, 1993 670 500 1,170 19,331 (8,120) 13,551 Loss for 1994 _ _ _ _ (1,332) (1,332) Balance, December 31, 1994 670 500 1,170 19,331 (9,452) 12,219 Loss for 1995 _ _ _ _ (647) (647) Unrealized gain on available-for-sale securities _ _ _ $140 _ 140 Balance, December 31, 1995 $670 $ 500 $1,170$ 19,331 $140 (10,099) $11,712
11. SUBSEQUENT EVENT On March 14, 1996, Farmer Mac announced that it had reached an agreement in principle to sell 320,000 newly issued shares of Class A Voting Common Stock to Zions First National Bank, Salt Lake City, Utah ("Zions") at a price of $8.00 per share. This transaction will generate $2.56 million in new capital and increase the outstanding shares of Class A Voting Common Stock to 990,000 shares, of which Zions would own approximately 33%. Although it is expected that this transaction will be consummated on April 10, 1996, no assurances can be given that the transaction will close. 12. LEASE COMMITMENTS Farmer Mac leases its office space under a non-cancelable operating lease expiring January 6, 2002. Farmer Mac has the option to terminate the lease in January 1997, upon the payment of a termination fee of $400,000. Future minimum commitments under leasing arrangements at December 31, 1995 are as follows (dollars in thousands): Year ending December 31: 1996 232 1997 235 1998 235 1999 235 2000 235 Thereafter 235 TOTAL $1,407 Rent expense for 1995, 1994 and 1993 was $166 thousand, net of $35 thousand of sublease income, $179 thousand, net of $25 thousand of sublease income and $162 thousand, net of $37 thousand of sublease income, respectively. 13. INCOME TAXES Farmer Mac is subject to income taxes at regular corporate statutory rates. Farmer Mac had book net operating loss carryforwards of approximately $10.0 million and $9.4 million at December 31, 1995 and 1994, respectively. Tax net operating loss carryforwards of $654 thousand expire in 2010, $1.6 million expire in 2009, $1.1 million expire in 2008, $1.7 million expire in 2007, $3.0 million expire in 2006, and $2.0 million expire in 2005. Farmer Mac did not pay taxes in 1995, 1994, and 1993. 14. EMPLOYEE BENEFITS Pension Plan On December 28, 1989, Farmer Mac adopted a defined contribution pension plan for all of its employees. Beginning January 1, 1994, the Company contributed 13.2% of the lesser of an individual's gross salary and $150,000, plus 5.7% of the difference between (i) the lesser of the gross salary and $150,000 and (ii) the Social Security Taxable Wage Base. Prior to 1994, the contributions were equal to 14.4% of gross salaries. Pension expense for the years ended December 31, 1995, 1994 and 1993 was $188 thousand, $179 thousand and $162 thousand, respectively. Stock Option Plan In 1992, Farmer Mac initiated a Stock Option Plan for key management employees to acquire shares of Class C Stock. These stock options are exercisable immediately, and, if not exercised, will expire ten years from the date of grant. No options have yet been exercised. The following table summarizes stock option activity for 1995 and 1994:
Number Option of Options Price Balance, January 1, 1994 115,000 $ 15 Granted 0 - Exercised 0 - Canceled (10,000) $ 15 Balance, December 3, 1994 105,000 $ 15 Granted 0 - Exercised 0 - Canceled 0 - Balance, December 31, 1995 105,000 $ 15
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Farmer Mac is a party to transactions involving financial instruments with off-balance sheet risk. These financial instruments include Farmer Mac Securities and commitments to purchase and guarantee Farmer Mac Securities. Farmer Mac uses these financial instruments in the normal course of business to fulfill its statutory purpose of increasing liquidity for agricultural and rural residential mortgage lenders. Farmer Mac guarantees the timely payment of principal and interest on Securities issued under the Farmer Mac I and Farmer Mac II Programs. In the Farmer Mac I Program, until enactment of the 1996 Act, Poolers were required to establish reserve accounts or issue subordinated interests equal to at least 10 percent of the initial balance of the Qualified Loans in the Pool backing the Securities. Before Farmer Mac is required to make a guarantee payment on its existing Farmer Mac I Securities, full recourse must be taken against the reserve or subordinated interest. The main risk Farmer Mac bears with its existing pools is that the reserve or subordinated interest will be insufficient ultimately to cover timely payment of principal and interest to security holders. To mitigate this risk, Farmer Mac required all loans in a pool to meet standards with respect to loan-to-value ratios, other financial ratios, and diversification among crops and geographic location. Farmer Mac subjected each pool submitted for guarantee under the Farmer Mac I Program to a "stress test" designed to analyze the pool's diversification and the sufficiency of the reserve or subordinated interest under simulated conditions of greatly increased foreclosures and losses. As of December 31, 1995, the subordinated interests represented 10.0% of the outstanding balance of all Farmer Mac I Securities and subordinated interests; any losses incurred as a result of foreclosures may reduce the outstanding balance of the subordinated interests. The 1996 Act has eliminated the former minimum 10 percent reserve or subordinated interest requirement. Farmer Mac is now authorized to issue and guarantee securities backed by Pools of Qualified Loans in the Farmer Mac I Program up to 100% of the principal amount of the Qualified Loans in each Pool. As of December 31, 1995 and 1994, the outstanding principal balance of securities guaranteed under the Farmer Mac I Program and not held in Farmer Mac's portfolio was $94.8 million and $93.0 million, respectively. At December 31, 1995, a total of two loans aggregating $299 thousand were 90 days or more past due, three loans totaling $683 thousand were in foreclosure and title to two loans with an aggregate outstanding principal balance of $709 thousand had been acquired by the trust in the Farmer Mac I Program. The seven loans combined represent 0.5% of the aggregate principal amount of outstanding Farmer Mac I Securities at December 31, 1995. Management believes that no losses will be incurred by Farmer Mac as a result of the loans in foreclosure or the real estate owned by the trust. Farmer Mac's credit exposure on Farmer Mac II Securities is covered in full by the "full faith and credit" of the United States by virtue of the USDA guarantee of the principal and interest on all Guaranteed Portions. As of December 31, 1995 and 1994, the outstanding principal balances of securities guaranteed under the Farmer Mac II Program and not held in Farmer Mac's portfolio were $4.8 million and $5.6 million, respectively. As of December 31, 1995, Farmer Mac had issued a commitment to guarantee approximately $50 million of Farmer Mac I Securities. As of December 31, 1994, Farmer Mac had issued commitments to purchase for investment Farmer Mac I Securities aggregating approximately $50 million and to guarantee an additional amount of Farmer Mac I Securities aggregating approximately $65 million. 16. CONCENTRATION OF CREDIT RISK The following tables set forth the geographic and commodity diversification, as well as the range of loan-to-value ratios, of all Farmer Mac I Securities, determined as of December 31, 1995 and 1994:
Geographic Diversification 1995 1994 _________________________ ________________________ On-Balance Off-Balance On-Balance Off-Balance Sheet Sheet Sheet Sheet Securities Securities Securities Securities Geographic Region Northeast 0.42% 0.44% 0.34% 1.77% Appalachia 1.04% 1.19% 1.03% 1.54% Southeast 6.71% 2.25% 7.81% 2.83% Lake States 5.53% 4.67% 6.27% 6.61% Corn Belt 8.47% 13.90% 8.90% 19.41% Delta States 12.29% 3.67% 13.88% 4.70% Northern Plains 4.52% 5.48% 2.12% 13.33% Southern Plains 10.71% 3.81% 12.20% 4.70% Mountain 7.00% 3.90% 5.59% 8.68% Pacific 43.31% 60.69% 41.86% 36.43% Totals 100.00% 100.00% 100.00% 100.00%
Commodity Diversification 1995 1994 ________________________ ________________________ On-Balance Off-Balance On-Balance Off-Balance Sheet Sheet Sheet Sheet Commodity Group Securities Securities Securities Securities Food Grains 13.27% 8.10% 12.87% 11.13% Feed Grains 13.35% 17.70% 14.70% 23.64% Cotton/Tobacco 9.30% 4.60% 10.28% 2.88% Oilseeds 11.88% 8.00% 12.88% 12.18% Potatoes, Tomatoes, and other Veg. 9.25% 5.35% 9.95% 5.50% Permanent Plantings 23.89% 31.30% 21.56% 18.47% Sugarbeets, Cane and Other Crops 4.41% 5.78% 3.69% 5.58% Dairy 3.08% 5.39% 3.01% 3.59% Cattle and Calves 9.13% 11.81% 8.70% 12.42% Other 2.44% 1.97% 2.36% 4.61% Totals 100.00% 100.00% 100.00% 100.00%
Distribution by Loan-to-Value Ratio 1995 1994 ________________________ _______________________ On-Balance Off-Balance On-Balance Off-Balance Sheet Sheet Sheet Sheet Securities Securities Securities Securities Loan-to-Value 0.00 - 10.00% 0.02% 1.52% 0.08% 0.75% 10.01 - 20.00% 0.72% 4.44% 1.17% 3.81% 20.01 - 30.00% 3.76% 13.72% 3.86% 8.13% 30.01 - 40.00% 8.56% 21.45% 9.37% 16.90% 40.01 - 50.00% 19.06% 28.61% 20.21% 23.47% 50.01 - 60.00% 32.19% 22.95% 29.61% 33.89% 60.01 - 70.00% 31.66% 6.90% 31.50% 12.62% 70.01 - 80.00% 4.03% 0.41% 4.20% 0.43% Total 100.00% 100.00% 100.00% 100.00%
Loan-to-Value ratios represent the original loan-to-value ratios. Current Loan-to-Value ratios may be higher or lower than the original Loan-to-Value ratios. 17. FAIR VALUE DISCLOSURES The majority of Farmer Mac's assets and liabilities are financial instruments; however, most of these financial instruments lack an available active trading market. Significant estimates, assumptions, and present value calculations were therefore used for purposes of the following disclosure, resulting in a high degree of subjectivity inherent in the indicated fair values. Accordingly, these fair value estimates are not necessarily indicative of what Farmer Mac would realize in an actual sale. The estimated fair values and carrying values at December 31, 1995 and 1994 are as follows:
1995 1994 ______________________ ______________________ Estimated Estimated Fair Carrying Fair Carrying Value Value Value Value (in thousands of dollars) Financial Assets: Cash and cash equivalents $ 8,336 $ 8,336 $ 73,129 $ 73,129 Investment securities 63,289 63,281 8,681 9,437 Farmer Mac I & II securities 427,040 417,169 358,023 367,994 Other investments 2,338 2,340 10,652 10,691 Financial Liabilities: Debentures, notes and bonds net: Due within one year 207,711 207,422 168,187 168,307 Due after one year 301,698 284,084 283,850 288,209
The following methods and assumptions were used to estimate the fair value of Farmer Mac's financial instruments: Cash and cash equivalents For the short-term financial instruments, the carrying value is a reasonable estimate of fair value. Investment securities The investment securities are comprised of mortgage-backed securities and agency debt securities. The fair values of these securities were based on quoted market prices or prices quoted for similar financial instruments. Farmer Mac I and II Securities The fair values of the guaranteed securities issued under the Farmer Mac I and II Programs and held in portfolio were estimated by using a model to project each pool's total expected cash flows, given the original pool subordination level, if any, payment characteristics and net interest rates of the qualified loan collateral. Other factors considered in determining the expected cash flows were yield maintenance provisions and credit quality. These expected cash flows were then discounted by, in the case of Farmer Mac I Securities, the corresponding rates imputed from the U.S. Treasury yield curve plus an incremental interest spread similar to the spread over Treasury rates found in agency mortgage-backed securities and, in the case of Farmer Mac II Securities, Farmer Mac's corresponding net yields at December 31, 1995 and 1994. Other investments Other investments include cash invested in a guaranteed investment contract and Guaranteed Portions purchased under the Farmer Mac II Program. For the cash invested in the guaranteed investment contract, the fair value is derived by discounting the expected cash flows by a market rate of a similar financial instrument. The fair values of the Guaranteed Portions purchased under the Farmer Mac II Program are derived in the same manner as the Farmer Mac II Securities. Debentures, notes and bonds, net Debentures, notes and bonds due within one year are comprised of Discount Notes and Medium-Term Notes with a remaining maturity of less than one year. For Discount Notes, the carrying value approximates the fair value. For Medium-Term Notes with a remaining maturity of less than one year and debentures, notes and bonds due after one year, the fair values were based on quoted market prices or prices quoted for similar credit quality financial instruments or on the current rates offered to Farmer Mac for debt of the same approximate remaining maturity. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the executive officers of the Registrant and persons who have been nominated for election or reelection to the board of directors at the Registrant's annual meeting of stockholders to be held on June 13, 1996 is hereby incorporated by reference from the Registrant's definitive proxy statement which will be filed with the Commission within 120 days after the close of the fiscal year. ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is hereby incorporated by reference from the Registrant's definitive proxy statement which will be filed with the Commission within 120 days after the close of the fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGENT Information concerning security ownership of certain beneficial owners and management is hereby incorporated by reference from the Registrant's definitive proxy statement which will be filed with the Commission within 120 days after the close of the fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions is hereby incorporated by reference from the Registrant's definitive proxy statement which will be filed with the Commission within 120 days after the close of the fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements. Refer to Item 8, above. (2) Financial Statement Schedules. All schedules are omitted since they are not applicable, not required, or the information required to be set forth therein is included in the financial statements, or in notes thereto. (3) Exhibits and Reports on Form 8-K. Exhibits Description ** 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. * 3.2 - Amended and restated Bylaws of the Registrant (filed as Exhibit 3.4 to Form 10-Q filed November 14, 1995). +* 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). +* 10.2 - 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). ____________________ * Incorporated by reference to the indicated prior filing. ** Filed herewith. + Management contract or compensatory plan. +* 10.2.1 - Amendment No. 1 dated January 10, 1991 to Employment Agreement 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 10.5 to Form 10-Q filed November 15, 1994). +** 10.2.4 - Amendment No. 4 dated as of February 8, 1996 to Employment Contract between Henry D. Edelman and the Registrant. +* 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 10.11 to Form 10-K filed March 30, 1994). ___________________ * Incorporated by reference to the indicated prior filing. ** Filed herewith. + Management contract or compensatory plan. +* 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. +* 10.4 - Employment Agreement dated June 13, 1989 between Thomas R. Clark and the Registrant (Previously filed as Exhibit 10.6 to Form 10-K filed April 1, 1990). +* 10.4.1 - Amendment No. 1 dated February 14, 1991 to Employment Agreement between Thomas R. Clark and the Registrant (Previously filed as Exhibit 10.9 to Form 10-K filed April 1, 1991). +* 10.4.2 - Amendment to Employment Contract dated as of June 1,1993 between Thomas R. Clark and the Registrant (Previously filed as Exhibit 10.12 to Form 10-Q filed November 15, 1993). +* 10.4.3 - Amendment No. 3 dated June 1, 1993 to Employment Contract between Thomas R. Clark and the Registrant (Previously filed as Exhibit 10.16 to Form 10-K filed March 30, 1994). +* 10.4.4 - Amendment No. 4 dated as of June 1, 1994 to Employment Contract between Thomas R. Clark and the Registrant (Previously filed as Exhibit 10.17 to Form 10-Q filed August 15, 1994). +* 10.4.5 - Amendment No. 5 dated as of June 1, 1995 to Employment Contract between Thomas R. Clark and the Registrant (Form 10-Q filed August 14, 1995). __________________ * Incorporated by reference to the indicated prior filing. ** Filed herewith. + Management contract or compensatory plan. +** 10.4.6 - Amendment No. 6 dated as of February 8, 1996 to Employment Contract between Thomas R. Clark and the Registrant. +* 10.5 - Employment Agreement dated April 29, 1994 between Charles M. Lewis and the Registrant (Previously filed as Exhibit 10.18 to Form 10-Q filed August 15, 1994). +* 10.5.1 - Amendment No. 1 dated as of June 1, 1995 to Employment Contract between Charles M. Lewis and the Registrant (Form 10-Q filed August 14, 1995). +** 10.5.2 - Amendment No. 2 dated as of February 8, 1996 to Employment Contract between Charles M. Lewis and the Registrant. +* 10.6 - Employment Agreement dated October 7, 1991 between Michael T. Bennett and the Registrant (Previously filed as Exhibit 10.16 to Form 10-K filed March 30, 1992). +* 10.6.1 - Amendment to Employment Contract dated as of June 1, 1993 between Michael T. Bennett and the Registrant (Previously filed as Exhibit 10.17 to Form 10-Q filed November 15, 1993). +* 10.6.2 - Amendment No. 2 dated June 1, 1993 to Employment Contract between Michael T. Bennett and the Registrant (Previously filed as Exhibit 10.21 to Form 10-K filed March 30, 1994). +* 10.6.3 - Amendment No. 3 dated June 1, 1994 to Employment Contract between Michael T. Bennett and the Registrant (Previously filed as Exhibit 10.22 to Form 10-K filed August 15, 1994). +* 10.6.4 - Amendment No. 4 dated as of June 1, 1995 to Employment Contract between Michael T. Bennett and the Registrant (Form 10-Q filed August 14, 1995). +** 10.6.5 - Amendment No. 5 dated as of February 8, 1996 to Employment Contract between Michael T. Bennett and the Registrant. __________________ * Incorporated by reference to the indicated prior filing. ** Filed herewith. + Management contract or compensatory plan. +* 10.7 - Employment Agreement dated March 15, 1993 between Christopher A. Dunn and the Registrant (Previously filed as Exhibit 10.17 to Form 10-Q filed May 17, 1993). +* 10.7.1 - Amendment to Employment Contract dated as of June 1, 1993 between Christopher A. Dunn and the Registrant (Previously filed as Exhibit 10.19 to Form 10-Q filed November 15, 1993). +* 10.7.2 - Amendment No. 2 dated June 1, 1993 to Employment Contract between Christopher A. Dunn and the Registrant (Previously filed as Exhibit 10.25 to Form 10-K filed March 30, 1994). +* 10.7.3 - Amendment No. 3 dated as of June 1, 1994 to Employment Contract between Christopher A. Dunn and the Registrant (Previously filed as Exhibit 10.26 to Form 10-Q filed August 15, 1994). +* 10.7.4 - Amendment No. 4 dated as of June 1, 1995 to Employment Contract between Christopher A. Dunn and the Registrant (Form 10-Q filed August 14, 1995). +** 10.7.5 - Amendment No. 5 dated as of February 8, 1996 to Employment Contract between Christopher A. Dunn and the Registrant. +* 10.8 - Lease Agreement, dated September 30, 1991 between 919 Eighteenth Street, N.W. Associates Limited Partnership and the Registrant (Previously filed as Exhibit 10.20 to Form 10-K filed March 30, 1992). * 10.9 - Strategic Alliance Agreement, dated November 15, 1994 between Western Farm Credit Bank and the Registrant, as amended January 1, 1995 (Previously filed as Exhibit 10.28 to Form 10-K filed March 31, 1995). ** 10.9.1 - Amendment No. 2 dated as of December 15, 1995 to Strategic Alliance Agreement between Western Farm Credit Bank and the Registrant. 21 - Subsidiaries. __________________ * Incorporated by reference to the indicated prior filing. ** Filed herewith. + Management contract or compensatory plan. 21.1 - Farmer Mac Mortgage Securities Corporation, a Delaware Corporation. 21.2 - Farmer Mac Acceptance Corporation, a Delaware corporation. * 99.1 Map of U.S. Department of Agriculture (USDA) Regions (Previously filed as Exhibit 1.1 to Form 10-K filed April 1, 1991). (b) Reports on Form 8-K. The Registrant has not filed any reports on Form 8-K during the quarter ended December 31, 1995. __________________ * Incorporated by reference to the indicated prior filing. ** Filed herewith. + Management contract or compensatory plan. 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 /s/ Henry D. Edelman March 29, 1996 _________________________________ ________________________ By: Henry D. Edelman Date President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name Title Date /s/ Charles Eugene Branstool Chairman of the Board March 29, 1996 ________________________________ and Director Charles Eugene Brannstool /s/ Henry D. Edelman President and Chief March 29, 1996 _______________________________ Executive Officer Henry D. Edelman Officer (Principal Executive Officer) /s/ Nancy E. Corsiglia Vice President - Business March 29, 1996 _____________________________ Development and Treasurer Nancy E. Corsiglia (Principal Financial and Accounting Officer) Name Title Date /s/ William H. Brandon, Jr. Director March 29, 1996 ________________________________ William H. Brandon, Jr. /s/ E. J. Brown Director March 29, 1996 ________________________________ E. J. Brown /s/ James M. Cirona Director March 29, 1996 ________________________________ James M. Cirona /s/ John C. Dean Director March 29, 1996 ________________________________ John C. Dean /s/ C. G. Holthus Director March 29, 1996 ________________________________ C.G. Holthus /s/ Bill Mainer Director March 29, 1996 ________________________________ Bill Mainer /s/ James A. McCarthy Director March 29, 1996 _______________________________ James A. McCarthy /s/ Michael C. Nolan Director March 29, 1996 _______________________________ Michael C. Nolan /s/ Marilyn Peters Director March 29, 1996 _______________________________ Marilyn Peters /s/ Darryl W. Rhodes Director March 29, 1996 _______________________________ Darryl W. Rhodes /s/ Gordon C. Southern Vice Chairman March 29, 1996 _______________________________ Gordon Clyde Southern /s/ Clyde A. Wheeler Director March 29, 1996 _______________________________ Clyde A. Wheeler Securities and Exchange Commission Washington, D.C. 20549 Exhibits to Form 10-K under The Securities Exchange Act of 1934 Federal Agricultural Mortgage Corporation Exhibit Description ** 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. +** 10.2.4 - Amendment No. 4 dated as of February 8, 1996 to Employment Contract between Henry D. Edelman and the Registrant. +** 10.3.7 - Amendment No. 7 dated as of February 8, 1996 to Employment Contract between Nancy E. Corsiglia and the Registrant. +** 10.4.6 - Amendment No. 6 dated as of February 8, 1996 to Employment Contract between Thomas R. Clark and the Registrant. +** 10.5.2 - Amendment No. 2 dated as of February 8, 1996 to Employment Contract between Charles M. Lewis and the Registrant. +** 10.6.5 - Amendment No. 5 dated as of February 8, 1996 to Employment Contract between Michael T. Bennett and the Registrant. +** 10.7.5 - Amendment No. 5 dated as of February 8, 1996 to Employment Contract between Christopher A. Dunn and the Registrant. ** 10.9.1 - Amendment No. 2 dated as of December 15, 1995 to Strategic Alliance Agreement between Western Farm Credit Bank and the Registrant. ____________________ + Management contract or compensatory plan. ** Filed herewith. EXHIBIT 3.1 EXHIBIT 10.2.4 EXHIBIT 10.3.7 EXHIBIT 10.4.6 EXHIBIT 10.5.2 EXHIBIT 10.6.5 EXHIBIT 10.7.5 EX-1 2 Title VIII of the Farm Credit Act of 1971, as amended 12 U.S.C. 2279aa et seq. AGRICULTURAL MORTGAGE SECONDARY MARKET 12 U.S.C. 2279aa SEC. 8.0. DEFINITIONS. SUBTITLE A - ESTABLISHMENT AND ACTIVITIES OF FEDERAL AGRICULTURAL MORTGAGE CORPORATION For purposes of this title: (1) AGRICULTURAL REAL ESTATE. - The term "agricultural real estate" means - (A) a parcel or parcels of land, or a building or structure affixed to the parcel or parcels, that - (i) is used for the production of one or more agricultural commodities or products: and (ii) consists of a minimum acreage or is used in producing minimum annual receipts, as determined by the Corporation; or (B) principal residence that is a single family, moderate-priced residential dwelling located in a rural area, excluding - (i) any community having a population in excess of 2,500 inhabitants; and (ii) any dwelling, excluding the land to which the dwelling is affixed, with a value exceeding $100,000 (as adjusted for inflation). (2) BOARD. - The term "Board" means - (A) the interim board of directors established in section 8.2(a); and (B) the permanent board of directors established in section 8.2(b); as the case may be. (3) CERTIFIED FACILITY. - The term "certified facility" means - (A) an agricultural mortgage marketing facility that is certified under section 8.5; or (B) the Corporation and any affiliate thereof. (4) CORPORATION. - The term "Corporation" means the Federal Agricultural Mortgage Corporation established in section 8.1. (5) GUARANTEE. - The term "guarantee" means the guarantee of timely payment of the principal and interest on securities representing interests in, or obligations backed by, pools of qualified loans, in accordance with this title. (6) INTERIM BOARD. _ The term "interim board" means the interim board of directors established in section 8.2(a). (7) ORIGINATOR. _ The term "originator" means any Farm Credit System institution, bank, insurance company, business and industrial development company, savings and loan association, association of agricultural producers, agricultural cooperative, commercial finance company, trust company, credit union, or other entity that originates and services agricultural mortgage loans. (8) PERMANENT BOARD. _ The term "permanent board" means the permanent board of directors established in section 8.2(b). (9) QUALIFIED LOAN. - The term "qualified loan" means an obligation - (A) (i) that is secured by a fee-simple or leasehold mortgage with status as a first lien on agricultural real estate located in the United States that is not subject to any legal or equitable claims deriving from a preceding fee-simple or leasehold mortgage; (ii) of - (I) a citizen or national of the United States or an alien lawfully admitted for permanent residence in the United States; or a private corporation or partnership whose members, stockholders, or partners holding a majority interest in the corporation or partnership are individuals described in subclause (I); and (iii) of a person, corporation, or partnership that has training or farming experience that, under criteria established by the Corporation, is sufficient to ensure a reasonable likelihood that the loan will be repaid according to its terms; or (B) that is the portion of a loan guaranteed by the Secretary of Agriculture pursuant to the Consolidated Farm and Rural Development Act (7 U.S.C. 1921 et seq.), except that - (i) subsections (b) through (d) of section 8.6, and sections 8.8 and 8.9, shall not apply to the portion of a loan guaranteed by the Secretary or to an obligation, pool, or security representing an interest in or obligation backed by a pool of obligations relating to the portion of a loan guaranteed by the Secretary; and (ii) the portion of a loan guaranteed by the Secretary shall be considered to meet all standards for qualified loans for all purposes under this Act. (10) STATE. - The term "State" has the meaning given such term in section 5.51. 1 2U.S.C.2279aa-1 SEC. 8.1. FEDERAL AGRICULTURAL MORTGAGE CORPORATION. - (a) ESTABLISHMENT. - (1) IN GENERAL. - There is hereby established a corporation to be known as the Federal Agricultural Mortgage Corporation, which shall be a federally chartered instrumentality of the United States. (2) INSTITUTION WITHIN FARM CREDIT SYSTEM. - The Corporation shall be an institution of the Farm Credit System. (3) LIABILITY. - (A) CORPORATION. - The Corporation shall not be liable for any debt or obligation of any other institution of the Farm Credit System. (B) SYSTEM INSTITUTIONS. - The Farm Credit System and System institutions (other than the Corporation) shall not be liable for any debt or obligation of the Corporation. (b) DUTIES. - The Corporation shall - (1) in consultation with originators, develop uniform underwriting, security appraisal, and repayment standards for qualified loans; (2) determine the eligibility of agricultural mortgage marketing facilities to contract with the Corporation for the provision of guarantees for specific mortgage pools; (3) provide guarantees for the timely repayment of principal and interest on securities representing interests in, or obligations backed by, pools of qualified loans; and (4) purchase qualified loans and issue securities representing interests in, or obligations backed by, the qualified loans, guaranteed for the timely repayment of principal and interest. 12 U.S.C. 2279aa-2 SEC. 8.2. BOARD OF DIRECTORS. - (a) INTERIM BOARD. - (1) NUMBER AND APPOINTMENT. - Until the permanent board of directors established in subsection (b) of this section first meets with a quorum of its members present, the Corporation shall be under the management of an interim board of directors composed of 9 members appointed by the President within 90 days after the date of the enactment of this title as follows: (A) 3 members appointed from among persons who are representatives of banks, other financial institutions or entities, and insurance companies. (B) 3 members appointed from among persons who are representatives of the Farm Credit System institutions. (C) 2 members appointed from among persons who are farmers or ranchers who are not serving, and have not served, as directors or officers of any financial institution or entity, of which not more than 1 may be a stockholder of any Farm Credit System institution. (D) 1 member appointed from among persons who represent the interests of the general public and are not serving, and have not served, as directors or officers of any financial institution or entity. (2) POLITICAL AFFILIATION. - Not more than 5 members of the interim board shall be of the same political party. (3) VACANCY. - A vacancy in the interim board shall be filled in the manner in which the original appointment was made. (4) CONTINUATION OF MEMBERSHIP. - If- (A) any member of the interim board who was appointed to such board from among persons who are representatives of banks, other financial institutions or entities, insurance companies, or Farm Credit System institutions ceases to be such a representative: or (B) any member who was appointed from among persons who are not or have not been directors or officers of any financial institution or entity becomes a director or an officer of any financial institution or entity; such member may continue as a member for not longer than the 45-day period beginning on the date such member ceases to be such a representative or becomes such a director or officer, as the case may be. (5) TERMS. - The members of the interim board shall be appointed or the life of such board. (6) QUORUM. _ 5 members of the interim board shall constitute a quorum. (7) CHAIRPERSON. - The President shall designate 1 of the members of the interim board as the chairperson of the interim board. (8) MEETINGS. - The interim board shall meet at the call of the chairperson or a majority of its members. (9) VOTING COMMON STOCK. _ (A) INITIAL OFFERING. - Upon the appointment of sufficient members of the interim board to convene a meeting with a quorum present, the interim board shall arrange for an initial offering of common stock and shall take whatever other actions are necessary to proceed with the operations of the Corporation. (B) PURCHASERS. - Subject to subparagraph (C), the voting common stock shall be offered to banks, other financial entities, insurance companies, and System institutions under such terms and conditions as the interim board may adopt. (C) DISTRIBUTION. - The voting stock shall be fairly and broadly offered to ensure that no institution or institutions acquire a disproportionate amount of the total amount of voting common stock outstanding of a class and that capital contributions and issuances of voting common stock for the contributions are fairly distributed between entities eligible to hold class A and class B stock, as provided under section 8.4. (10) TERMINATION. - The interim board shall terminate when the permanent board of directors established in subsection (b) of this section first meets with a quorum present. (b) PERMANENT BOARD. _ (1) ESTABLISHMENT. - Immediately after the date that banks, other financial institutions or entities, insurance companies, and System institutions have subscribed and fully paid for at least $20,000,000 of common stock of the Corporation, the Corporation shall arrange for the election and appointment of a permanent board of directors. After the termination of the interim board, the Corporation shall be under the management of the permanent board. (2) COMPOSITION. - The permanent board shall consist of 15 members, of which _ (A) 5 members shall be elected by holders of common stock that are insurance companies, banks, or other financial institutions or entities: (B) 5 members shall be elected by holders of common stock thatare Farm Credit System institutions; and 5 members shall be appointed by the President, by and with the advice and consent of the Senate - (i) which members shall not be, or have been, officers or directors of any financial institutions or entities; (ii) which members shall be representatives of the general public; (iii) of which members not more than 3 shall be members of the same political party; and (iv) of which members at least 2 shall be experienced in farming or ranching. (3) PRESIDENTIAL APPOINTEES. - The President shall appoint the members of the permanent board referred to in paragraph (2)(C) not later than the later of - (A) the date referred to in paragraph (1); or the expiration of the 270-day period beginning on the date of the enactment of this title. (4) VACANCY. - (A) ELECTED MEMBERS. - Subject to paragraph (6), a vacancy among the members elected to the permanent board in the manner described in subparagraph (A) or (B) of paragraph (2) shall be filled by the permanent board from among persons eligible for election to the position for which the vacancy exists. (B) APPOINTED MEMBERS. - A vacancy among the members appointed to the permanent board under paragraph (2)(C) shall be filed in the manner in which the original appointment was made. (5) CONTINUATION OF MEMBERSHIP. - If- (A) any member of the permanent board who was appointed or elected to the permanent board from among persons who are representatives of banks, other financial institutions or entities, insurance companies, or Farm Credit System institutions ceases to be such a representative; or (B) any member who was appointed from persons who are not or have not been directors or officers of any financial institution or entity becomes a director or an officer of any financial institution or entity; such member may continue as a member for not longer than the 45-day period beginning on the date such member ceases to be such a representative, officer, or employee or becomes such a director or officer, as the case may be. (6) TERMS. - (A) APPOINTED MEMBERS. - The members appointed by the President shall serve at the pleasure of the President. (B) ELECTED MEMBERS. - The members elected under subparagraphs (A) and (B) of subsection (b)(2) of this section shall each be elected annually for a term ending on the date of the next annual meeting of the common stockholders of the Corporation and shall serve until their successors arc elected and qualified. Any seat on the permanent board that becomes vacant after the annual election of the directors shall be filled by the members of the permanent board from the same category of directors, but only for the unexpired portion of the term. (C) VACANCY APPOINTMENT. - Any member appointed to fill a vacancy occurring before the expiration of the term for which the predecessor of the member was appointed shall be appointed only for the remainder of such term. (D) SERVICE AFTER EXPIRATION OF TERM. - A member may serve after the expiration of the term of the member until the successor of the member has taken office. (7) QUORUM. - 8 members of the permanent board shall constitute a quorum. (8) NO ADDITIONAL PAY FOR FEDERAL OFFICERS OR EMPLOYEES. - Members of the permanent board who are full-time officers or employees of the United States shall receive no additional pay by reason of service on the permanent board. (9) CHAIRPERSON. - The President shall designate 1 of the members of the permanent board who are appointed by the President as the chairperson of the permanent board. (10) MEETINGS. - The permanent board shall meet at the call of the chairperson or a majority of its members. (c) OFFICERS AND STAFF. - The Board may appoint, employ, fix the pay of, and provide other allowances and benefits for such officers and employees of the Corporation as the Board determines to be appropriate. 112 U.S.C. 2279aa-3 SEC. 8.3. POWERS AND DUTIES OF CORPORATION AND BOARD. - (a) GUARANTEES. - After the Board has been duly constituted, subject to the other provisions of this title and other commitments and requirements established pursuant to law, the Corporation may provide guarantees on terms and conditions determined by the Corporation of securities issued on the security of, or in participation in, pooled interests in qualified loans. (b) DUTIES OF THE BOARD. - (1) IN GENERAL. The Board shall - (A) determine the general policies that shall govern the operations of the Corporation; (B) select,appoint, and determine the compensation of qualified persons to fill such offices as may be provided for in the bylaws of the Corporation; and (C) assign to such persons such executive functions, powers, and duties as may be prescribed by the bylaws of the Corporation or by the Board. (2) EXECUTIVE OFFICERS AND FUNCTIONS.- The persons elected or appointed under paragraph (1)(B) shall be the executive officers of the Corporation and shall discharge the executive functions, powers, and duties of the Corporation. (c) POWERS OF THE CORPORATION. - The Corporation shall be a body corporate and shall have the following powers: (1) To operate under the direction of its Board. (2) To issue stock in the manner provided in section 8.4. (3) To adopt, alter, and use a corporate seal which shall be judicially noted. (4) To provide for a president, 1 or more vice presidents, secretary, treasurer, and such other officers, employees, and agents as may be necessary, 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 such persons. (5) To provide guarantees in the manner provided under section 8.6. (6) To have succession until dissolved by a law enacted by the Congress. (7) To prescribe bylaws, through the Board, not inconsistent with law, that shall provide for- (A) the classes of the stock of the Corporation; and the manner in which - (i) the stock shall be issued, transferred, and retired; (ii) the officers, employees, and agents of the Corporation are selected; (iii) the property of the Corporation is acquired, held, and transferred; (iv) the commitments and other financial assistance of the Corporation are made; (v) the general business of the Corporation is conducted; and (vi) the privileges granted by law to the Corporation are exercised and enjoyed; (8) To prescribe such standards as may be necessary to carry out this title. (9) To enter into contracts and make payments with respect to the contracts. (10) 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. (11) To make and perform contracts, agreements, and commitments with persons and entities both inside and outside of the Farm Credit System. (12) 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. (13) To purchase, hold, sell, or assign a qualified loan, to issue a guaranteed security, representing an interest in, or an obligation backed by, the qualified loan, and to perform all the functions and responsibilities of an agricultural mortgage marketing facility operating as a certified facility under this title. (14) To establish, acquire, and maintain affiliates (as such term is defined in section 8.11(g)) under applicable State laws tocarry out any activities that otherwise would be performed directly by the Corporation under this title. (15) To exercise such other incidental powers as are necessary to carry out the powers, duties, and functions of the Corporation in accordance with this title. (d) FEDERAL RESERVE BANKS AS DEPOSITORIES AND FISCAL AGENTS. - The Federal Reserve banks shall act as depositories for, and as fiscal agents or custodians of, the Corporation. (e) ACCESS TO BOOK-ENTRY SYSTEM. - The Corporation shall have access to the book-entry system of the Federal Reserve System. 12 U.S.C. 2279aa-4 SEC. 8.4. STOCK ISSUANCE - (a) VOTING COMMON STOCK. - (1) ISSUE. - The Corporation shall issue voting common stock having such par value as may be fixed by the Board from time to time. Each share of voting common stock shall be entitled to one vote with rights of cumulative voting at all elections of directors. Voting shall be by classes as described in section 8.2(a)(9). The stock shall be divided into two classes with the same par value per share. Class A stock may be held only by entities that are not Farm Credit System institutions and that are entitled to vote for directors specified in section 8.2(b)(2)(A),including national banking associations (which shall be allowed to purchase and hold such stock). Class B stock may be held only by Farm Credit System institutions that are entitled to vote for directors specified in section 8.2(b)(2)(B). (2) LIMITATION ON ISSUE. - After the date the permanent board first meets with a quorum of its members present, voting common stock of the Corporation may be issued only to originators and certified facilities. (3) AUTHORITY OF BOARD TO ESTABLISH TERMS AND PROCEDURES. - The Board shall adopt such terms, conditions, and procedures with regard to the issue of stock under this section as may be necessary, including the establishment of a maximum amount limitation on the number of shares of voting common stock that may be outstanding at any time. (4) TRANSFERABILITY. - Subject to such limitations as the Board may impose, any share of any class of voting common stock issued under this section shall be transferable among the institutions or entities to which shares of such class of common stock may be offered under paragraph (1), except that, as to the Corporation, such shares shall be transferable only on the books of the Corporation. (5) MAXIMUM NUMBER OF SHARES. - No stockholder, other than a holder of class B stock, may own, directly or indirectly, more than 33 percent of the outstanding shares of such class of the voting common stock of the Corporation. (b) REQUIRED CAPITAL CONTRIBUTIONS.- (1) IN GENERAL - The Corporation may require each originator and each certified facility to make, or commit to make, such nonrefundable capital contributions to the Corporation as are reasonable and necessary to meet the administrative expenses of the Corporation. (2) STOCK ISSUED AS CONSIDERATION FOR CONTRIBUTION. - The Corporation, from time to time, shall issue to each originator or certified facility voting common stock evidencing any capital contributions made pursuant to this subsection. (c) DIVIDENDS. _ (1) IN GENERAL. - Such dividends as may be declared by the Board, in the discretion of the Board, shall be paid by the Corporation to the holders of the voting common stock of the Corporation pro rata based on the total number of shares of both classes of stock outstanding. (2) RESERVES REQUIREMENT. - No dividend may be declared or paid by the Board under this section unless the Board determines that adequate provision has been made for the reserve required under section 8.10(c)(1). (3) DIVIDENDS PROHIBITED WHILE OBLIGATIONS ARE OUTSTANDING. - No dividend may be declared or paid by the Board under this section while any obligation issued by the Corporation to the Secretary of the Treasury under section 8.13 remains outstanding. (d) NONVOTING COMMON STOCK. - The Corporation is authorized to issue nonvoting common stock having such par value as may be fixed by the Board from time to time. Such nonvoting common stock shall be freely transferable, except that, as to the Corporation, such stock shall be transferable only on the books of the Corporation. Such dividends as may be declared by the Board, in the discretion of the Board, may be paid by the Corporation to the holders of the nonvoting common stock of the Corporation, subject to paragraphs (2) and (3) of subsection (c) of this section. (e) PREFERRED STOCK. - (1) AUTHORITY OF BOARD. - The Corporation is authorized to issue nonvoting preferred stock having such par value as may be fixed by the Board from time to time. Such preferred stock issued shall be freely transferable, except that, as to the Corporation, such stock shall be transferred only on the books of the Corporation. (2) RIGHTS OF PREFERRED STOCK. - Subject to paragraphs (2) and (3) of subsection (c) of this section, the holders of the preferred stock shall be entitled to such rate of cumulative dividends, and such holders shall be subject to such redemption or other conversion provisions, as may be provided for at the time of issuance. No dividends shall be payable on any share of common stock at any time when any dividend is due on any share of preferred stock and has not been paid. (3) PREFERENCE OF TERMINATION OF BUSINESS. - In the event of any liquidation, dissolution, or winding up of the business of the Corporation, the holders of the preferred shares of stock shall be paid in full at the par value thereof, plus all accrued dividends, before the holders of the common shares receive any payment. 12 U.S.C. 2279aa-5 SEC. 8.5. CERTIFICATION OF AGRICULTURAL MORTGAGE MARKETING FACILITIES. - (a) ELIGIBILITY STANDARDS. - (1) ESTABLISHMENT REQUIRED. - Within 120 days after the date on which the permanent board first meets with a quorum present, the Corporation shall issue standards for the certification of agricultural mortgage marketing facilities (other than the Corporation), including eligibility standards in accordance with paragraph (2). (2) MINIMUM REQUIREMENTS. - To be eligible to be certified under the standards referred to in paragraph (1), an agricultural mortgage marketing facility (other than the Corporation) shall - (A) be an institution of the Farm Credit System or a corporation, association, or trust organized under the laws of the United States or of any State; (B) meet or exceed capital standards established by the Board; (C) have as one of the purposes of the facility, the sale or resale of securities representing interests in, or obligations backed by, pools of qualified loans that have been provided guarantees by the Corporation; (D) demonstrate managerial ability with respect to agricultural mortgage loan underwriting, servicing, and marketing that is acceptable to the Corporation; (E) adopt appropriate agricultural mortgage loan underwriting, appraisal, and servicing standards and procedures that meet or exceed the standards established by the Board; (F) for purposes of enabling the Corporation to examine the facility, agree to allow officers or employees of the Corporation to have access to all books, accounts, financial records, reports, files, and all other papers, things, or property, of any type whatsoever, belonging to or used by the Corporation that are necessary to facilitate an examination of the operations of the facility in connection with securities, and the pools of qualified loans that back securities, for which the Corporation has provided guarantees; and (G) adopt appropriate minimum standards and procedures relating to loan administration and disclosure to borrowers concerning the terms and rights applicable to loans for which guarantee is provided, in conformity with uniform standards stablished by the Corporation. (3) NONDISCRIMINATION REQUIREMENT. - The standard established under this subsection shall not discriminate between or against Farm Credit System and non-Farm Credit System applicants. (b) CERTIFICATION BY CORPORATION. _ Within 60 days after receiving an application for certification under this section, the Corporation shall certify the facility if the facility meets the standards established by the Corporation under subsection (a)(1) of this section. (c) MAXIMUM TIME PERIOD FOR CERTIFICATION. - Any certification by the Corporation of an agricultural mortgage marketing facility shall be effective for a period determined by the Corporation of not to exceed 5 years. (d) REVOCATION. - (1) IN GENERAL. - After notice and an opportunity for a hearing, the Corporation may revoke the certification of an agricultural mortgage marketing facility if the Corporation determines that the facility no longer meets the standards referred to in subsection (a) of this section. (2) EFFECT OF REVOCATION. - Revocation of a certification shall not affect any pool guarantee that has been issued by the Corporation. (e) AFFILIATION OF FCS INSTITUTIONS WITH FACILITY. - (1) ESTABLISHMENT OF AFFILIATE AUTHORIZED. - Notwithstanding any other provision of this Act, any Farm Credit System institution acting for such institution alone or in conjunction with one or more other such institutions, may establish and operate as an affiliate, an agricultural mortgage marketing facility if, within a reasonable time after such establishment, such facility obtains and thereafter retains certification under subsection (b) of this section as a certified facility. (2) EXCLUSIVE AGENCY AGREEMENT AUTHORIZED. - Any number of Farm Credit System institutions (other than the Corporation) may enter into an agreement with any certified facility (including an affiliate established under paragraph (1)) to sell the qualified loans of such institutions exclusively to or through the facility. 12 U.S.C. 2279aa-6 SEC. 8.6. GUARANTEE OF QUALIFIED LOANS.- (a) GUARANTEE AUTHORIZED FOR CERTIFIED FACILITIES. (1) IN GENERAL. - Subject to the requirements of this section and on such other terms and conditions as the Corporation shall consider appropriate, the Corporation- (A) shall guarantee the timely payment of principal and interest on the securities issued by a certified facility that represents interests solely in, or obligations fully backed by, any pool consisting solely of qualified loans which meet the standards established under section 8.8 and which are held by such facility; and (B) may issue a security, guaranteed as to the timely payment of principal and interest, that represents an interest solely in, or an obligation fully backed by, a pool consisting of qualified loans that - (i) meet the standards established under section 8.8; and (ii) have been purchased and held by the Corporation. (2) INABILITY OF FACILITY TO PAY. - If the facility is unable to make any payment of principal or interest on any security for which a guarantee has been provided by the Corporation under paragraph (1) of this section the Corporation shall make such payment as and when due in cash and on such payment shall be subrogated fully to the rights satisfied by such payment. (3) POWER OF CORPORATION. - Notwithstanding any other provision of law, the Corporation is empowered, in connection with any guarantee under this subsection, whether before or after any default, to provide by contract with the facility for the extinguishment, on default by the facility, of any redemption, equitable, legal, or other right, title, or interest of the facility in any mortgage or mortgages constituting the pool against which the guaranteed securities are issued. With respect to any issue of guaranteed securities, in the event of default and pursuant otherwise to the terms of the contract, the mortgages that constitute such pool shall become the absolute property of the Corporation subject only to the unsatisfied rights of the holder of the securities based on and backed by such pool. (b) OTHER RESPONSIBILITIES OF AND LIMITATIONS ON CERTIFIED FACILITIES. - As a condition for providing any guarantees under this section for securities issued by a certified facility that represent interests in, or obligations backed by, any pool of qualified loans, the Corporation shall require such facility to agree to comply with the following requirements: (1) LOAN DEFAULT RESOLUTION. - The facility shall act in accordance with the standards of a prudent institutional lender to resolve loan defaults. (2) SUBROGATION OF UNITED STATES AND CORPORATION TO INTERESTS OF FACILITY. - The proceeds of any collateral, judgments, settlements or guarantees received by the facility with respect to any loan in such pool, shall be applied, after payment of costs of collection - (A) first, to reduce the amount of any principal outstanding on any obligation of the Corporation that was purchased by the Secretary of the Treasury under section 8.13 to the extent the proceeds of such obligation were used to make guarantees in connection with such securities: and (B) second, to reimburse the Corporation for any such guarantee payments. (3) LOAN SERVICING. - The originator of any loan in such pool shall be permitted to retain the right to service the loan. (4) MINORITY PARTICIPATION IN PUBLIC OFFERINGS. - The facility shall take such steps as may be necessary to ensure that minority owned or controlled investment banking firms, underwriters, and bond counsels throughout the United States have an opportunity to participate to a significant degree in any public offering of securities. (5) NO DISCRIMINATION AGAINST STATES WITH BORROWERS RIGHTS. - The facility may not refuse to purchase qualified loans originating in States that have established borrowers rights laws either by statute or under the constitution of such States, except that the facility may require discounts or charge fees reasonably related to costs and expenses arising from such statutes or constitutional provisions. (c) ADDITIONAL AUTHORITY OF THE BOARD. - To ensure the liquidity of securities for which guarantees have been provided under this section, the Board shall adopt appropriate standards regarding - (1) the characteristics of any pool of qualified loans serving as collateral for such securities; and (2) transfer requirements. (d) AGGREGATE PRINCIPAL AMOUNTS OF QUALIFIED LOANS. - (1) INITIAL YEAR. - During the first year after the date of the enactment of this title, the Corporation may not provide guarantees for securities representing interests in, or obligations backed by, qualified loans (other than loans which back securities issued by Farm Credit System institutions for which the Corporation provides a guarantee) in an aggregate principal amount in excess of 2 percent of the total agricultural real estate debt outstanding at the close of the prior calendar year (as published by the Board of Governors of the Federal Reserve System), less all Farmers Home Administration agricultural real estate debt. (2) SECOND YEAR. - During the year following the year referred to in paragraph (1), the Corporation may not provide guarantees for securities representing interests in, or obligations backed by, qualified loans (other than loans which back securities issued by Farm Credit System institutions for which the Corporation provides a guarantee) in an additional principal amount in excess of 4 percent of the total agricultural real estate debt outstanding at the close of the prior calendar year, less all Farmers Home Administration agricultural real estate debt. (3) THIRD YEAR. - During the year following the year referred to in paragraph (2), the Corporation may not provide guarantees for securities representing interests in, or obligations backed by, qualified loans (other than loans which back securities issued by Farm Credit System institutions for which the Corporation provides a guarantee) in an additional principal amount in excess of 8 percent of the total agricultural real estate debt outstanding at the close of the prior calendar year, less all Farmers Home Administration agricultural real estate debt. (4) SUBSEQUENT YEARS. - In years subsequent to the year referred to in paragraph (3), the Corporation may provide guarantees without regard to the principal amount of the qualified loans guaranteed. (e) PURCHASE OF GUARANTEED SECURITIES. - (1) PURCHASE AUTHORITY. - The Corporation (and affiliates) may purchase, hold, and sell any securities guaranteed under this section by the Corporation that represent interests in, or obligations backed by, pools of qualified loans. Securities issued under this section shall have maturities and bear rates of interest as determined by the Corporation. (2) ISSUANCE OF DEBT OBLIGATIONS. - The Corporation (and affiliates) may issue debt obligations solely for the purpose of obtaining amounts for the purchase of any securities under paragraph (1), for the purchase of qualified loans (as defined in section 8.0(9)(B)), and for maintaining reasonable amounts for business operations (including adequate liquidity) relating to activities under this subsection. (3) TERMS AND LIMITATIONS. - (A) TERMS. - The obligations issued this subsection shall have maturities and bear rates of interest as determined by the Corporation, and may be redeemable at the option of the Corporation before maturity in the manner stipulated in the obligations. (B) REQUIREMENT. - Each obligation shall clearly indicate that the obligation it not an obligation of, and is not guaranteed as to principal and interest by, the Farm Credit Administration, the United States, or any other agency or instrumentality of the United States (other than the Corporation). (C) AUTHORITY. - The Corporation may not issue obligations pursuant to paragraph (2) under this subsection while any obligation issued by the Corporation under section 8.13(a) remains outstanding. 12 U.S.C. 2279aa-7 SEC. 8.7. [REPEALED] 12 U.S.C. 2279aa-8 SEC. 8.8. STANDARDS FOR QUALIFIED LOANS. - (a) STANDARDS. - Not later than 120 days after the appointment and election of the permanent Board, the Corporation, in consultation with originators, shall establish uniform underwriting, security appraisal, and repayment standards for qualified loans. In establishing standards for qualified loans, the Corporation shall confine corporate operations, so far as practicable, to mortgage loans that are deemed by the Board to be of such quality so as to meet, substantially and generally, the purchase standards imposed by private institutional mortgage investors. (b) MINIMUM CRITERIA. - To further the purpose of this title to provide a new source of long-term fixed rate financing to assist farmers and ranchers to purchase agricultural real estate, the standards established by the Board pursuant to subsection (a) of this section shall, at a minimum - (1) provide that no agricultural mortgage loan with a loan-to-value ratio in excess of 80 percent may be treated as a qualified loan; (2) require each borrower to demonstrate sufficient cash-flow to adequately service the agricultural mortgage loan; (3) contain sufficient documentation standards; (4) contain adequate standards to protect the integrity of the appraisal process with respect to any agricultural mortgage loans; (5) contain adequate standards to ensure that the borrower is or will be actively engaged in agricultural production, and require the borrower to certify to the originator that the borrower intends to continue agricultural production on the site involved; (6) minimize speculation in agricultural real estate for nonagricultural purposes; and (7) in establishing the value of agricultural real estate, consider the purpose for which the real estate is taxed. (c) LOAN AMOUNT LIMITATION. - (1) IN GENERAL. - A loan may not be treated as a qualified loan if the principal amount of such loan exceeds $2,500,000, adjusted for inflation, except as provided in paragraph (2). (2) ACREAGE EXCEPTION. - Paragraph (1) shall not apply with respect to any agricultural mortgage loan described in such paragraph if such loan is secured by agricultural real estate that, in the aggregate, comprises not more than 1,000 acres. (d) CONGRESSIONAL REVIEW. - No standard prescribed under subsection (a) shall take effect before the later of - (1) the end of a period consisting of 30 legislative days and beginning on the date such standards are submitted to the Congress; or (2) the end of a period consisting of 90 calendar days and beginning on such date. (e) NONDISCRIMINATION REQUIREMENT. - The standards established under subsection (a) shall not discriminate against small originators or small agricultural mortgage loans that are at least $50,000. The Board shall promote and encourage the inclusion of qualified loans for small farms and family farmers in the agricultural mortgage secondary market. 12 U.S.C. 2279aa-9 SEC. 8.9. EXEMPTION FROM RESTRUCTURING AND BORROWERS RIGHTS PROVISIONS FOR POOLED LOANS. - (a) RESTRUCTURING. - Notwithstanding any other provision of law, sections 4.14, 4.14A, 4.14B, 4.14C, and 4.14D and 4.36 shall not apply to any loan included in a pool of qualified loans backing securities or obligations for which the Corporation provides guarantee. The loan servicing standards established by the Corporation shall be patterned after similar standards adopted by other federally sponsored secondary market facilities. (b) BORROWERS RIGHTS. - At the time of application for a loan, originators that are Farm Credit System institutions shall give written notice to each applicant of the terms and conditions of the loan, setting forth separately terms and conditions for pooled loans and loans that are not pooled. This notice shall include a statement, if applicable, that the loan may be pooled and that, if pooled, sections 4.14, 4.14A, 4.14B, 4.14C, and 4.14D and 4.36 shall not apply. This notice also shall inform the applicant that he or she has the right not to have the loan pooled. Within 3 days from the time of commitment, an applicant has the right to refuse to allow the loan to be pooled, thereby retaining rights under sections 4.14, 4.14A,, 4.14B, 4.14C, and 4.14D and 4.36, if applicable. 12 U.S.C. 2279aa-10 SEC. 8.10. FUNDING FOR GUARANTEE; RESERVES OF CORPORATION. - (a) GUARANTEE. - The Corporation shall provide guarantees for securities representing interests in, or obligations backed by, pools of qualified loans through commitments issued by the Corporation providing for guarantees. (b) GUARANTEE FEES. - (1) INITIAL FEE. - At the time a guarantee is issued by the Corporation, the Corporation shall assess the certified facility a fee of not more than 1/2 of 1 percent of the initial principal amount of each pool of qualified loans. (2) ANNUAL FEES. - Beginning in the second year after the date the guarantee is issued under paragraph (1), the Corporation may, at the end of each year, assess the certified facility an annual fee of not more than 1/2 of 1 percent of the principal amount of the loans then constituting the pool. (3) DETERMINATION OF AMOUNT. - The Corporation shall establishsuch fees on the amount of risk incurred by the Corporation in providing the guarantees with respect to which such fee is assessed, as determined by the Corporation. Fees assessed under paragraphs (1) and (2) shall be established on an actuarially sound basis. (4) ANNUAL REVIEW BY GAO. - The Comptroller General of the United States shall annually review, and submit to the Congress a report regarding, the actuarial soundness and reasonableness of the fees established by the Corporation under this subsection.- (c) CORPORATION RESERVE AGAINST GUARANTEES LOSSES REQUIRED. - (1) IN GENERAL. - So much of the fees assessed under this section as the Board determines to be necessary shall be set aside by the Corporation in a segregated account as a reserve against losses arising out of the guarantee activities of the Corporation. (2) EXHAUSTION OF RESERVE REQUIRED. - The Corporation may not issue obligations to the Secretary of the Treasury under section 8.13 in order to meet the obligations of the Corporation with respect to any guarantees provided under this title until the reserve established under paragraph (1) has been exhausted. (d) FEES TO COVER ADMINISTRATIVE COSTS AUTHORIZED.- The Corporation may impose charges or fees in reasonable amounts in connection with the administration of its activities under this title to recover its costs for performing such administration. 12 U.S.C. 2279aa-11 SEC. 8.11. SUPERVISION, EXAMINATION, AND REPORT OF CONDITION. - (a) REGULATION.- (1) AUTHORITY.- Notwithstanding any other provision of this Act, the Farm Credit Administration shall have the authority to provide, acting through the Office of Secondary Market Oversight - (A) for the examination of the Corporation and its affiliates; and (B) for the general supervision of the safe and sound performance of the powers, functions, and duties vested in the Corporation and its affiliates by this title, including through the use of the authorities granted to the Farm Credit Administration under - (i) part C of title V; and (ii) beginning 6 months after the date of enactment of this section, section 5.17(a)(9). (2) CONSIDERATIONS. - In exercising its authority pursuant to this section, the Farm Credit Administration shall consider - (A) the purposes for which the Corporation was created; (B) the practices appropriate to the conduct of secondary markets in agricultural loans; and the reduced levels of risk associated with appropriately (3) OFFICE OF SECONDARY MARKET OVERSIGHT. - (A) Not later than 180 days after the date of enactment of this paragraph, the Farm Credit Administration Board shall establish within the Farm Credit Administration the Office of Secondary Market Oversight. (B) The Farm Credit Administration Board shall carry out the authority set forth in this section through the Office of Secondary Market Oversight. (C) The Office of Secondary Market Oversight shall be managed by a full-time Director who shall be selected by and report to the Farm Credit Administration Board. (b) EXAMINATIONS AND AUDITS.- (1) IN GENERAL. - The financial transactions of the Corporation shall be examined by examiners of the Farm Credit Administration in accordance with the principles and procedures applicable to commercial corporate transactions under such rules and regulations as may be prescribed by the Administration. (2) FREQUENCY. - The examinations shall occur at such times as the Farm Credit Administration Board may determine, but in no event less than once each year. (3) ACCESS. - The examiners shall - (A) have access to all books, accounts, financial records, reports, files, and all other papers, things, or property belonging to or in use by the Corporation and necessary to facilitate the audit; and (B) be afforded full access for verifying transactions with certified facilities and other entities with whom the Corporation conducts transactions. (c) ANNUAL REPORT OF CONDITION. - The Corporation shall make and publish an annual report of condition as prescribed by the Farm Credit Administration. Each report shall contain financial statements prepared in accordance with generally accepted accounting principles and contain such additional information as the Farm Credit Administration may by regulation prescribe. The financial statements of the Corporation shall be audited by an independent public accountant. (d) FCA ASSESSMENTS TO COVER COSTS.- The Farm Credit Administration shall assess the Corporation for the cost to the Administration of any regulatory activities conducted under this section, including the cost of any examination. (e) DEFINITION OF AFFILIATE. - As used in this title, the term "affiliate" shall mean an entity effectively controlled or owned by the Corporation, except that such term shall not include an originator (as defined in section 8.0(7)). (f) The Farm Credit Administration Board shall ensure that - (1) the Office of Secondary Market Oversight has access to a sufficient number of qualified and trained employees to adequately supervise the secondary market activities of the Corporation; and the supervision of the powers, functions, and duties of the Corporation is performed, to the extent practicable, by personnel who are not responsible for the supervision of the banks and associations of the Farm Credit System. 12 U.S.C. 2279aa-12 SEC. 8.12. SECURITIES IN CREDIT ENHANCED POOLS.- (a) FEDERAL LAWS. - (1) APPLICABILITY OF CERTAIN FEDERAL SECURITIES LAWS.- For purposes of section 3(a)(2) of the Securities Act of 1933, no security representing an interest in, or obligations backed by, a pool of qualified loans for which guarantees have been provided by the Corporation shall be deemed to be a security issued or guaranteed by a person controlled or supervised by, or acting as an instrumentality of, the Government of the United States. No such security shall be deemed to be a "government security" for purposes of the Securities Exchange Act of 1934 or for purposes of the Investment Company Act of 1940. (2) NO FULL FAITH AND CREDIT OF THE UNITED STATES.- Each security for which credit enhancement has been provided by the Corporation shall clearly indicate that the security is not an obligation of, and is not guaranteed as to principal or interest by, the Farm Credit Administration, the United States, or any other agency or instrumentality of the United States (other than the Corporation). (b) STATE SECURITIES LAWS.- (1) GENERAL EXEMPTION. - Any security or obligation that has been provided a guarantee by the Corporation shall be exempt from any law of any State with respect to or requiring registration or qualification of securities or real estate to the same extent as any obligation issued by, or guaranteed as to principal and interest by, the United States or any agency or instrumentality of the United States. (2) STATE OVERRIDE. - The provisions of paragraph (1) shall not be applicable to any State that, during the 8-year period beginning on the date of the enactment of this title, enacts a law that - (A) specifically refers to this subsection; and (B) expressly provides that paragraph (1) shall not apply to the State. (c) AUTHORIZED INVESTMENTS. _ (1) IN GENERAL. - Securities representing an interest in, or obligations backed by, pools of qualified loans with respect to which the Corporation has provided a guarantee shall be authorized investments of any person, trust, corporation, partnership, association, business trust, or business entity created pursuant to or existing under the laws of the United States or any State to the same extent that the person, trust, corporation, partnership, association, business trust, or business entity is authorized under any applicable law to purchase, hold, or invest in obligations issued by or guaranteed as to principal and interest by the United States or any agency or instrumentality of the United States. Such securities or obligations may be accepted as security for all fiduciary, trust, and public funds, the investment or deposits of which shall be under the authority and control of the United States or any State or any officers of either. (2) STATE LIMITATIONS ON PURCHASE, HOLDING, OR INVESTMENT. - If State law limits the purchase, holding, or investment in obligations issued by the United States by the person, trust, corporation, partnership, association, business trust, or business entity, securities or obligations of a certified facility issued on which the Corporation has provided a guarantee shall be considered to be obligations issued by the United States for purposes of the limitation. (3) NONAPPLICABILITY OF PROVISIONS. - (A) SUBSEQUENT STATE LAW. - Paragraphs (1) and (2) shall not apply with respect to a particular person, trust, corporation, partnership, association, business trust, or business entity, or class thereof, in any State that, prior to the expiration of the 8-year period beginning on the date of the enactment of this title, enacts a law that specifically refers to this section and either prohibits or provides for a more limited authority to purchase, hold, or invest in the securities by any person, trust, corporation, partnership, association, busines trust, or business entity, or class thereof, than is provided in paragraphs (1) and (2). (B) EFFECT OF SUBSEQUENT STATE LAW. - The enactment by any State of a law of the type described in subparagraph (A) shall not affect the validity of any contractual commitment to purchase, hold, or invest that was made prior to the effective date of the law and shall not require the sale or other disposition of any securities acquired prior to the effective date of the law. (d) STATE USURY LAWS SUPERSEDED. - A provision of the Constitution or law of any State shall not apply to an agricultural loan made by an originator or a certified facility in accordance with this title for sale to the Corporation or to a certified facility for inclusion in a pool for which the Corporation has provided, or has committed to provide, a guarantee, if the loan, not later than 180 days after the date the loan was made, is sold to the Corporation or included in a pool for which the Corporation has provided a guarantee, if the provision - (1) limits the rate or amount of interest, discount points, finance charges, or other charges that may be charged, taken, received, or reserved by an agricultural lender or a certified facility; or (2) limits or prohibits a prepayment penalty (either fixed or declining), yield maintenance, or make-whole payment that may be charged, taken, or received by an agricultural lender or a certified facility in connection with the full or partial payment of the principal amount due on a loan by a borrower in advance of the scheduled date for the payment under the terms of the loan, otherwise known as a prepayment of the loan principal. 12 U.S.C. 2279aa13 SEC. 8.13. AUTHORITY TO ISSUE OBLIGATIONS TO COVER GUARANTEE LOSSES OF CORPORATION. - (a) SALE OF OBLIGATIONS TO TREASURY. - (1) IN GENERAL. - Subject to the limitations contained in section 8.10(c) and the requirement of paragraph (2), the Corporation may issue obligations to the Secretary of the Treasury the proceeds of which may be used by the Corporation solely for the purpose of fulfilling the obligations of the Corporation under any guarantee provided by the Corporation under this title. (2) CERTIFICATION. - The Secretary of the Treasury may purchase obligations of the Corporation under paragraph (1) only if the Corporation certifies to the Secretary that (A) the requirements of section 8.10(c) have been fulfilled; and (B) the proceeds of the sale of such obligations are needed to fulfill the obligations of the Corporation under any guarantee provided by the Corporation under this title. (b) EXPEDITIOUS TRANSACTION REQUIRED. - Not later than 10 business days after receipt by the Secretary of the Treasury of any certification by the Corporation under subsection (a)(2) of this section, the Secretary of the Treasury shall purchase obligations issued by the Corporation in an amount determined by the Corporation to be sufficient to meet the guarantee liabilities of the Corporation. (c) LIMITATION ON AMOUNT OF OUTSTANDING OBLIGATIONS. - The aggregate amount of obligations issued by the Corporation under subsection (a)(1) of this section which may be held by the Secretary of the Treasury at any time (as determined by the Secretary) shall not exceed $1,500,000,000. (d) TERMS OF OBLIGATION. - (1) INTEREST. - Each obligation purchased by the Secretary of the Treasury shall bear interest at a rate determined by the Secretary, taking into consideration the average rate on outstanding marketable obligations of the United States as of the last day of the last calendar month ending before the date of the purchase of such obligation. (2) REDEMPTION. - The Secretary of the Treasury shall require that such obligations be repurchased by the Corporation within a reasonable time. (e) COORDINATION WITH TITLE 31, UNITED STATES CODE.- (1) AUTHORITY TO USE PROCEEDS FROM SALE OF TREASURY SECURITIES.- For the purpose of purchasing obligations of the Corporation, the Secretary of the Treasury may use as a public debt transaction the proceeds from the sale by the Secretary of any securities issued under chapter 31, of title 31, United States Code, and the purposes for which securities may be issued under such chapter are extended to include such purchases. (2) TREATMENT OF TRANSACTIONS. - All purchases and sales by the Secretary ofthe Treasury of obligations issued by the Corporation under this section shall be treated as public debt transactions of the United States. (f) AUTHORIZATION OF APPROPRIATIONS. - There is authorized to be appropriated to the Secretary of the Treasury $1,500,000,000, without fiscal year limitation, to carry out the purposes of this title. 12 U.S.C. 2279aa-14 SEC. 8.14. FEDERAL JURISDICTION. - Notwithstanding section 1349 of Title 28, United States Code, or any other provision of law: (1) The Corporation shall be considered an agency under sections 1345 and 1442 of such title. (2) All civil actions to which the Corporation is a party shall be deemed to arise under the laws of the United States and, to the extent applicable, shall be deemed to be governed by Federal common law. The district courts of the United States shall have originaljurisdiction of all such actions, without regard to amount of value. (3) Any civil or other action, case, or controversy in a court of a State or any court, other than a district court of the United States, to which the Corporation is a party may at any time before trial be removed by the Corporation, without the giving of any bond or security - (A) to the District Court of the United States for the district and division embracing the place where the same is pending; or (B) if there is no such district court, to the District Court of the United States for the district in which the principal office of the Corporation is located, by following any procedure for removal for causes in effect at the time of such removal. (4) No attachment or execution shall be issued against the Corporation or any of the property of the Corporation before final judgment in any Federal, State, or other court. SUBTITLE B - REGULATION OF FINANCIAL SAFETY AND SOUNDNESS OF FEDERAL AGRICULTURAL MORTGAGE CORPORATION 12 U.S.C. 2279bb SEC. 8.31. DEFINITIONS. For purposes of this subtitle: (1) COMPENSATION. - The term 'compensation' means any payment of money or the provision of any other thing of current or potential value in connection with employment. (2) CORE CAPITAL. - The term 'core capital' means, with respect to the Corporation, the sum of the following (as determined in accordance with generally accepted accounting principles): (A) The par value of outstanding common stock. (B) The par value of outstanding preferred stock. (C) Paid-in capital. (D) Retained earnings. (3) DIRECTOR. - The term 'Director' means the Director of the Office of Secondary Market Oversight of the Farm Credit Administration, selected under section 8.11(a)(3). (4) OFFICE. - The term 'Office' means the Office of Secondary Market Oversight of the Farm Credit Administration, established in section 8.11(a). (5) REGULATORY CAPITAL. - The term 'regulatory capital' means, with respect to the Corporation, the core capital of the Corporation plus an allowance for losses and guarantee claims, as determined in accordance with generally accepted accounting principles. (6) STATE. - The term 'State' means the States of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, Guam, the Virgin Islands, American Samoa, the Trust Territory of the Pacific Islands, and any other territory or possession of the United States. 12 U.S.C. 2279bb -1 SEC. 8.32. RISK-BASED CAPITAL LEVELS. (a) RISK-BASED CAPITAL TEST. - Not sooner than the expiration of the 3-year period beginning on the date of enactment of the Farm Credit System Reform Act of 1996, the Director of the Office of Secondary Market Oversight shall, by regulation, establish a risk-based capital test under this section for the Corporation. When applied to the Corporation, the risk-based capital test shall determine the amount of regulatory capital for the Corporation that is sufficient for the Corporation to maintain positive capital during a 10-year period in which both of the following circumstances occur. (1) CREDIT RISK. - With respect to securities representing an interest in, or obligations backed by, a pool of qualified loans owned or guaranteed by the Corporation and other obligations of the Corporation, losses on the underlying qualified loans occur throughout the United States at a rate of default and severity (based on any measurements of default reasonably related to prevailing industry practice in determining capital adequacy) reasonably related to the rate and severity that occurred in contiguous areas of the United States containing an aggregate of not less than 5 percent of the total population of the United States that, for a period of not less than 2 years (as established by the Director), experienced the highest rates ofdefault and severity of agricultural mortgage losses in other such areas for any period of such duration, as determined by the Director. (2) INTEREST RATE RISK. _ Interest rates on Treasury obligations of varying terms increase or decrease over the first 12 months of such 10-year period by not more than the lesser of (A) 50 percent (with respect to the average interest rates on such obligations during the 12-month period preceding the 10-year period), or (B) 600 basis points, and remain at such level for the remainder of the period. This paragraph may not be construed to require the Director to determine interest rate risk under this paragraph based on the interest rates for various long-term and short-term obligations all increasing or all decreasing concurrently. (b) CONSIDERATIONS. - (1) ESTABLISHMENT OF TEST. - In establishing the risk-based capital test under subsection (a) - (A) the Director shall take into account appropriate distinctions based on various types of agricultural mortgage products, varying terms of Treasury obligations, and any other factors the Director considers appropriate; (B) the Director shall conform loan data used in determining credit risk to the minimum geographic and commodity diversification standards applicable to pools of qualified loans eligible for guarantee; (C) the Director may take into account retained subordinated participating interests under section 8.6(b)(2) (as in effect before the date of the enactment of the Farm Credit System Reform Act of 1996); (D) the Director may take into account other methods or tests to determine credit risk developed by the Corporation before the date of the enactment of this section; and (E) the Director shall consider any other information submitted by the Corporation in writing during the 180-day period beginning on the date of the enactment of such Act. (2) REVISING TEST. - Upon the expiration of the 8-year period beginning on the date of the enactment of this section, the Director shall examine the risk-based capital test under subsection (a) and may revise the test. In making examinations and revisions under this paragraph, the Director shall take into account that, before the date of the enactment of this section, the Corporation has not issued guarantees for pools of qualified loans. To the extent that the revision of the risk-based capital test causes a change in the classification of the corporation within the enforcement levels established under section 8.35, the Director shall waive the applicability of any additional enforcement actions available because of such change for a reasonable period of time, to permit the Corporation to increase the amount of regulatory capital of the Corporation accordingly. (c) RISK-BASED CAPITAL LEVEL. - For purposes of this subtitle,the risk-based capital level for the Corporation shall be equal to the sum of the following amounts: (1) CREDIT AND INTEREST RATE RISK. - The amount of regulatory capital determined by applying the risk-based capital test under subsection (a) to the Corporation, adjusted to account for foreign exchange risk. (2) MANAGEMENT AND OPERATIONS RISK. - To provide for management and operations risk, 30 percent of the amount of regulatory capital determined by applying the risk-based capital test under subsection (a) to the Corporation. (d) SPECIFIED CONTENTS. - (1) In General. - The regulations establishing the risk-based capital test under this section shall - (A) be issued by the Director for public comment in the form of a notice of proposed rulemaking, to be first published after the expiration of the period referred to in subsection (a); and (B) contain specific requirements, definitions, methods, variables, and parameters used under the risk-based capital test and in implementing the test (such as loan loss severity, float income, loan-to-value ratios, taxes, yield curve slopes, default experience, prepayment rates, and performance of pools of qualified loans). (2) SPECIFICITY. - The regulations referred to in paragraph (1) shall be sufficiently specific to permit an individual other than the Director to apply the test in the same manner as the Director. (e) AVAILABILITY OF MODEL. - The Director shall make copies of the statistical model or models used to implement the risk-based capital test under this section available for public acquisition and may charge a reasonable fee for such copies. 12 U.S.C. 2279bb -2 SEC. 8.33. MINIMUM CAPITAL LEVEL. (a) IN GENERAL. - Except as provided in subsection (b), for purposes of this subtitle, the minimum capital level for the Corporation shall be an amount of core capital equal to the sum of - (1) 2.75 percent of the aggregate on-balance sheet assets of the Corporation, as determined in accordance with generally accepted accounting principles; and (2) 0.75 percent of the aggregate off-balance sheet obligations of the Corporation, which, for the purposes of this subtitle, shall include - (A) the unpaid principal balance of outstanding securities that are guaranteed by the Corporation and backed by pools of qualified loans; (B) instruments that are issued or guaranteed by the Corporation and are substantially equivalent to instruments described in subparagraph (A); and (C) other off-balance sheet obligations of the Corporation. (b) TRANSITION PERIOD. - (1) IN GENERAL. - For purposes of this subtitle, the minimum capital level for the Corporation - (A) prior to January 1, 1997, shall be the amount of core capital equal to the sum of - (i) 0.45 percent of the aggregate off-balance sheet obligations of the Corporation; (ii) 0.45 percent of designated on-balance sheet assets of the Corporation, as determined under paragraph (2); and (iii) 2.50 percent of on-balance sheet assets of the Corporation other than assets designated under paragraph (2); (B) during the 1-year period ending December 31, 1997, shall be the amount of core capital equal to the sum of - (i) 0.55 percent of aggregate off-balance sheet obligations of the Corporation; (ii) 1.20 percent of designated on-balance sheet assets of the Corporation, as determined under paragraph (2); and (iii) 2.55 percent of on-balance sheet assets of the Corporation other than assets designated under paragraph (2); (C) during the 1-year period ending December 31, 1998, shall be the amount of core capital equal to - (i) if the Corporation's core capital is not less than $25,000,000 on January 1, 1998, the sum of - (I) 0.65 percent of aggregate off-balance sheet obligations of the Corporation; (II) 1.95 percent of designated on-balance sheet assets of the Corporation, as determined under paragraph (2); and (III) 2.65 percent of on-balance sheet assets of the Corporation other than assets designated under paragraph (2); or (ii) if the Corporation's core capital is less than $25,000,000 on January 1, 1998, the amount determined under subsection (a); and (D) on and after January 1, 1999, shall be the amount determined under subsection (a). (2) DESIGNATED ON-BALANCE SHEET ASSETS. - For purposes of this subsection, the designated on-balance sheet assets of the Corporation shall be - (A) the aggregate on-balance sheet assets of the Corporation acquired under section 8.6(e); and (B) the aggregate amount of qualified loans purchased and held by the Corporation under section 8.3(c)(13). 12 U.S.C. 2279bb -3 SEC. 8.34. CRITICAL CAPITAL LEVEL. For purposes of this subtitle, the critical capital level for the Corporation shall be an amount of core capital equal to 50 percent of the total minimum capital amount determined under section 8.33. 12 U.S.C. 2279bb-4. SEC. 8.35. ENFORCEMENT LEVELS. (a) IN GENERAL. - The Director shall classify the Corporation, for purposes of this subtitle, according to the following enforcement levels: (1) LEVEL I. - The Corporation shall be classified as within level I if the Corporation - (A) maintains an amount of regulatory capital that is equal to or exceeds the risk-based capital level established under section 8.32; and (B) equals or exceeds the minimum capital level established under section 8.33. (2) LEVEL II. - The Corporation shall be classified as within level III if - (A) the Corporation - (i) maintains an amount of regulatory capital that is less than the risk-based capital level; and (ii) equals or exceeds the minimum capital level; or (B) the Corporation is otherwise classified as within level II under subsection (b) of this section. (3) LEVEL III. - The Corporation shall be classified as within level II if - (A) the Corporation - (i) does not equal or exceed the minimum capital level; and (ii) equals or exceeds the critical capital level established under section 8.34; or (B) the Corporation is otherwise classified as within level III under subsection (b) of this section. (4) LEVEL IV. - The Corporation shall be classified as within level IV if the Corporation - (A) does not equal or exceed the critical capital level; or (B) is otherwise classified as within level IV under subsection (b) of this section. (b) DISCRETIONARY CLASSIFICATION. - If at any time the Director determines in writing (and provides written notification to the Corporation and the Farm Credit Administration) that the Corporation is taking any action not approved by the Director that could result in a rapid depletion of core capital or that the value of the property subject to mortgages securitized by the Corporation or property underlying securities guaranteed by the Corporation, has decreased significantly, the Director may classify the Corporation - (1) as within level II, if the Corporation is otherwise within level I; (2) as within level III, if the Corporation is otherwise within level II; or (3) as within level IV, if the Corporation is otherwise within level III. (c) QUARTERLY DETERMINATION. - The Director shall determine the classification of the Corporation for purposes of this subtitle on not less than a quarterly basis (and as appropriate under subsection (b)). The first such determination shall be made for the quarter ending March 31, 1992. (d) NOTICE. - Upon determining under subsection (b) or (c) that the Corporation is within level II or II, the Director shall provide written notice to the Congress and to the Corporation - (1) that the Corporation is within such level; (2) that the Corporation is subject to the provisions of section 8.36 or 8.37, as applicable; and (3) stating the reasons for the classification of the Corporation within such level. (e) IMPLEMENTATION. - Notwithstanding paragraphs (1) and (2) of subsection (a), during the period beginning on December 13, 1991, and ending on the effective date of the risk based capital regulation issued by the Director under section 8.32, the Corporation shall be classified as within level I if the Corporation equals or exceeds the minimum capital level established under section 8.33. 12 U.S.C. 2279bb -5 SEC. 8.36. MANDATORY ACTIONS APPLICABLE TO LEVEL II. (a) CAPITAL RESTORATION PLAN. - If the Corporation is classified as within level II, the Corporation shall, within the time period determined by the Director, submit to the Director a capital restoration plan and, after approval, carry out the plan. (b) RESTRICTION OF DIVIDENDS. - If the Corporation is classified as within level II, the Corporation may not make any payment of dividends that would result in the Corporation being reclassified as within level III or IV. (c) RECLASSIFICATION FROM LEVEL II TO LEVEL III. - The Director shall immediately reclassify the Corporation as within level III (and the Corporation shall be subject to the provisions of section 8.37), if - (1) the Corporation is within level II; and (2) (A) the Corporation does not submit a capital restoration plan that is approved by the Director; or (B) the Director determines that the Corporation has failed to make, in good faith, reasonable efforts necessary to comply with such a capital restoration plan and fulfill the schedule for the plan approved by the Director. (d) EFFECTIVE DATE. - This section shall take effect upon the expiration of the 30-month period beginning on the date of the enactment of this section. 12 U.S.C. 2279bb -6 SEC. 8.37. SUPERVISORY ACTIONS APPLICABLE TO LEVEL III. (a) MANDATORY SUPERVISORY ACTIONS. - (1) CAPITAL RESTORATION PLAN. - If the Corporation is classified as within level III, the Corporation shall, within the time period determined by the Director, submit to the Director a capital restoration plan and, after approval, carry out the plan. (2) RESTRICTIONS ON DIVIDENDS. - (A) PRIOR APPROVAL. - If the Corporation is classified as within level II, the Corporation - (i) may not make any payment of dividends that would result in the Corporation being reclassified as within level IV; and (ii) make any other payment of dividends only if the Director approves the payment before the payment. (B) STANDARD FOR APPROVAL. - If the Corporation is classified as within level III, the Director may approve a payment of dividends by the Corporation only if the Director determines that the payment (i) will enhance the ability of the Corporation to meet the risk-based capital level and the minimum capital level promptly, (ii) will contribute to the long-term safety and soundness of the Corporation, or (iii) is otherwise in the public interest. (3) RECLASSIFICATION FROM LEVEL III TO LEVEL IV. - The Director shall immediately reclassify the Corporation as within level IV if - (A) the Corporation is classified as within level III; and (B) (i) the Corporation does not submit a capital restoration plan that is approved by the Director; or (ii) the Director determines that the Corporation has failed to make, in good faith, reasonable efforts necessary to comply with such a capital restoration plan and fulfill the schedule for the plan approved by the Director. (b) DISCRETIONARY SUPERVISORY ACTIONS. - In addition to any other actions taken by the Director (including actions under subsection (a)), the Director may, at any time, take any of the following actions if the Corporation is classified as within level III; (1) LIMITATION ON INCREASE IN OBLIGATIONS. - Limit any increase in, or order the reduction of, any obligations of the Corporation, including off-balance sheet obligations. (2) LIMITATION ON GROWTH. - Limit or prohibit the growth of the assets of the Corporation or require contraction of the assets of the Corporation. (3) PROHIBITION ON DIVIDENDS. - Prohibit the Corporation from making any payment of dividends. (4) ACQUISITION OF NEW CAPITAL. - Require the Corporation to acquire new capital in any form and in any amount sufficient to provide for the reclassification of the Corporation as within level II. (5) RESTRICTION OF ACTIVITIES. - Require the Corporation to terminate, reduce, or modify any activity that the Director determines creates excessive risk to the Corporation. (6) CONSERVATORSHIP. - Appoint a conservator for the Corporation consistent with this Act. (c) EFFECTIVE DATE. - This section shall take effect on January 1, 1992. 12 U.S.C. 2279bb -7 SEC. 8.38 RECAPITALIZATION OF THE CORPORATION. (a) Mandatory Recapitalization. - The Corporation shall increase the core capital of the Corporation to an amount equal to or greater than $25,000,000, not later than the earlier of - (1) the date that is 2 years after the date of enactment of this section; or (2) the date that is 180 days after the end of the first calendar quarter that the aggregate on-balance sheet assets of the Corporation, plus the outstanding principal of the off-balance sheet obligations of the Corporation, equal or exceed $2,000,000,000. (b) RAISING CORE CAPITAL. - In carrying out this section, the Corporation may issue stock under section 8.4 and otherwise employ any recognized and legitimate means of raising core capital in the power of the Corporation under section 8.3. (c) LIMITATION ON GROWTH OF TOTAL ASSETS. - During the 2-year period beginning on the date of enactment of this section, the aggregate on-balance sheet assets of the Corporation, plus the outstanding principal of the off-balance sheet obligations of the Corporation, may not exceed $3,000,000,000 if the core capital of the Corporation is less than $25,000,000. (d) ENFORCEMENT. - If the Corporation fails to carry out subsection (a) by the date required under paragraph (1) or (2) of subsection (a), the Corporation may not purchase a new qualified loan, or issue or guarantee a new loan-backed security until the core capital of the Corporation is increased to an amount equal to or greater than $25,000,000. SEC. 8.41. CONSERVATORSHIP; LIQUIDATION; RECEIVERSHIP. (a) VOLUNTARY LIQUIDATION. - The Corporation may voluntarily liquidate only with the consent of, and in accordance with a plan of liquidation approved by, the Farm Credit Administration Board. (b) INVOLUNTARY LIQUIDATION.- (1) IN GENERAL. - The Farm Credit Administration Board may appoint a conservator or receiver for the Corporation under the circumstances specified in section 4.12(b). (2) APPLICATION. - In applying section 4.12(b) to the Corporation under paragraph (1) - (A) the Corporation shall also be considered insolvent if the Corporation is unable to pay its debts as they fall due in the ordinary course of business; (B) a conservator may also be appointed for the Corporation if the authority of the Corporation to purchase qualified loans for issue or guarantee loan-backed securities is suspended; and (C) a receiver may also be appointed for the Corporation if- (i)(I) the authority of the Corporation to purchase qualified loans or issue or guarantee loan-backed securities is suspended; or (II) the Corporation is classified under section 8.35 as within level III or IV and the alternative actions available under subtitle B are not satisfactory; and (ii) the Farm Credit Administration determines that the appointment of a conservator would not be appropriate. (3) NO EFFECT ON SUPERVISORY ACTIONS. - The grounds for appointment of a conservator for the Corporation under this subsection shall be in addition to those in section 8.37. (c) APPOINTMENT OF A CONSERVATOR OR RECEIVER.- (1) QUALIFICATIONS. - Notwithstanding section 4.12(b), of conservator or receiver is appointed for the Corporation, the conservator or receiver shall be - (A) The Farm Credit Administration or any other governmental entity or employee, including the Farm Credit System insurance Corporation; or (B) Any person that - (i) has no claim against, or financial interest in, the Corporation or other basis for a conflict of interest as the conservator or receiver; and (ii) has the financial and management expertise necessary to direct the operations and affairs of the Corporation and, if necessary, to liquidate the Corporation. (2) COMPENSATION._ (A) IN GENERAL.- A conservator or receiver for Corporation and professional personnel (other than a Federal employee) employed to represent or assist the conservator or receiver may be compensated for activities conducted as, or for, a conservator or receiver. (B) LIMIT ON COMPENSATION.- Compensation may not be provided in amounts greater than the compensation paid to employees of the Federal Government for similar services, except that the Farm Credit Administration may provide compensation at higher rates that are not in excess of rates prevailing in the private sector if the Farm Credit Administration determines that compensation at higher rates is necessary in order to recruit and retain competent personnel. (C) CONTRACTUAL ARRANGEMENTS.- The conservator or receiver may contract with any governmental entity, including the Farm Credit System Insurance Corporation, to make personnel, services, and facilities of the entity available to the conservator or receiver on such terms and compensation arrangements as shall be mutually agreed, and each entity may provide the same to the conservator or receiver. (3) EXPENSES.- A valid claim for expenses of the conservatorship or receivership (including compensation under paragraph (2)) and a valid claim with respect to a loan made under subsection (f) shall - (A) be paid by the conservator or receiver from funds of the Corporation before any other valid claim against the Corporation; and (B) may be secured by a lien, on such property of the Corporation as the conservator or receiver may determine, that shall have priority over any other liens. (4) LIABILITY. - If the conservator or receiver for the Corporation is not a Federal entity, or an officer or employee for the Federal Government, the conservator or receiver shall not be personally liable for damages in tort or otherwise for an act or omission performed pursuant to and in the course of the conservatorship or receivership, unless the act or omission constitutes gross negligence or any form of intentional tortuous conduct or criminal conduct. (5) INDEMNIFICATION. - The Farm Credit Administration may allow indemnification of the conservator or receiver from the asset of the conservatorship or receivership on such terms as the Farm Credit Administration considers appropriate. (d) JUDICIAL REVIEW OF APPOINTMENT.- (1) IN GENERAL. - Notwithstanding subsection (i)(1), not later than 30 days after a conservator or receiver is appointed under subsection (b), the Corporation may bring an action in the United States District court for the District of Columbia for an order requiring the Farm Credit Administration Board to remove the conservator or receiver. The court shall, on the merits, dismiss the action or direct the Farm Credit Administration Board to remove the conservator or receiver. (2) STAY OF OTHER ACTIONS._ On the commencement of an action under paragraph (1), any court having jurisdiction of any other action or enforcement proceeding authorized under this Act to which the Corporation is party shall stay the action or proceeding during the pendency of the action for removal of the conservator or receiver. (e) GENERAL POWERS OF CONSERVATOR OR RECEIVER. - The conservator or receiver for the Corporation shall have such powers to conduct the conservatorship or receivership as shall be provided pursuant to regulations adopted by the Farm Credit Administration Board. Such powers shall be comparable to the powers available to a conservator or receiver appointed pursuant section 4.12(b). (f) BORROWINGS FOR WORKING CAPITAL.- (1) IN GENERAL.- If the conservator or receiver of the Corporation determines that it is likely that there will be insufficient funds to pay the ongoing administrative expenses of the conservatorship or receivership or that there will be insufficient liquidity to fund maturing obligations of the conservatorship or receivership, the conservator or receiver may borrow funds in such amounts, from such sources, and at such rates of interest as the conservator or receiver considers necessary or appropriate to meet the administrative expenses or liquidity needs of the conservatorship or receivership. (2) WORKING CAPITAL FROM FARM CREDIT BANKS. - A Farm Credit bank may loan funds to the conservator or receiver for a loan authorized under paragraph (1) or, in the event of receivership, a Farm Credit bank may purchase assets of the Corporation. (g) AGREEMENTS AGAINST INTERESTS OF CONSERVATOR OR RECEIVER. - No agreement that tends to diminish or defeat the right, title, or interest of the conservator or receiver for the Corporation in any asset acquired by the conservator or receiver as conservator or receiver for the Corporation shall be valid against the conservator or receiver unless the agreement - (1) is in writing; (2) is executed by the Corporation and any person claiming an adverse interest under the agreement, including the obligor, contemporaneously with the acquisition of the asset by the Corporation; (3) is approved by the Board or an appropriate committee of the Board, which approval shall be reflected in the minutes of the Board or committee; and (4) has been, continuously, from the time of the agreement's execution, an official record of the Corporation. (h) REPORT TO THE CONGRESS._ On a determination by the receiver for the Corporation that there are insufficient assets of the receivership to pay all valid claims against the receivership, the receiver shall submit to the Secretary of the Treasury, the Committee on Agriculture of the House of Representatives, and the Committee on Agriculture, Nutrition, and Forestry of the Senate a report on the financial condition of the receivership. (i) TERMINATION OF AUTHORITIES.- (1) CORPORATION. - The charter of the Corporation shall be canceled and the authority provided to the Corporation by this title shall terminate, on such date as the Farm Credit Administration Board determines is appropriate following the placement of the Corporation in receivership, but not later than the conclusion of the receivership and discharge of the receiver. (2) OVERSIGHT. - The Office of Secondary Market Oversight established under section 8.11 shall be abolished, and section 8.11(a) and subtitle B shall have no force or effect, on such date as the Farm Credit Administration Board determines is appropriate following the placement of the Corporation in receivership, but not later than the conclusion of the receivership and discharge of the receiver. PROVISIONS OF THE FARM CREDIT SYSTEM REFORM ACT OF 1996 (P.L. 104- 105, 110 STAT. 162) DIRECTLY IMPACTING FARMER MAC PROGRAM: SEC. 206 BORROWER STOCK. Section 4.3A of the Farm Credit Act of 1971 (12 U.S.C. 2154a) is amended -- (1) by redesignating subsections (f) and (g) as subsections (g) and (h), respectively; and (2) by inserting after subsection (e) the following: (f) LOANS DESIGNATED FOR SALE OR SOLD INTO THE SECONDARY MARKET.- (1) IN GENERAL._ Subject to paragraph (2) and notwithstanding any other provision of this section, the bylaws adopted by a bank or association under subsection (b) may provide - (A) in the case of a loan made on or after the date of enactment of this paragraph that is designated, at the time the loan is made, for sale into a secondary market, that no voting stock or articipation certificate purchase requirement shall apply to the borrower for the loan; and (B) in the case of a loan made before the date of enactment of this paragraph that is sold into a secondary market, that all outstanding voting stock or participation certificates held by the borrower with respect to the loan shall, subject to subsection (d)(1), be retired. (2) APPLICABILITY. - Notwithstanding any other provision of this section, in the case of a loan sold to a secondary market under title VIII, paragraph (1) shall apply regardless of whether the bank or association retains a subordinated participation interest in a loan or pool of loans or contributes to a cash reserve. (3) EXCEPTION. - (A) IN GENERAL. - Subject to subparagraph (B) and notwithstanding any other provision of this section, if a loan esignated for sale under paragraph (1)(A) is not sold into a secondary market during the 180-day period that begins on the date of the designation, the voting stock or participation certificate purchase requirement that would otherwise apply to the loan in the absence of a bylaw provision described in paragraph (1)(A) shall be effective. (B) RETIREMENT. - The bylaws adopted by a bank or association under subsection (b) may provide that if a loan described in subparagraph (A) is sold into a secondary market after the end of the 180-day period described in the subparagraph, all outstanding voting stock or participation certificates held by the borrower with respect to the loan shall, subject to subsection (d)(1), be retired. SEC. 208 BORROWERS' RIGHTS. (a) DEFINITION OF LOAN. - Section 4.14A(a)(5) of the Farm Credit Act of 1971 (12 U.S.C. 2202a(a)(5)) is amended to read as follows - (5) LOAN. - (A) IN GENERAL. - Subject to subparagraph (B), the term "loan" means a loan made to a farmer, rancher, or producer or harvester of aquatic products, for any agricultural or aquatic purpose and other credit needs of the borrower, including financing for basic processing and marketing directly related to the borrower's operations and those of other eligible farmers, ranchers, and producers or harvesters of aquatic products. A new subsection (B) is added to the end as follows: (B) EXCLUSION FOR LOANS DESIGNATED FOR SALE INTO SECONDARY MARKET. - (i) IN GENERAL. - Except as provided in clause (ii), the term "loan" does not include a loan made on or after the date of enactment of this subparagraph that is designated, at the time the loan is made, for sale into a secondary market. (ii) UNSOLD LOANS. - (I) IN GENERAL. - Except as provided in subclause (II), if a loan designated for sale under clause (i) is not sold into a secondary market during the 180-day period that begins on the date of the designation, the provisions of this section and sections 4.14, 4.14B, 4.14C, 4.14D, and 4.36 that would otherwise apply to the loan in the absence of the exclusion described in clause (i) shall become effective with respect to the loan. (II) LATER SALE. - If a loan described in subclause (I) is sold into a secondary market after the end of the 180-day period described in subclause (I), subclause (I) shall not apply with respect to the loan beginning on the date of the sale. (b) BORROWERS' RIGHTS FOR POOLED LOANS. - The first sentence of section 8.9(b) of the Farm Credit Act of 1971 (12 U. S. C. 2279aa-9(b)) is amended by inserting "(as defined in section 4.14A(a)(5))" after "application for a loan." EX-2 3 AMENDMENT NO. 4 TO EMPLOYMENT CONTRACT AGREED, as of the 8th day of February 1996, between the Federal Agricultural Mortgage Corporation (FAMC) and Henry D. Edelman (you), that the existing employment contract between the parties hereto, dated May 5, 1989, as amended by Employment Agreement Amendment No. 1 dated January 10, 1991, Amendment to Employment Agreement dated as of June 1, 1993 and Amendment No. 3 to Employment Contract dated as of June 1, 1994 (collectively, the Agreement), be and hereby is amended as follows: Sections 2 and 4 and subsections 9(a)(iii) and 9(d) of the Agreement are replaced in their entireties with the following new sections or subsections, as the case may be: 2. TERM. The term of this Agreement shall continue until June 1, 1999 or any earlier effective date of termination pursuant to Paragraph 9 hereof (the "Term"). 4. COMPENSATION. FAMC will pay to you the following aggregate compensation for all services rendered by you under this Agreement: (a) BASE SALARY. You will be paid a base salary (the Base Salary) during the Term of: Three Hundred Five Thousand Dollars ($305,000) per year effective from and including January 1, 1996 through May 31, 1996, payable in arrears on a bi- weekly basis; and Three Hundred Fifteen Thousand Dollars ($315,000) per year effective from and including June 1, 1996 through the remainder of the Term, payable in arrears on a biweekly basis; and (b) INCENTIVE COMPENSATION. In addition to your Base Salary, you will be paid an additional payment during the term of this Agreement in respect of work performed by you during the preceding Planning Year (June 1 through May 31), or portion thereof as follows: on June 1 of each year through and including the effective date of termination, an additional payment in an amount at the sole discretion of the Board of Directors if it determines that you have performed in an extraordinary manner your duties, pursuant to business plans proposed by management and approved by the Board of Directors, during the preceding Planning Year. 9(a)(iii) FAMC may terminate the employment of the Employee without "cause" at any time. Such termination shall become effective on the earlier of June 1, 1999 or two years from the date of notice of such termination. 9(d) Severance Pay. Upon termination of this Agreement pursuant to preceding subsection 9(a)(iii), FAMC shall pay you within thirty (30) days after such termination an aggregate amount in cash equal to one hundred percent (100%) of all Base Salary scheduled to be paid and not yet paid to you under this Agreement for the balance of the Term. In the event of severance of FAMC's employment of you pursuant to preceding subsections 9(a)(i) or (iii), the amount to be paid by FAMC to you hereunder will not be mitigated by any subsequent earnings by you from any source. Any other references in the Agreement to "annual Bonuses" or "levels of bonus" shall hereafter be deemed to refer to "Incentive Compensation." As amended hereby, the Agreement remains in full force and effect. Federal Agricultural Mortgage Corporation Employee By:_____________________________ _________________ Title: Chairman, Board of Directors EX-3 4 AMENDMENT NO. 7 TO EMPLOYMENT CONTRACT AGREED, as of the 8th day of February 1996, between the Federal Agricultural Mortgage Corporation (FAMC) and Nancy E. Corsiglia (you) that the existing employment contract between the parties hereto, dated May 11, 1989, as amended by letter dated December 14, 1989, Employment Agreement Amendment No. 2 dated February 14, 1991, Amendment to Employment Agreement dated as of June 1, 1993, Amendment No. 4 to Employment Contract dated as of June 1, 1993, Amendment No. 5 to Employment Contract dated as of June 1, 1994 and Amendment No. 6 to Employment Contract dated as of June 1, 1995 (collectively, the Agreement), be and hereby is amended as follows: Sections 1 and 3 and subsections 8(a)(iii) and 8(d) of the Agreement are replaced in their entireties with the following new sections or subsections, as the case may be: 1. TERM. The term of your employment shall continue until June 1, 1998 or any earlier effective date of termination pursuant to Paragraph 8 hereof (the "Term"). 3. COMPENSATION. FAMC will pay to you the following aggregate compensation for all services rendered by you under this Agreement: (a) BASE SALARY. You will be paid a base salary (the Base Salary) during the Term of One Hundred Seventy-SevenThousand Two Hundred Fifty Dollars ($177,250) per year effective from and including January 1, 1996 through May 31, 1996, payable in arrears on a bi-weekly basis; and One Hundred EightySix Thousand One Hundred Thirteen Dollars ($186,113) per year effective from and including June 1, 1996 through the remainder of the Term; and (b) INCENTIVE COMPENSATION. In addition to your Base Salary, you will be paid additional payments during the term of this Agreement in respect of work performed by you during the preceding Planning Year (June 1 through May 31), or portion thereof as follows: on June 1 of each year through and including the effective date of termination, an additional payment in an amount at the sole discretion of the Board of Directors if it determines that you have performed in an extraordinary manner your duties, pursuant to business plans proposed by management and approved by the Board of Directors, during the preceding Planning Year. 8(a) (iii) FAMC may terminate your employment without "cause" at any time. Such termination shall become effective on the earlier of June 1, 1998 or two years from the date of notice of such termination. 8(d) SEVERANCE PAY. Upon termination of this Agreement pursuant to preceding subsection 8(a)(iii), FAMC will pay you within thirty (30) days after such termination an aggregate amount in cash equal to one hundred percent (100%) of all Base Salary scheduled to be paid and not yet paid to you under this Agreement for the balance of the Term. In the event of severance of your employment by FAMC pursuant to preceding subsections 8(a)(i) or (iii), the amount to be paid by FAMC to you hereunder will not be mitigated by any subsequent earnings by you from any source. Any other references in the Agreement to "annual Bonuses" or "levels of bonus" shall hereafter be deemed to refer to "Incentive Compensation." As amended hereby, the Agreement remains in full force and effect. Federal Agricultural Mortgage Corporation Employee By:_____________________________ _________________ Title: President EX-4 5 AMENDMENT NO. 6 TO EMPLOYMENT CONTRACT AGREED, as of the 8th day of February 1996, between the Federal Agricultural Mortgage Corporation (FAMC) and Thomas R.Clark (you), that the existing employment contract between the parties hereto, dated June 13, 1989, as amended by Employment Agreement Amendment No. 1 dated February 14, 1991 and Amendment to Employment Contract dated as of June 1, 1993, Amendment No. 3 to Employment Contract dated as of June 1, 1993, Amendment No. 4 to Employment Contract dated as of June 1, 1994 and Amendment No. 5 to Employment Contract dated as of June 1, 1995 (collectively, the Agreement), be and hereby is amended as follows: Sections 1 and 3 and subsections 7(a)(iii) and 7(d) of the Agreement are replaced in their entireties with the following new sections or subsections, as the case may be: 1. TERM. The term of your employment shall continue until June 1, 1998 or any earlier effective date of termination pursuant to Paragraph 7 hereof (the "Term"). 3. COMPENSATION. FAMC will pay to you the following aggregate compensation for all services rendered by you under this Agreement: (a) BASE SALARY. You will be paid a base salary during the Term of: One Hundred Seventy-Seven Thousand Two Hundred Fifty Dollars ($177,250) per year effective from and including January 1, 1996 through May 31, 1996, payable in arrears on a bi-weekly basis; and One Hundred Eighty-Six Thousand One Hundred Thirteen Dollars ($186,113) per year effective from and including June 1, 1996 through the remainder of the Term, payable in arrears on a bi-weekly basis; and (b) INCENTIVE COMPENSATION. In addition to your Base Salary, you will be paid an additional payment during the term of this Agreement in respect of work performed by you during the preceding Planning Year (June 1 through May 31), or portion thereof as follows: on June 1 of each year through and including the effective date of termination, an additional payment in an amount at the sole discretion of the Board of Directors if it determines that you have performed in an extraordinary manner your duties, pursuant to business plans proposed by management and approved by the Board of Directors, during the preceding Planning Year. 7(a) (iii) FAMC may terminate your employment without"cause" at any time. Such termination shall be effective on the earlier of June 1, 1998, or two years from the date of notice of such termination. 7(d) SEVERANCE PAY. Upon termination of this Agreement pursuant to preceding subsection 7(a)(iii), FAMC will pay you within thirty (30) days after such termination an aggregate amount in cash equal to one hundred percent (100%) of all Base Salary scheduled to be paid and not yet paid to you under this Agreement for the balance of the Term. In the event of severance of your employment by FAMC pursuant to preceding subsections 7(a)(i) or (iii), the amount to be paid by FAMC to you hereunder will not be mitigated by any subsequent earnings by you from any source. Any other references in the Agreement to "annual Bonuses" or "levels of bonus" shall hereafter be deemed to refer to "Incentive Compensation." As amended hereby, the Agreement remains in full force and effect. Federal Agricultural Mortgage Corporation Employee By:_______________________ _______________ Title: President EX-5 6 AMENDMENT NO. 2 TO EMPLOYMENT CONTRACT AGREED, as of the 8th day of February 1996, between the Federal Agricultural Mortgage Corporation (FAMC) and Charles M. Lewis (you), that the existing employment contract between the parties hereto, dated April 29, 1994, as amended by Amendment No. 1 to Employment Contract dated as of June 1, 1995 (collectively, the Agreement), be and hereby is amended as follows: Sections 1 and 3 and subsections 7(a) (iii) and 7(c) of the Agreement are replaced in their entireties with the following new sections or subsections, as the case may be: 1. TERM. The term of your employment shall continue until June 1, 1997 or any earlier effective date of termination pursuant to Paragraph 7 hereof (the "Term"). 3. COMPENSATION. FAMC will pay to you the following aggregate compensation for all services rendered by you under this Agreement: (a) BASE SALARY. You will be paid a base salary (the Base Salary) during the Term of: Ninety- Three Thousand Seven Hundred Fifty Dollars ($93,750) effective from and including January 1, 1996 through May 31, 1996, payable in arrears on a bi- weekly basis; and Ninety-Eight Thousand Four Hundred Thirty-Eight Dollars ($98,438) per year effective from and including June 1, 1996 through the remainder of the Term, payable in arrears on a bi-weekly basis; and (b) INCENTIVE COMPENSATION. In addition to your Base Salary, you will be paid additional payments during the term of this Agreement in respect of work performed by you during the preceding Planning Year (June 1 through May 31), or portion thereof as follows: on June 1 of each year through and including the effective date of termination, an additional payment in an amount at the sole discretion of the Board of Directors if it determines that you have performed in an extraordinary manner your duties, pursuant to business plans proposed by management and approved by the Board of Directors, during the preceding Planning Year. 7(a) (iii) FAMC may terminate your employment without "cause" at any time. Such termination shall become effective on June 1, 1997. 7(c) SEVERANCE PAY. Upon termination of this Agreement pursuant to preceding subsection 7(a)(iii) or 7(a)(iv), FAMC will pay you within thirty (30) days after such termination an aggregate amount in cash equal to one hundred percent (100%) of all Base Salary scheduled to be paid and not yet paid to you under this Agreement for the balance of the Term. In the event of FAMC's severance of your employment pursuant to preceding subsection 7(a)(i), (iii) or (iv), the amount to be paid by FAMC to you hereunder shall not be mitigated by any subsequent earnings by you from any source. Any other references in the Agreement to "annual Bonuses" or "levels of bonus" shall hereafter be deemed to refer to "Incentive Compensation." As amended hereby, the Agreement remains in full force and effect. Federal Agricultural Mortgage Corporation Employee By: _______________________ _________________ Title: President EX-6 7 AMENDMENT NO. 5 TO EMPLOYMENT CONTRACT AGREED, as of the 8th February 1996, between the Federal Agricultural Mortgage Corporation (Farmer Mac) and Michael T. Bennett (you), that the existing employment contract between the parties hereto, dated October 7, 1991, as amended by Amendment to Employment Contract dated as of June 1, 1993, Amendment No. 2 to Employment Contract dated as of January 6, 1994, Amendment No. 3 to Employment Contract dated as of June 1, 1994 and Amendment No. 4 to Employment Contract dated as of June 1, 1995 (collectively, the Agreement), be and hereby is amended as follows: Sections 1, 3 and 6 and subsections 7(a)(3) and 7(d) of the Agreement are replaced in their entirety with the following new sections or subsections, as the case may be: 1. TERM. The term of your employment shall continue until June 1, 1998 or any earlier effective date of termination pursuant to Paragraph 7 hereof (the "Term"). 3. COMPENSATION. Farmer Mac will pay to you the following aggregate compensation for all services rendered by you under this Agreement: (a) BASE SALARY. You will be paid a base salary (the Base Salary) during the Term of: One Hundred SeventySeven Thousand Five Hundred Dollars ($177,500) per year effective from and including January 1, 1996 through May 31, 1996, payable in a rrears on a bi-weekly basis; and One Hundred Eighty-Six Thousand Three Hundred Seventy-Five Dollars ($186,375) per year effective from and including June 1, 1996 through the remainder of the Term, payable in arrears on a bi- weekly basis; and (b) INCENTIVE COMPENSATION. In addition to your Base Salary, you will be paid an additional payment during the term of this Agreement in respect of work performed by you during the preceding Planning Year (June 1 through May 31), or portion thereof as follows: on June 1 of each year through and including the effective date of termination, an additional payment in an amount at the sole discretion of the Board of Directors if it determines that you have performed in an extraordinary manner your duties, pursuant to business plans proposed by management and approved by the Board of Directors, during the preceding Planning Year. 7(a)(3) Farmer Mac may terminate your employment without "cause" at any time. Such termination shall become effective on June 1, 1998. 7(d) SEVERANCE PAY. Upon termination of this Agreement pursuant to preceding subsection 7(a)(3) or 7(a)(4), Farmer Mac shall pay you within thirty (30) days after such termination an aggregate amount in cash equal to one hundred percent (100%) of all Base Salary scheduled to be paid and not yet paid to you under this Agreement for the balance of the Term. In the event of severance of Farmer Mac's employment of you pursuant to preceding subsections 7(a)(1), (3) or (4),the amount to be paid by Farmer Mac to you hereunder shall not be mitigated by any subsequent earnings by you from any source. Section 6 of the Agreement is hereby amended by replacing the phrase "Twenty-five Thousand Dollars ($25,000)" with the phrase "Thirty Thousand Dollars ($30,000)." Any other references in the Agreement to "annual Bonuses" or "levels of bonus" shall hereafter be deemed to refer to "Incentive Compensation." As amended hereby, the Agreement remains in full force and effect. Federal Agricultural Mortgage Corporation Employee By: _____________________________ _________________ Title: President EX-7 8 AMENDMENT NO. 5 TO EMPLOYMENT CONTRACT AGREED, as of the 8th day of February 1996, between the Federal Agricultural Mortgage Corporation (FAMC) and Christopher A. Dunn (you), that the existing employment contract between the parties hereto, dated March 15, 1993, as amended by Amendment to Employment Contract dated as of June 1, 1993 and Amendment No. 2 to Employment Contract dated as June 1, 1993, Amendment No. 3 to Employment Contract dated as of June 1, 1994 and Amendment No. 4 to Employment Contract dated as of June 1, 1995 (collectively, the Agreement), be and hereby is amended as follows: Sections 1 and 3 and subsections 7(a)(iii) and 7(d) of the Agreement are replaced in their entireties with the following new sections or subsections, as the case may be: 1. TERM. The term of your employment shall continue until June 1, 1998 or any earlier effective date of termination pursuant to Paragraph 7 hereof (the "Term"). 3. COMPENSATION. FAMC will pay to you the following aggregate compensation for all services rendered by you under this Agreement: (a) BASE SALARY. You will be paid a base salary (the Base Salary) during the Term of: One Hundred Seventy- One Thousand Eight Hundred Seventy Five Dollars ($171,875) per year effective from and including January 1, 1996 through May 31, 1996, payable in arrears on a bi-weekly basis; and One Hundred Eighty Thousand Four Hundred Sixty-Nine Dollars ($180,469) per year effective from and including June 1, 1996 through the remainder of the Term, payable in arrears on a bi- weekly basis; and (b) INCENTIVE COMPENSATION. In addition to your Base Salary, you will be paid additional payments during the term of this Agreement in respect of work performed by you during the preceding Planning Year (June 1 through May 31), or portion thereof as follows: on June 1 of each year through and including the effective date of termination, an additional payment in an amount at the sole discretion of the Board of Directors if it determines that you have performed in an extraordinary manner your duties, pursuant to business plans proposed by management and approved by the Board of Directors, during the preceding Planning Year. 7(a) (iii) FAMC may terminate your employment without "cause" at any time. Such termination shall become effective on the earlier of June 1, 1998 or two years from the date of notice of such termination. 7(d) SEVERANCE PAY. Upon termination of this Agreement pursuant to preceding subsection 7(a)(iii), FAMC shall pay you within thirty (30) days after such termination an aggregate amount in cash equal to one hundred percent (100%) of all Base Salary scheduled to be paid and not yet paid to you under this Agreement for the balance of the Term. In the event of FAMC's severance of your employment pursuant to preceding subsections 7(a)(i), (iii) or (iv), the amount to bepaid by FAMC to you hereunder shall not be mitigated by any subsequent earnings by you from any source. Section 6 of the Agreement is hereby amended by replacing the phrase "Twenty-five Thousand Dollars ($25,000)" with the phrase "Thirty Thousand Dollars ($30,000)." Any other references in the Agreement to "annual Bonuses" or "levels of bonus" shall hereafter be deemed to refer to "Incentive Compensation." As amended hereby, the Agreement remains in full force and effect. Federal Agricultural Mortgage Corporation Employee By:________________________ ____________________ Title: President EX-8 9 AMENDMENT NO. 2 to STRATEGIC ALLIANCE AGREEMENT between FEDERAL AGRICULTURAL MORTGAGE CORPORATION and WESTERN FARM CREDIT BANK Dated as of December 15, 1995 AMENDMENT NO. 2, dated as of December 15, 1995, to Strategic Alliance Agreement, dated as of November 15, 1994, as amended by Amendment No. 1 thereto dated as of January 1, 1995 (the "Strategic Alliance Agreement"), between the FEDERAL AGRICULTURAL MORTGAGE CORPORATION, a federally chartered instrumentality of the United States ("Farmer Mac") and the WESTERN FARM CREDIT BANK, a federally chartered farm credit bank ("WFCB"). RECITALS WHEREAS, Farmer Mac and WFCB have entered into the Strategic Alliance Agreement providing, among other things, for the establishment and operation by WFCB of the Business in order to facilitate further the development of a secondary market for agricultural real estate loans; WHEREAS, under the Strategic Alliance Agreement, WFCB has the right to sell to Farmer Mac from time to time up to an aggregate of $1.5 million of its Notes, the proceeds from the sale of which are to be used by WFCB to pay or reimburse itself and Farmer Mac for expenses incurred in operating the Business; WHEREAS, under the Strategic Alliance Agreement, WFCB is obligated to purchase Class C Common Stock from Farmer Mac concurrently with the sale to Farmer Mac of a Note; WHEREAS, WFCB has requested that Farmer Mac allow WFCB the alternatives of meeting its stock purchase obligations under the Strategic Alliance Agreement by purchasing either Class B or Class C Common Stock in connection with the purchase by Farmer Mac of Notes; WHEREAS, in consideration for the continued efforts of WFCB in pursuing and operating the Business in the face of unanticipated adverse circumstances, the Board of Directors of Farmer Mac has deemed it to be in the best interests of Farmer Mac to allow WFCB the alternatives of purchasing either Class B Common Stock or Class C Common Stock under the terms set forth in Article 5 thereof, provided that the maximum amount of Class B Common Stock that may be acquired by WFCB under the Strategic Alliance Agreement shall not exceed the number of shares purchasable thereunder for $500,000; WHEREAS, WFCB and Farmer Mac desire to amend the Strategic Alliance Agreement to effectuate the allowance to WFCB of the alternative of purchasing Class B Common Stock; WHEREAS, capitalized terms used but not defined herein have the meanings given to them in the Strategic Alliance Agreement. NOW, THEREFORE, in consideration of the premises and mutual agreements herein contained, and intending to be legally bound hereby, Farmer Mac and WFCB hereby agree as follows: Section 1. Certain Definitions. The definition of "Book Value" in Article 1 of the Strategic Alliance Agreement is hereby replaced with the following new definition: "Book Value" at any date shall mean: (i) with respect to the Class B Common Stock, the quotient of (x) the stockholders' equity of Farmer Mac determined in accordance with GAAP as of such date divided by (y) the sum of (A) the aggregate number of shares of Class A Common Stock outstanding on such date, (B) the aggregate number of shares of Class B common Stock outstanding on such date and (C) the product of three multiplied by the aggregate number of shares of Class C Common Stock outstanding on such date; and (ii) with respect to the Class C Common Stock, the product of three multiplied by the quotient calculated in (i) above. For illustrative purposes only, an example of the calculation of Book Value with respect to the Class C Common Stock is set forth in Schedule 1. Section 2. Representations and Warranties. In Section 4.1(b) of the Strategic Alliance Agreement, the reference to "Class C Common Stock" in the last sentence thereof is hereby changed to "Class B Common Stock and/or Class C Common Stock, as the case may be,". In Sections 4.1(d) and 4.2(c) of the Strategic Alliance Agreement, all references to "Class C Common Stock" are hereby changed to "Class B Common Stock and/or Class C Common Stock, as the case may be,". Section 3. Stock Purchases and Debt Obligations. (a) Section 5.1(a) of the Strategic Alliance Agreement is hereby replaced with the following new section: (a) Terms of Purchase. Subject to the terms and conditions hereof, the WFCB agrees to purchase from Farmer Mac, and Farmer Mac agrees to issue and sell to the WFCB at the WFCB's election, concurrently with the purchase by Farmer Mac of any Note (as defined in Section 5.2(a)) issued by the WFCB on any Closing Date, as provided in Section 5.2, an aggregate number of shares of either Class B Common Stock or Class C Common Stock or any combination of Class B Common Stock or Class C Common Stock equal to the principal amount of the Note being issued by the WFCB on such Closing Date, divided by the applicable Per Share Price (as defined below) on such Closing Date; provided, however, that the aggregate number of shares of Class B Common Stock that may be purchased by the WFCB under this Agreement shall not exceed the number calculated by dividing $500,000 by the Per Share Price of shares of Class B Common Stock on the Closing Date for such purchase. The applicable "Per Share Price" of shares of Class B Common Stock or Class C Common Stock at any Closing Date shall be equal to the greater of (x) the Book Value per share of the Class B Common Stock or Class C Common Stock, as the case may be, as of the end of the fiscal quarter most recently ended prior to such Closing Date with respect to which Farmer Mac has filed a Form 10-Q or Form 10-K with the SEC and (y) the par value of the Class B Common Stock or Class C Common Stock, as the case may be. The closing of the purchase by the WFCB of Class B Common Stock and/or Class C Common Stock, as the case may be, shall occur on the applicable Closing Date. Farmer Mac shall give the WFCB at least five days' prior written notice of the relevant Per Share Price applicable for such Closing Date. (b) In Sections 5.1(b), 5.1(c), 5.2(g) and 5.2(i) all references to "Class C Common Stock" are hereby changed to "Class B Common Stock and/or Class C Common Stock, as the case may be,". Section 4. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. IN WITNESS WHEREOF, each of the parties has caused this Amendment to be duly executed on its behalf as of the day and year first above written. FEDERAL AGRICULTURAL MORTGAGE CORPORATION By: Henry D. Edelman Its: President and Chief Executive Officer WESTERN FARM CREDIT BANK By: James M. Cirona Its: President and Chief Executive Officer EX-27 10
5 1000 12-MOS DEC-31-1994 DEC-31-1995 8,336 482,790 21,084 0 0 512,210 65 0 512,464 216,556 284,084 0 0 2,340 9,372 512,464 37,761 37,761 0 0 3,699 0 34,709 (647) 0 0 0 0 0 (647) (.28) (.28)
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