SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) November 26, 1997
Federal Agricultural Mortgage Corporation
(Exact Name of Registrant as Specified in its Charter)
Federally chartered instrumentality
of the United States 0-17440 52-1578738
State or Other Jurisdiction of Incorporation (Commission (IRS Employer
File Number) Identification No.)
919 18th Street, N.W., Suite 200, Washington, D.C. 20006
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (202) 872-7700
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N/A
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 5. Other Events
On November 26, 1997, the Federal Agricultural Mortgage Corporation
completed the sale of 400,000 shares of its Class C Non-Voting Common Stock, par
value $1.00 per share, in an underwritten public offering. A copy of the final
Offering Circular used in connection with the offer and sale of those securities
is attached.
Item 7. Financial Statements and Exhibits
Exhibit 99(1) - Offering Circular, dated November 21, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements 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
(Registrant)
By: /s/ Michael T. Bennett
Michael T. Bennett
Vice President
Date: November 26, 1997
<PAGE>
Exhibit Index
Exhibit 99(1)
<PAGE>
OFFERING CIRCULAR NOVEMBER 21 , 1997
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350,000 Shares
Farmer Mac
Federal Agricultural Mortgage Corporation
Class C Non-Voting Common Stock
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The 350,000 shares of Class C Non-Voting Common Stock, par value $1.00 per share
(the "Class C Common Stock"), are being offered by the Federal Agricultural
Mortgage Corporation ("Farmer Mac"), a federally chartered instrumentality of
the United States created by Congress to establish a secondary market for
agricultural real estate mortgage loans.
The Class C Common Stock is quoted on the Nasdaq National Market ("Nasdaq")
under the symbol "FAMCK." On November 20, 1997, the last reported sales price of
the Class C Common Stock on Nasdaq was $62 per share. See "Price Range of Class
C Common Stock and Dividends."
FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE CLASS C COMMON STOCK
OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 8 TO 11.
THE CLASS C COMMON STOCK IS NOT REQUIRED TO BE REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. ACCORDINGLY, NO REGISTRATION STATEMENT HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THE CLASS C COMMON STOCK HAS NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
OFFERING CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE UNITED STATES GOVERNMENT DOES NOT GUARANTEE PAYMENTS DUE ON FUNDS INVESTED
IN THE STOCK OR INDEBTEDNESS OF FARMER MAC, ANY DIVIDEND PAYMENTS ON SHARES OF
FARMER MAC STOCK OR THE PROFITABILITY OF FARMER MAC.
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discounts and Farmer Mac(2)
Commissions(1)
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<S> <C> <C> <C>
Per Share $61.00 $3.44 $57.56
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<S> <C> <C> <C>
Total(3) $21,350,000 $1,204,000 $20,146,000
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(1) Farmer Mac has agreed to indemnify the Underwriter against certain
liabilities. See "Underwriting."
(2) Before deducting expenses of the Offering payable by Farmer Mac estimated
to be $150,000.
(3) Farmer Mac has granted the Underwriter a 30-day option to purchase up to
50,000 additional shares of Class C Common Stock on the same terms per
share solely to cover over-allotments, if any. If such option is exercised
in full, the total price to public will be $24,400,000, the total
underwriting discounts and commissions will be $1,376,000 and the total
proceeds to Farmer Mac will be $23,024,000. See "Underwriting."
</TABLE>
The Class C Common Stock is being offered by the Underwriter as set forth under
"Underwriting" herein. It is expected that delivery of the shares of Class C
Common Stock will be made at the offices of SBC Warburg Dillon Read Inc., New
York, New York, on or about November 26, 1997.
SBC Warburg Dillon Read Inc.
<PAGE>
AVAILABLE INFORMATION
Farmer Mac is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by Farmer Mac with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549; Suite 1400, the Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661; and Seven World Trade Center, New York,
New York 10048. Copies of such materials can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates or by accessing the Commission's website on the
internet at http://www.sec.gov. Such materials also can be obtained by accessing
Farmer Mac's website on the internet at http://www.farmermac.com or by writing
or calling the Corporate Secretary of Farmer Mac at 919 18th Street, N.W.,
Washington, D.C. 20006, telephone number (202) 872-7700.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Pursuant to the requirements of the Exchange Act, Farmer Mac prepares an
Annual Report on Form 10-K that describes Farmer Mac, its business and
operations and contains Farmer Mac's audited financial statements. On a
quarterly basis and also in accordance with such requirements, Farmer Mac
prepares Quarterly Reports on Form 10-Q that include unaudited financial data
and other information concerning its business and operations. The following
documents filed by Farmer Mac with the Commission pursuant to the Exchange Act
are incorporated herein by reference: (1) Farmer Mac's Annual Report on Form
10-K for the year ended December 31, 1996; and (2) Farmer Mac's Quarterly
Reports on Form 10-Q for the quarters ended March 31, June 30, and September 30,
1997. In addition to the foregoing, all documents filed by Farmer Mac pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Offering Circular and thereafter until the termination of the offering
of the Class C Common Stock offered hereby are incorporated herein by reference
and deemed to be a part hereof from the date of filing of such documents. Any
statement contained herein or in a document incorporated herein by reference
shall be deemed to be modified or superseded for purposes of this Offering
Circular to the extent that a statement contained herein or in any other
subsequently filed document that also is incorporated herein by reference
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Offering Circular. Investors can obtain any of the foregoing documents
in the manner described under "Available Information."
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS C COMMON
STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT-COVERING TRANSACTIONS AND THE IMPOSITION OF A PENALTY BID. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
OFFERING CIRCULAR SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto included
elsewhere or incorporated by reference in this Offering Circular. Unless
otherwise specified, all data in this Offering Circular assume that the
Underwriter's over-allotment option has not been exercised.
The Corporation
General
Farmer Mac is a federally chartered instrumentality of the United States
created by Congress in 1988 to establish a secondary market for agricultural
real estate mortgage loans, including rural housing loans. Farmer Mac provides
liquidity to the agricultural mortgage market by: (i) purchasing newly
originated agricultural mortgage loans directly from lenders on a continuing
basis (the "cash window"); (ii) exchanging agricultural mortgage loans for
Farmer Mac-guaranteed securities backed by the same loans ("swap transactions");
and (iii) purchasing portfolios of seasoned agricultural mortgage loans
("existing loans") on a negotiated basis. Agricultural mortgage loans purchased
by Farmer Mac are aggregated into pools that back Farmer Mac-guaranteed
securities, which are sold periodically into the capital markets.
The Farm Credit System Reform Act of 1996 (the "1996 Act"), enacted by
Congress in February 1996, expanded Farmer Mac's agricultural secondary market
authorities, thereby improving its operating flexibility. In its pre-1996 Act
operations, Farmer Mac was dependent upon third party "poolers" to aggregate
agricultural mortgage loans and submit them to Farmer Mac for securitization and
was precluded from issuing its guarantee without the existence of a minimum 10%
cash reserve or subordinated (first loss) interest. As a result of the 1996 Act,
Farmer Mac now purchases agricultural mortgage loans directly from lenders and
issues and guarantees securities backed by such loans without the pre-1996 Act
cash reserve or subordinated interest requirement.
Farmer Mac conducts its business through two programs, "Farmer Mac I" and
"Farmer Mac II." The Farmer Mac I program involves the purchase and
securitization of agricultural mortgage loans that are not guaranteed by any
instrumentality or agency of the United States. The Farmer Mac II program
involves the purchase of the "guaranteed portions" of loans guaranteed by the
U.S. Department of Agriculture (the "USDA") and the issuance of securities
backed by such guaranteed portions. Farmer Mac's sources of revenue are: (i)
fees it receives in connection with the issuance of its guarantees; (ii) gains
on the sales of securities backed by loans it purchases; and (iii) net interest
income earned on its portfolio of guaranteed securities purchased under the
Farmer Mac I and II programs, its investment portfolio and loans purchased
pending securitization.
Prior to the enactment of the 1996 Act, Farmer Mac completed seven
securitizations under the Farmer Mac I program resulting in guarantees of
approximately $748 million of securities (of which approximately $234 million
are currently outstanding). Since the 1996 Act, Farmer Mac has completed nine
securitizations under the revised Farmer Mac I program resulting in guarantees
of approximately $320 million of securities (of which approximately $316 million
are currently outstanding). From the inception of the Farmer Mac II program in
1991 through September 30, 1997, Farmer Mac guaranteed approximately $346
million of securities issued thereunder (of which approximately $263 million are
currently outstanding). The Farmer Mac II program was not affected by the 1996
Act.
In addition to its increased business activity, Farmer Mac has increased
its presence in the capital markets, particularly the debt markets, through the
implementation of an expanded debt issuance strategy intended to attract more
investors to its debt and mortgage-backed securities and thereby improve the
liquidity of those securities and reduce its borrowing and securitization costs.
The proceeds of these increased debt issuances have been invested primarily in
high quality, short- and long-term floating rate investments, which have
generated net interest income that has contributed substantially to Farmer Mac's
increased profitability. Farmer Mac's eventual objective for the proceeds of its
increased debt issuances is investment in the Farmer Mac I program through the
acquisition and securitization of loans meeting Farmer Mac's standards
("Qualified Loans"). During the phase-in of that objective, the term of which is
dependent upon growth in Farmer Mac's core guarantee business, Farmer Mac
expects to continue to invest in non-program (investment) assets.
Growth in Farmer Mac's core business is dependent upon guarantee volume
which, in turn, depends upon the increase in the cumulative volume of loans
acquired through the Farmer Mac programs. Loan volume has not been increasing as
rapidly as management anticipated following the passage of the 1996 Act due, in
part, to the longer than expected lead-time between marketing initiatives and
the realization of results. Notwithstanding the slowness in loan volume growth,
expenses have been increasing as management seeks to attract more sellers and
expand the level of their participation. As a result of increased marketing
efforts and the introduction of new loan products with competitive rates and
terms, Farmer Mac has begun to attract a diverse network of sellers ranging from
community banks to regional financial institutions including, among others,
AgFirst Farm Credit Bank, Columbia, South Carolina; Firstar Bank, Milwaukee,
Wisconsin; First Union Bank of Virginia, Harrisonburg, Virginia; Glendale
Federal Bank, Glendale, California; Northwest Farm Credit Services, ACA,
Spokane, Washington; US Bank National Association, Minneapolis, Minnesota; and
Wells Fargo Bank, San Francisco, California. Farmer Mac also has begun to
attract the interest of non-traditional agricultural real estate lenders,
particularly mortgage bankers and agricultural supply and equipment companies,
for whom Farmer Mac's management believes the advantages of its program would
result in diversification of income sources and more efficient utilization of
their existing facilities and personnel at low marginal costs through access to
their established customer base. In that regard, GMAC Commercial Mortgage
Corporation has submitted an application to become an approved seller. The
addition of mortgage bankers and regional financial institutions, many of whom
have experience selling loans to the residential secondary mortgage market
agencies, should significantly increase the number of outlets offering Farmer
Mac loans. Many of these institutions have undertaken, or would be expected to
undertake, marketing initiatives, utilizing various media sources, to advertise
the availability of Farmer Mac loans. Because most of these institutions are, or
will be, new to the Farmer Mac programs, management cannot predict the timing or
the level of volume likely to be generated by them, although management does not
anticipate any such volume prior to 1998. Based on management's evaluation of
the business potential of these and other prospective participants, Farmer Mac
will continue to add resources, including additional field personnel and other
employees dedicated to customer service, to support these institutions' efforts
in establishing and expanding an agricultural secondary market presence in the
areas they serve, and to attract more sellers who offer the prospect of active
participation in Farmer Mac's programs.
Target Markets
The primary target markets for Farmer Mac's programs are traditional
agricultural lenders, such as commercial banks, insurance companies and
institutions of the Farm Credit System ("System Institutions"), as well as
non-traditional lenders, such as mortgage bankers and agricultural supply and
equipment companies. Management estimates that approximately $41 billion of
outstanding agricultural real estate mortgage indebtedness was eligible for the
Farmer Mac I program at December 31, 1996 (approximately $6 billion as annual
new originations and approximately $35 billion as existing loans held by
lenders). Management also estimates that more than $6 billion of outstanding
USDA-guaranteed indebtedness was eligible for purchase by Farmer Mac under the
Farmer Mac II program at December 31, 1996.
Program Advantages
Farmer Mac's programs offer agricultural lenders opportunities to: (i)
provide borrowers with loan products and terms not otherwise generally
available, including loans with long-term maturities at fixed interest rates;
(ii) increase their fee income from origination and servicing fees on new loan
volume; (iii) reduce their regulatory capital requirements, since Farmer
Mac-guaranteed securities swapped for agricultural whole loans are accorded a
lower risk-weight under risk-based capital guidelines; and (iv) improve balance
sheet liquidity, since Farmer Mac-guaranteed securities may be pledged as
collateral and used in repurchase transactions.
<PAGE>
Operating Strategy
Farmer Mac's operating strategy is to expand the existing network of
lenders approved to participate in its programs and increase the level of their
participation. Farmer Mac is pursuing this strategy through marketing
initiatives focused on increasing lenders' awareness of the advantages of Farmer
Mac's programs and attracting regional banks, mortgage bankers and agricultural
supply and equipment companies to utilize those programs. Farmer Mac has
increased its marketing capabilities, including a recent expansion of the number
of regionally based marketing personnel dedicated to direct lender-contacts,
sales efforts and support services.
Growth Strategy
Farmer Mac's growth strategy is to continue to expand the size of the
Farmer Mac I and II programs. With respect to the Farmer Mac I program, this
will involve continued penetration of the annual new originations market by
increasing, through the frequent introduction of new loan products with
competitive terms and rates, its regular cash window purchases of agricultural
mortgage loans from lenders. Farmer Mac also intends to penetrate the market for
new and existing loans by offering lenders the opportunity either to swap loans
for Farmer Mac-guaranteed securities (backed by their respective mortgage loans)
or to sell such loans to Farmer Mac. With respect to the Farmer Mac II program,
Farmer Mac intends to continue to penetrate the secondary market for
USDA-guaranteed loans by offering lenders opportunities for increased fee
income, increased liquidity and a variety of competitively priced loan products
that otherwise may not be available.
<TABLE>
<CAPTION>
The Offering
<S> <C>
Class C Common Stock offered
by Farmer Mac(1)........................... 350,000 shares
Common Stock outstanding after Offering:
Class A Voting Common Stock............. 996,350 shares
Class B Voting Common Stock............. 500,301 shares
Class C Non-Voting Common Stock (2)..... 3,028,214 shares
Use of proceeds............................. The net proceeds will be added
to the working capital of Farmer
Mac and used for general
corporate purposes.
Nasdaq National Market symbol............... FAMCK
</TABLE>
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(1) The ratio of any dividends and liquidation distributions payable in
respect of each share of Class C Common Stock compared to each share of
Voting Common Stock (as defined herein) will be 3-to-1. See "Price Range
of Class C Common Stock and Dividends."
(2) Based upon 2,678,214 shares of Class C Common Stock outstanding on
November 13, 1997. Does not include options to purchase 277,708 shares of
Class C Common Stock reserved for issuance under Farmer Mac's stock option
plans, of which options to purchase 105,000, 112,830, 54,828, 1,850 and
3,200 shares have been granted as of November 13, 1997 to directors,
officers and other employees at an exercise price of $6.56, $7.88, $35.50,
$38.75 and $54.75 per share, respectively.
<PAGE>
<TABLE>
<CAPTION>
Summary Financial Information
(dollars in thousands, except per share amounts)
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- ------------------
1993 1994 1995 1996 1996 1997
-------- --------- -------- -------- --------- --------
Statement of
Operations Data:
<S> <C> <C> <C> <C> <C> <C>
Interest Income.... $32,642 $31,712 $36,424 $37,353 $27,491 $57,521
Interest Expense... 30,848 30,303 34,709 34,623 25,546 52,367
Net Interest Income 1,794 1,409 1,715 2,730 1,945 5,154
Other Income:
Guarantee Fee
Income............ 1,203 1,143 1,263 1,623 1,130 1,857
Gain on Issuance
of Mortgage-Backed
Securities, Net.... -- -- -- 1,070 913 2,111
Miscellaneous Income. 176 177 171 63 55 233
Total Other Income .. 1,379 1,320 1,434 2,756 2,098 4,201
Other Expenses ........ 3,976 4,061 3,796 5,081 3,665 5,904
Income (Loss) Before
Income Taxes and
Extraordinary Item .. (803) (1,332) (647) 405 378 3,451
Provision for Income
Taxes ............... -- -- -- 12 -- 103
Income (Loss) Before
Extraordinary Item (803) (1,332) (647) 393 378 3,348
Extraordinary Gain(1) . 127 -- -- 384 384 --
Net Income (Loss).. (676) (1,332) (647) 777 762 3,348
Earnings (Loss) Per
Share (2):
Earnings (Loss)
Per Share Before
Extraordinary Item:
Class A and B
Voting Common
Stock ........... $(0.17) $(0.28) $(0.14) $0.07 $0.07 $0.33
Class C Non-Voting
Common Stock .... $(0.51) $(0.85) $(0.41) $0.22 $0.22 $1.00
Earnings (Loss)
Per Share:
Class A and B
Voting Common
Stock ........... $(0.14) $(0.28) $(0.14) $0.14 $0.15 $0.33
Class C Non-Voting
Common Stock .... $(0.43) $(0.85) $(0.41) $0.43 $0.44 $1.00
</TABLE>
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(1) Farmer Mac recognized extraordinary gains of $127,000 for the year ended
December 31, 1993 and $384,000 for both the nine months ended September
30, 1996 and the year ended December 31, 1996, from the early
extinguishment of $14.9 million and $8.0 million of debt in 1993 and 1996,
respectively.
(2) Amounts represent primary and fully diluted earnings per share for each
period presented, except for the year ended December 31, 1996 in which
case fully diluted earnings per share were $.07 and $0.20 per share before
extraordinary item and $0.13 and $0.40 per share after extraordinary item
for Classes A and B Voting Common Stock and Class C Non-Voting Common
Stock, respectively. Earnings per share reflect the 3-to-1 dividend and
liquidation rights ratio applicable to each share of Class C Non-Voting
Common Stock relative to each share of Classes A and B Voting Common
Stock.
<PAGE>
<TABLE>
<CAPTION>
At September 30, 1997
-----------------------------
As
Actual Adjusted (3)
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<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and investment securities $ 894,199 $ 914,195
Farmer Mac I and II Securities.................. 436,531 436,531
Total Assets.................................... 1,374,153 1,394,149
Debentures, Notes and Bonds, Net:
Due within one year....................... 954,814 954,814
Due after one year........................ 357,981 357,981
Total Liabilities............................. 1,323,574 1,323,574
Stockholders' Equity.......................... 50,579 70,575
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- ------------------
1993 1994 1995 1996 1996 1997
-------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Other Data:
Outstanding guaranteed
securities (at end
of period).......... $487,614 $459,332 $502,365 $631,283 $598,162 $813,527
Loans purchased...... 39,946 81,243 157,265 254,883 191,919 257,364
Guaranteed securities
issued............. 39,946 81,243 157,265 240,715 186,588 247,713
</TABLE>
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(3) As adjusted to give effect to the sale of the Class C Common Stock offered
hereby and the application of the net proceeds therefrom. See "Use of
Proceeds."
<PAGE>
RISK FACTORS
Potential investors should carefully consider the following factors, as
well as the more detailed information and Consolidated Financial Statements and
Notes thereto included elsewhere or incorporated by reference in this Offering
Circular, before making a decision to invest in the Class C Common Stock offered
hereby.
Uncertainties Regarding the Development of the Agricultural Secondary Market
The target markets for Farmer Mac's secondary market operations are
traditional agricultural mortgage lenders, such as commercial banks, insurance
companies and System Institutions, as well as non-traditional lenders, such as
mortgage bankers and agricultural supply and equipment companies. To date,
however, the Farmer Mac programs have received only limited acceptance among
traditional agricultural lenders, although the number of lenders approved to
participate in Farmer Mac's programs is growing. Farmer Mac believes that a
number of factors have constrained participation in its programs, including: (i)
the historical preference of lenders to retain agricultural mortgage loans in
their own portfolios; (ii) the excess liquidity and capital of many lenders;
(iii) the disinclination of many lenders to offer intermediate-term adjustable
rate and long-term fixed rate agricultural mortgage loans as a result of the
higher profitability associated with short-term lending; and (iv) the lack of
borrower demand for intermediate- and long-term loans due to the lower interest
rates generally associated with shorter term loans. Farmer Mac's ability to
secure the active participation of lenders in its programs will depend, to a
large extent, on each particular lender's perception of the advantages of
selling agricultural mortgage loans into the Farmer Mac secondary market.
Non-traditional lenders, particularly mortgage bankers and certain agricultural
supply and equipment companies, have expressed interest in Farmer Mac's
programs, but only a few have applied to become approved sellers. No assurance
can be given that, even if approved as sellers, they will become active
participants. Notwithstanding the number of agricultural lenders approved to
participate in Farmer Mac's programs and the volume of agricultural mortgage
loans purchased since the 1996 Act, no assurance can be given that lenders will
be willing to sell agricultural mortgage loans to Farmer Mac in the future on
terms and in sufficient volume to ensure Farmer Mac's long-term success.
History of Operating Results
Prior to 1996, Farmer Mac's profitability was determined largely by the
volume of guarantee transactions in which it engaged; however, the volume of its
guarantee transactions generally did not produce income in excess of operating
expenses, resulting in net losses. Several developments, particularly the
enactment of the 1996 Act, two stock sales in 1996 and the implementation of the
expanded debt issuance strategy in early 1997, have significantly improved
Farmer Mac's operating flexibility, resulting in increased earnings and
quarterly profits beginning with the 1996 second quarter. While these
developments have improved Farmer Mac's financial condition, future improvements
in operating results will depend largely upon growth in Farmer Mac's core
business, particularly the volume of new guarantee transactions, which cannot be
assured at this time.
Regulatory and Legislative Risks
By statute, the Farm Credit Administration (the "FCA") has general
regulatory and supervisory authority over both Farmer Mac and the Farm Credit
System. Most of the other traditional agricultural lenders that qualify to
participate in Farmer Mac's programs, particularly commercial banks and
insurance companies, are also regulated and supervised by federal and, in some
cases, state regulatory agencies. While the primary purpose of such agencies is
to ensure the safety and soundness of the respective regulated entities, the
actions taken by those agencies could adversely affect Farmer Mac or the ability
of certain lenders to participate in Farmer Mac's programs or the terms of their
participation.
Farmer Mac is also subject to the risk that legislative developments or
interpretations of its authorizing legislation could adversely affect it or the
ability of certain lenders to participate in its programs or the terms of any
such participation. Moreover, from time to time, various agricultural lending
groups, including the Farm Credit System and the commercial banking industry,
and their respective trade associations, have pursued legislative initiatives
that, if successful, could have had an adverse impact on the development and
operation of the Farmer Mac secondary market. No assurance can be given that
similar legislative initiatives by such groups or associations will not be
undertaken in the future or that, if undertaken, such initiatives would not be
successful.
In May 1997, in response to concerns expressed by certain members of
Congress regarding the investment practices of government-sponsored enterprises
("GSEs"), the United States General Accounting Office (the "GAO") commenced a
review of the investment policies and practices of certain GSEs, including
Farmer Mac, the Federal National Mortgage Association ("Fannie Mae") and the
Federal Home Loan Mortgage Corporation ("Freddie Mac"). Investment income
contributed substantially to Farmer Mac's profitability for the nine months
ended September 30, 1997. Currently, there are certain restrictions on Farmer
Mac's investment authorities, but Farmer Mac is unable to predict whether new
statutory or regulatory restrictions would be recommended by the GAO or, if so
recommended, whether action would be taken by Congress or Farmer Mac's regulator
to impose additional restrictions. Any additional investment restrictions, and
their possible impact on Farmer Mac's financial position and results of
operations, would have to be evaluated in light of their severity, the time
period of their effectiveness, growth in Farmer Mac's core business and
alternative business strategies available to Farmer Mac. There can be no
assurance, however, that additional investment restrictions would not have a
material adverse effect on Farmer Mac's financial position or results of
operations.
Liabilities for Guarantees of Mortgage-Backed Securities
Farmer Mac issues guarantees on mortgage-backed securities that are backed
by qualified agricultural real estate mortgage loans, including rural housing
loans. Farmer Mac's obligations under guarantees it issues on mortgage-backed
securities are obligations solely of Farmer Mac and are not backed by the full
faith and credit of the United States. Sources of funding for the payment of
claims, if any, under such guarantees are the fees that Farmer Mac charges for
providing such guarantees and Farmer Mac's general assets, which, collectively,
are insignificant in relation to its potential exposure to any meaningful level
of possible claims under such guarantees. A portion of the guarantee fees
received by Farmer Mac is required to be set aside by Farmer Mac in a segregated
account as a reserve against losses from its guarantee activities. Currently,
Farmer Mac's contingent liabilities in respect of guarantees of outstanding
mortgage-backed securities substantially exceed any amounts in such reserve
account. Furthermore, although Farmer Mac may borrow up to $1.5 billion from the
U.S. Treasury, under certain conditions, to meet its guarantee obligations,
Farmer Mac anticipates that its future contingent liabilities in respect of its
guarantees on mortgage-backed securities will greatly exceed its resources,
including amounts in its guarantee reserve account and its limited ability to
borrow from the U.S. Treasury.
Statutory Capital Requirements and Future Risk-Based Capital Regulations
As a GSE created by Congress, Farmer Mac is subject to significant
statutory and regulatory requirements, including minimum and critical capital
requirements, that affect its business, operations and results. The 1996 Act
established new higher minimum and critical capital requirements for Farmer Mac,
but provided a transition period resulting in the full imposition of those
requirements on and after January 1, 1999 (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources"). By statute, the FCA, acting through the Director of the
Office of Secondary Market Oversight (the "Director"), is required to promulgate
risk-based capital regulations for Farmer Mac. The 1996 Act provided 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. Thus, beginning in early February 1999, the
Director may, and would be expected to, publish risk-based capital regulations
for Farmer Mac, thereby possibly increasing Farmer Mac's regulatory capital
requirements beyond the minimum and critical capital requirements in the 1996
Act. Farmer Mac has had no discussions with the Director as to the possible
level of risk-based capital regulations that may be proposed. In the event that
Farmer Mac were unable to comply with higher capital regulations that may be
imposed in the future, the FCA could take certain enforcement actions against
Farmer Mac, including curtailing its business activities.
Commodity and Geographic Concentrations
At September 30, 1997, Farmer Mac had guarantees outstanding on
approximately $550 million of securities issued under the Farmer Mac I program,
of which approximately $316 million were issued pursuant to Farmer Mac's new
authorities under the 1996 Act. Of the $550 million of Farmer Mac-guaranteed
securities issued under the Farmer Mac I program, $259 million, or 47%, of the
agricultural mortgage loans backing such securities (by principal balance) are
located in the Pacific region of the United States (primarily the states of
California and Washington). In addition, $143 million, or 26%, of the
agricultural mortgage loans backing Farmer Mac-guaranteed securities are
classified as "permanent plantings" (primarily apples, grapes and almonds),
almost all of which are located in the Pacific region. Protracted adverse
weather, market or other conditions affecting the particular geographic region
and the particular commodities related to the agricultural mortgage loans
backing Farmer Mac-guaranteed securities could have a material adverse effect on
Farmer Mac's financial condition and results of operations.
Agricultural Lending Risks
Repayment of agricultural loans is typically dependent upon the success of
the related farming operation, which is, in turn, dependent upon many variables
and factors over which farmers may have little or no control, such as weather
conditions, economic conditions (both domestic and international) and even
political conditions. If the cash flow from a farming operation is diminished
(for example, adverse weather conditions destroy a crop or prevent the planting
or harvesting of a crop), the farmer's ability to repay the loan may be
impaired. Significant loan payment defaults by farmers are likely to necessitate
payments under Farmer Mac's guarantees and could have a material adverse effect
on Farmer Mac's financial condition and results of operations.
Discretion as to Use of Proceeds
The primary purposes of this Offering are to increase Farmer Mac's equity
capital and enhance the market liquidity of the Class C Common Stock. Management
believes that market conditions make this an attractive time to raise additional
capital and enhance the Class C Common Stock's liquidity. As of the date of this
Offering Circular, Farmer Mac has no specific plans for the net proceeds from
the Offering other than to use them for working capital and other general
corporate purposes. Accordingly, management will retain broad discretion as to
the use of the net proceeds.
Volatility of Stock Price; Limited Trading
The market price of the Class C Common Stock has been, and in the future
may be, subject to significant volume and price fluctuations from time to time
in response to numerous factors, including, but not limited to, Farmer Mac's
reported financial results, the introduction or enactment of legislation or
adoption of regulations affecting Farmer Mac, changing conditions in the economy
in general or the agricultural lending market in particular, publicity relating
to Farmer Mac or the agricultural lending market and volatility in the stock
markets generally. In addition, there has been, and in the future there may be,
limited trading in the Class C Common Stock.
Dilution
Purchasers of Class C Common Stock offered hereby will experience an
immediate and substantial dilution of $40.99 of net tangible book value per
share of their investment. See "Dilution."
Absence of Cash Dividends
Farmer Mac has never paid any cash dividends in respect of the Class C
Common Stock and does not anticipate paying any such cash dividends in the
foreseeable future.
Dependence on Key Personnel
Farmer Mac is dependent upon certain key executive officers, many of whom
have been employed by Farmer Mac for most of its operating history. The loss of
those officers or its inability to attract and retain key employees in the
future could have a material adverse effect on Farmer Mac and its operations.
Forward-Looking Statements
When used in this Offering Circular and the documents incorporated by
reference herein, the words "believes," "anticipates," "expects," "intends,"
"should" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to a number of risks and uncertainties
summarized in this "Risk Factors" section or elsewhere in this Offering Circular
or the documents incorporated by reference herein. Given such risks and
uncertainties, prospective investors are cautioned not to place undue reliance
on such statements. Farmer Mac also undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements that may be made
to reflect any future events or circumstances.
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by Farmer Mac from the issue and sale of
the Class C Common Stock offered hereby are estimated to be approximately $20.0
million, and will be added to Farmer Mac's working capital and used for general
corporate purposes.
PRICE RANGE OF CLASS C COMMON STOCK AND DIVIDENDS
The Class C Common Stock is quoted on the Nasdaq National Market
("Nasdaq") under the symbol "FAMCK." Prior to December 16, 1996, the Class C
Common Stock was quoted on the Nasdaq SmallCap Market of the Nasdaq Stock
Market. The following table sets forth the high and low closing bid quotations
of the Class C Common Stock as reported by Nasdaq for the periods indicated. The
prices are inter-dealer prices without adjustment for retail mark-ups,
mark-downs or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
High Low
<S> <C> <C> <C>
1995
First Quarter................. $ 4 1/2 $ 4 1/2
Second Quarter................ 4 1/2 4 1/4
Third Quarter................. 4 1/4 4 1/4
Fourth Quarter................ 4 1/4 4 1/4
1996
First Quarter................. $ 7 $ 4 1/4
Second Quarter................ 8 7
Third Quarter................. 24 1/4 8
Fourth Quarter................ 30 1/2 18 1/2
1997
First Quarter................. $37 $ 24 1/4
Second Quarter................ 35 1/4 24 1/2
Third Quarter................. 41 1/4 33 1/2
Fourth Quarter (through
November 20) ................ 66 39
</TABLE>
On November 20, 1997, the last reported sales price of the Class C Common
Stock on Nasdaq was $62 per share, and there were approximately 1,568 registered
holders thereof.
Farmer Mac has never paid cash dividends in respect of any class of its
Common Stock and does not anticipate paying any dividends on the Class C Common
Stock in the foreseeable future. The ratio of any dividends payable on each
share of Class C Common Stock compared to dividends payable on each share of the
Voting Common Stock will be 3-to-1.
<PAGE>
CAPITALIZATION
The following table sets forth the short-term indebtedness and
capitalization of Farmer Mac at September 30, 1997, and as adjusted to give
effect to the estimated net proceeds from the issuance of the Class C Common
Stock offered hereby.
<TABLE>
<CAPTION>
September 30, 1997
---------------------------
Actual As Adjusted
------------ ------------
(in thousands)
<S> <C> <C>
Short-Term Debt.................................... $ 954,814 $ 954,814
============ ============
Long-Term Debt..................................... $ 357,981 $ 357,981
------------ ------------
Stockholders' Equity:
Common Stock:
Class A Voting, $1 par value, 2,000,000
shares authorized, 995,950 shares issued
and outstanding ............................. $ 996 $ 996
Class B voting, $1 par value, 2,000,000
shares authorized, 500,301 shares issued
and outstanding ............................. 500 500
Class C non-voting, $1 par value,
4,000,000 shares authorized, 2,677,942
shares issued and outstanding,
3,027,942 shares to be issued
and outstanding(1) 2,678 3,028
Additional paid in capital...................... 52,610 72,256
Unrealized gain on securities available-
for-sale .................................... 936 936
Accumulated deficit............................. (7,141) (7,141)
------------ ------------
Total Stockholders' Equity................... 50,579 70,575
============ ============
Total Capitalization...................... $ 408,560 $ 428,556
============ ============
</TABLE>
- -----------------
(1) Does not include options to purchase 277,708 shares of Class C Common
Stock reserved for issuance under Farmer Mac's stock option plans, of
which options to purchase 105,000, 112,830, 54,828, 1,850 and 3,200 shares
have been granted as of November 13, 1997 to directors, officers and other
employees at an exercise price of $6.56, $7.88, $35.50, $38.75 and $54.75
per share, respectively.
<PAGE>
DILUTION
The net tangible book value of Farmer Mac as of September 30, 1997 was
$50.6 million. Net tangible book value per share of Class C Common Stock
represents the amount of total tangible assets less total liabilities of Farmer
Mac, divided by the number of shares of all classes of Common Stock then
outstanding, adjusted to give effect to the 3-to-1 dividend and liquidation
preferences applicable to each share of Class C Common Stock relative to each
share of Voting Common Stock. Calculated on such basis, the net tangible book
value per share of Class C Common Stock was $15.92 at such date. After giving
effect to the sale of the Class C Common Stock offered hereby and deducting
estimated offering expenses payable by Farmer Mac, the adjusted net tangible
book value of Farmer Mac as of September 30, 1997 would be $20.01 per share of
Class C Common Stock. This represents an immediate dilution of $40.99 of net
tangible book value per share of Class C Common Stock to purchasers thereof. The
following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C>
Offering price per share of Class C Common Stock............... $ 61.00
Adjusted net tangible book value per share of Class C
Common Stock (1) .............................................. 20.01
----------
Dilution per share of Class C Common Stock to
purchasers thereof (1) ........................................ $ 40.99
==========
</TABLE>
- -----------------
(1) If net tangible book value per share of Class C Common Stock were
calculated without adjustment for the 3-to-1 dividend and liquidation
preferences applicable to each share of Class C Common Stock relative to
each share of Voting Common Stock, such net tangible book value per share
of Class C Common Stock would be $15.60 and the dilution per share of
Class C Common Stock to purchasers thereof would be $45.40.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The historical selected consolidated financial data below as of and for
the years ended December 31, 1993, 1994, 1995 and 1996 are derived from, and are
qualified by reference to, the financial statements audited by KPMG Peat Marwick
LLP, independent certified public accountants, which are incorporated herein by
reference. The selected financial data for the nine month periods ended
September 30, 1996 and 1997 are derived from unaudited financial statements
contained in Appendix A hereto and include all adjustments, consisting of normal
recurring accruals, which Farmer Mac considers necessary for a fair presentation
of the financial position and the results of operations for these periods.
Results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of operations for the full year. The data presented below
should be read in conjunction with Farmer Mac's Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other information included or
incorporated by reference herein.
<TABLE>
<CAPTION>
(dollars in thousands, except per share amounts)
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- ------------------
1993 1994 1995 1996 1996 1997
-------- --------- -------- -------- --------- --------
Statement of
Operations Data:
<S> <C> <C> <C> <C> <C> <C>
Interest Income.... $32,642 $31,712 $36,424 $37,353 $27,491 $57,521
Interest Expense... 30,848 30,303 34,709 34,623 25,546 52,367
Net Interest Income 1,794 1,409 1,715 2,730 1,945 5,154
Other Income:
Guarantee Fee
Income.............. 1,203 1,143 1,263 1,623 1,130 1,857
Gain on Issuance
of Mortgage-
Backed Securities,
Net .............. -- -- -- 1,070 913 2,111
Miscellaneous
Income.............. 176 177 171 63 55 233
Total Other Income. 1,379 1,320 1,434 2,756 2,098 4,201
Other Expenses..... 3,976 4,061 3,796 5,081 3,665 5,904
Income (Loss) Before
Income Taxes and
Extraordinary Item .. (803) (1,332) (647) 405 378 3,451
Provision for Income
Taxes............... -- -- -- 12 -- 103
Income (Loss) Before
Extraordinary Item .. (803) (1,332) (647) 393 378 3,348
Extraordinary Gain (1) 127 -- -- 384 384 --
Net Income (Loss) ..... (676) (1,332) (647) 777 762 3,348
</TABLE>
- ---------------
(Table continued on following page.)
(1) Farmer Mac recognized extraordinary gains of $127,000 for the year ended
December 31, 1993, and $384,000 for both the nine months ended September
30, 1996 and the year ended December 31, 1996, from the early
extinguishment of $14.9 million and $8.0 million of debt in 1993 and 1996,
respectively.
<PAGE>
(Table continued from preceding page.)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- ------------------
1993 1994 1995 1996 1996 1997
-------- --------- -------- -------- --------- --------
Statement of
Operations Data:
<S> <C> <C> <C> <C> <C> <C>
Earnings (Loss) Per
Share (2):
Earnings (Loss)
Per Share Before
Extraordinary Item:
Class A and B
Voting Common
Stock ............ $(0.17) $(0.28) $(0.14) $0.07 $0.07 $0.33
Class C Non-Voting
Common Stock ..... $(0.51) $(0.85) $(0.41) $0.22 $0.22 $1.00
Earnings (Loss)
Per Share:
Class A and B
Voting Common
Stock .......... $(0.14) $(0.28) $(0.14) $0.14 $0.15 $0.33
Class C Non-Voting
Common Stock .... $(0.43) $(0.85) $(0.41) $0.43 $0.44 $1.00
</TABLE>
<TABLE>
<CAPTION>
At December 31, At September 30,
------------------------------------- ------------------
1993 1994 1995 1996 1996 1997
-------- --------- -------- -------- --------- --------
Balance Sheet Data:
Cash, cash
equivalents and
investment
<S> <C> <C> <C> <C> <C> <C>
securities.......... $101,563 $ 78,418 $ 73,957 $154,711 $115,801 $ 894,199
Farmer Mac I and II
Mortgage-Backed
Securities.......... 398,522 368,208 417,449 416,839 407,737 436,531
Total Assets........ 525,396 477,452 512,744 603,104 553,069 1,374,153
Debentures, Notes
and Bonds, Net:
Due within one
year............ 172,350 168,307 207,422 259,164 258,929 954,814
Due after one
year ........... 330,190 288,209 284,084 287,128 270,758 357,981
Total Liabilities .. 511,845 465,233 501,032 555,899 537,904 1,323,574
Stockholders' Equity 13,551 12,219 11,712 47,205 15,165 50,579
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- ------------------
1993 1994 1995 1996 1996 1997
-------- --------- -------- -------- --------- --------
Other Data:
<S> <C> <C> <C> <C> <C> <C>
Outstanding guaranteed
securities (at end $487,614 $459,332 $502,365 $631,283 $598,162 $813,527
of period)...........
Loans purchased...... 39,946 81,243 157,265 254,883 191,919 257,364
Guaranteed
securities issued.. 39,946 81,243 157,265 240,715 186,588 247,713
- --------------------------
</TABLE>
(2) Amounts represent primary and fully diluted earnings per share for each
period presented, except for the year ended December 31, 1996 in which
case fully diluted earnings per share were $.07 and $0.20 per share before
extraordinary item and $0.13 and $0.40 per share after extraordinary item
for Classes A and B Voting Common Stock and Class C Non-Voting Common
Stock, respectively. Earnings per share reflect the 3-to-1 dividend and
liquidation rights ratio applicable to each share of Class C Non-Voting
Common Stock relative to each share of Classes A and B Voting Common
Stock.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of Farmer Mac's financial condition
and results of operations should be read in conjunction with, and is qualified
in its entirety by reference to, Farmer Mac's Consolidated Financial Statements
and Notes thereto included elsewhere or incorporated by reference in this
Offering Circular.
Results of Operations
Overview
Net income for the first nine months of 1997 totaled $3.3 million,
compared to $0.8 million for the same period a year ago. Net income for the nine
months ended September 30, 1996 included a $0.4 million extraordinary gain from
the early extinguishment of debt. Farmer Mac's improved operating results are
attributable to a series of positive developments beginning in early 1996, which
marked a turnaround in its business prospects and financial performance. Those
developments included the enactment of the 1996 Act in early 1996; two stock
sales during 1996; and the opening of the cash window in mid-1996.
In early 1997, Farmer Mac implemented its expanded debt issuance strategy
to increase its presence in the capital markets, particularly the debt markets,
in order to attract more investors to its debt and mortgage-backed securities
and thereby improve the liquidity of its securities and reduce its borrowing and
securitization costs. Since the strategy's implementation, Farmer Mac has
experienced a tightening of its mortgage-backed securities spreads relative to
other comparable agency securities and anticipates continued improvements in
pricing as liquidity and investor recognition of Farmer Mac increase.
Farmer Mac's revised authorities, improved financial condition and
increased earnings have facilitated its efforts to expand program participation
and loan purchase volume. During the first nine months of 1997, Farmer Mac
continued to focus on developing its seller network and intensified its
marketing initiatives with regional banks and non-traditional mortgage lenders,
such as mortgage bankers and agricultural supply and equipment companies. Farmer
Mac has added several regional lending institutions to its network of approved
sellers, including AgFirst Farm Credit Bank, Columbia, South Carolina; Firstar
Bank, Milwaukee, Wisconsin; Glendale Federal Bank, Glendale, California;
Northwest Farm Credit Services, ACA, Spokane, Washington; and Wells Fargo Bank,
San Francisco, California. Since September 30, 1997, Farmer Mac has approved
First Union Bank of Virginia, Harrisonburg, Virginia; United Nebraska Bank,
Grand Island, Nebraska; and US Bank National Association, Minneapolis,
Minnesota, as sellers. With the addition of these institutions, Farmer Mac now
has approved 123 lenders covering 28 states as sellers, and has an additional 30
seller applications under review.
During the first nine months of 1997, Farmer Mac implemented a training
program through which it conducts "seller workshops" in various locations and at
various times throughout the country. Farmer Mac believes that these workshops
have contributed, and will continue to contribute, to an increased interest in
Farmer Mac's programs and improved the understanding of those programs by
participants. Since September 30, 1997, Farmer Mac has expanded its product line
with the announcement of additional loan products, including a "part-time
farmer" real estate loan, designed for borrowers who live on agricultural
properties, but derive a significant portion of their income from off-farm
employment. This loan is available for single-family, owner-occupied detached
residences located on agricultural production properties of at least 5 acres or
with annual gross receipts of $5,000 from production of crops or livestock.
Other products added to Farmer Mac's existing line of 5- and 15-year, fixed rate
loans include a new three-year, and a refined one-year, adjustable rate loan
(ARM), both with flexible prepayment terms, and a 10-year, fixed rate loan.
During fourth quarter 1997, Farmer Mac expects to consummate the first
transaction under its "swap" program, which allows lenders to exchange new or
seasoned Qualified Loans for Farmer Mac-guaranteed securities. That transaction,
which will involve the exchange of approximately $1 million of newly originated
Qualified Loans for Farmer Mac-guaranteed securities, is expected to serve as
the model for future swap transactions. Swap transactions, whether involving
newly originated or existing loans, offer certain advantages to lenders because
the Farmer Mac-guaranteed securities received in exchange for the loans are
accorded a lower risk-weight than whole loans under risk-based capital
guidelines and can be pledged as collateral and used in repurchase transactions.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Net Income. Net income for the first nine months of 1997 totaled $3.3
million, compared to $0.8 million for same period a year ago. Net income for the
nine months ended September 30, 1996 includes a $0.4 million extraordinary gain
from early extinguishment of debt. The increase in net income was largely
attributable to increases in net interest income, gain on issuance of
mortgage-backed securities and guarantee fee income. The increase in net
interest income was due to increases in non-program investments (cash and cash
equivalents and investments) and, to a lesser extent, program investments
(Farmer Mac I and II Securities and loans held for securitization).
Average Balances, Income and Expense, Yield and Rates. The following table
provides information regarding interest-earning assets and interest-bearing
liabilities for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
----------------------------- ----------------------------
Average Income/ Average Average Income/ Average
Balances Expense Yield Balances Expense Yield
Rate Rate
--------- --------- --------- --------- -------- --------
(dollars in thousands)
Assets
Interest earning
assets:
<S> <C> <C> <C> <C> <C> <C>
Farmer Mac I and II
Securities....... $ 423,817 $22,612 7.11% $407,872 $22,210 7.26%
Investments and
cash equivalents. 700,019 33,357 6.35% 115,528 4,813 5.55%
Loans held for
securitization... 24,234 1,552 8.54% 7,769 468 8.03%
--------- --------- --------- --------- -------- --------
Total interest
earning assets....... 1,148,070 57,521 6.68% 531,169 27,491 6.90%
Other assets......... 47,685 23,363
--------- ---------
$1,195,755 $554,532
========= =========
Liabilities and
stockholders' equity
Interest-bearing
liabilities:
Debentures, notes
and bonds, net ... $1,121,911 $52,367 6.22% $ 517,850 $25,546 6.58%
Other liabilities.. 27,510 23,204
Stockholders' equity. 46,334 13,478
--------- --------- --------- --------- --------- -------
$1,195,755 $ 554,532
=========== ==========
Net interest
income/spread........ $5,154 .46% $1,945 .32%
======= ========= ======== ========
Net yield on interest
earning assets..... .60% .49%
========= ========
</TABLE>
<PAGE>
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.
<TABLE>
Nine Months Ended
September 30, 1997
Compared to
Nine Months Ended
September 30, 1996
----------------------------
Increase (Decrease) due to
Rate Volume Total
-------- -------- ---------
(in thousands)
Income from interest-earning assets:
<S> <C> <C> <C>
Farmer Mac I and II Securities... $ (430) $ 832 $ 402
Investments...................... 789 27,755 28,544
Loans held for securitization.... 31 1,053 1,084
-------- -------- ---------
Total income from interest-earning
assets............................. 390 29,640 30,030
Expense on interest-bearing
liabilities .......................(1,297) 28,118 26,821
======== ======== =========
Change in net interest income...... $1,687 $ 1,522 $ 3,209
======== ======== =========
</TABLE>
Net Interest Income. Net interest income totaled $5.2 million for the nine
months ended September 30, 1997, compared to $1.9 million for the same period in
1996. The increase in net interest income was due to an increase in the average
balance of interest-earning assets combined with an increase in net interest
yield. The increase in the average balance of interest-earning assets was
primarily due to an increase in the average balance of investments and cash
equivalents resulting from the implementation of Farmer Mac's expanded debt
issuance strategy. The increase in net interest yield was due to an increase in
the average balance of loans held for securitization, as well as a shift in the
composition of the investment portfolio from short-term, highly liquid
investments to longer-term floating-rate investments, which generally have
higher spreads. The shift toward long-term floating-rate investments was
primarily attributable to growth in securities guaranteed by instrumentalities
or agencies of the United States.
Other Income. Other income totaled $4.2 million for the nine months ended
September 30, 1997, compared to $2.1 million for the nine months ended September
30, 1996. The increase in other income was due to increases in gain on issuance
of mortgage-backed securities, net of related expenses, and guarantee fees.
During the first nine months of 1997, Farmer Mac issued $171.9 million of
mortgage-backed securities compared to $120.7 million during the same period a
year ago. Gains resulting from those issuances totaled $2.1 million and $0.9
million, respectively. The gain on issuance for the nine months ended September
30, 1996 is net of accrued expenses related to a dispute with Western Farm
Credit Bank ("WFCB"), which was subsequently resolved.
Guarantee fee income totaled $1.9 million for the nine months ended
September 30, 1997, compared to $1.1 million for the nine months ended September
30, 1996. The increase in guarantee fee income was due to an increase in the
balance of outstanding guaranteed securities and the 25 basis point increase in
the guarantee fee rate charged on mortgage-backed securities issued under Farmer
Mac's revised legislative authorities. At September 30, 1997, Farmer Mac had
$813.5 million of guaranteed securities outstanding (including Farmer Mac I and
II Securities held in portfolio) as compared to $598.2 million at September 30,
1996. Of those amounts, $316.2 million and $120.6 million were issued under
Farmer Mac's revised authorities.
Other Expenses. Other expenses totaled $5.9 million for the nine months
ended September 30, 1997, as compared to $3.7 million for the nine months ended
September 30, 1996. The increase in other expenses was primarily attributable to
increased compensation, including annual incentive compensation paid to senior
management in June 1997, and other costs related to expanded operations under
Farmer Mac's revised legislative authorities. Included in other expenses is the
provision for losses, which totaled $780 thousand for the nine months ended
September 30, 1997, compared to $202 thousand for the nine months ended
September 30, 1996. This increase was due to an increase in the outstanding
balance of mortgage-backed securities.
Income Tax Expense. As a result of the utilization of net operating loss
carryforwards, Farmer Mac's tax expense was limited to $103 thousand for the
nine months ended September 30, 1997. No income tax expense was recognized
during the nine months ended September 30, 1996. Should profits continue at
current levels, Farmer Mac would utilize all of its remaining net operating loss
carry forwards in 1998, resulting in a higher effective tax rate for 1998.
Liquidity and Capital Resources
Farmer Mac's primary liquidity requirements are operating expenses and
costs of purchasing Qualified Loans and investment securities. Farmer Mac's
primary sources of liquidity are operating cash flows, proceeds from issuances
of debt obligations, and principal and interest payments on investment
securities and Qualified Loans underlying its portfolio of Farmer Mac I and II
Securities. During the nine months ended September 30, 1997, Farmer Mac
issuances of discount notes totaled $15.8 billion of discount notes and related
redemptions of such notes totaled $15.1 billion. During the same period, Farmer
Mac issued $104.9 million of medium-term notes. Farmer Mac also maintains a
portfolio of cash equivalents, comprised of commercial paper and other
short-term investments, to draw upon as necessary. At September 30, 1997, Farmer
Mac's cash and cash equivalents totaled $246.2 million.
Farmer Mac's statutory capital requirements define "minimum" and
"critical" amounts of "core capital" required for certain types of assets and
guarantees. At September 30, 1997, the minimum capital requirement was equal to
2.55% of aggregate on-balance sheet assets, plus 0.55% of aggregate off-balance
sheet obligations. The 1996 Act phases in higher minimum capital requirements
over a three-year transition period. The fully phased-in minimum capital
requirement, effective after December 31, 1998, requires Farmer Mac to hold
capital equal to 2.75% of aggregate on-balance sheet assets, plus 0.75% of
aggregate off-balance sheet obligations. Critical capital levels are
approximately one-half of the minimum capital levels. Certain levels of
enforcement are given to the FCA depending upon Farmer Mac's compliance with
these capital levels. As of September 30, 1997, Farmer Mac's minimum capital
requirement was $32.6 million compared with actual capital of $50.6 million. If
the fully phased-in standard under the 1996 Act had been in effect at September
30, 1997, Farmer Mac's actual capital would have been in excess of the total
minimum capital required.
In the opinion of management, Farmer Mac has sufficient liquidity and
capital for the next twelve months.
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table and the notes thereto set forth information regarding
the beneficial ownership, as of November 13, 1997, and as adjusted to reflect
the sale of the Class C Common Stock offered hereby, of (i) each person or
entity who owns beneficially or of record 5% or more of the outstanding shares
of any class of Common Stock and (ii) all directors and executive officers of
Farmer Mac as a group in respect of the Class C Common Stock (the only class
held by such persons). The beneficial ownership information described and set
forth below is based on information furnished by the specified persons or
entities and is determined in accordance with Rule 13d-3 under the Exchange Act.
It does not constitute an admission of beneficial ownership for any other
purpose.
<TABLE>
<CAPTION>
% of Class C
Common Stock Owned
-------------------
Name and % of Class % of
Address of Number of Shares of Voting Total
Beneficial Owner Beneficially Shares Owned Voting % Before % After
Owned Shares(1) Offering Offering
<S> <C> <C> <C> <C> <C>
Zions Bancorporation(2) 322,100 shares of
Salt Lake City, UT ........... Class A Common Stock 32.33% 21.52% 18.67% 16.51%
AgriBank, FCB 148,441 shares of
St. Paul, MN ................. Class B Common Stock 29.67% 9.92% 0.41% 0.36%
Western Farm Credit Bank 55,250 shares of
Sacramento, CA .............. Class B Common Stock 11.04% 3.69% 1.39% 1.23%
AgAmerica, FCB(3) 85,774 shares of
Spokane, WA ................. Class B Common Stock 17.14% 5.73% -- --
AgFirst Farm Credit Bank(4) 84,024 shares of
Columbia, SC ................. Class B Common Stock 16.79% 5.61% 1.50% 1.32%
Farm Credit Bank of Wichita(5) 45,223 shares of
Wichita, KS .................. Class B Common Stock 9.04% 3.02% * *
Farm Credit Bank of Texas(6) 38,503 shares of
Austin, TX ................... Class B Common Stock 7.70% 2.57% * *
CoBank 30,136 shares of
Denver, CO .................. Class B Common Stock 6.02% 2.01% * *
All officers and directors as a 9,483 shares of
group (20 persons)(7) .......... Class C Common Stock -- -- 0.35% 0.31%
- ----------------------
</TABLE>
(1) Percentage is determined by dividing the number of shares of Voting Common
Stock owned by the total number of shares of Voting Common Stock
outstanding.
(2) W. David Hemingway, a Class A director, is an Executive Vice President of
Zions First National Bank, a wholly owned subsidiary of Zions
Bancorporation. Zions Bancorporation beneficially owns 500,100 shares of
Class C Common Stock.
(3) John G. Nelson, III, a Class B director, is a member of the Board of
Directors of AgAmerica, FCB.
(4) John Dan Raines, Jr., a Class B director, is a member of the Board of
Directors of AgFirst.
(5) Darryl W. Rhodes, a Class B director, is a Senior vice President of the
Farm Credit Bank of Wichita.
(6) James A. McCarthy, a Class B director, is a member of the Board of
Directors of the Farm Credit Bank of Texas.
(7) Under Farmer Mac's stock option plans: (A) certain executive officers of
Farmer Mac have been granted (i) options to purchase 105,000 shares of
Class C Common Stock at an adjusted exercise price of $6.56 per share;
(ii) options to purchase 112,830 shares of Class C Common Stock at an
exercise price of $7.88 per share; (iii) options to purchase 24,828 shares
of Class C Common Stock at an exercise price of $35.50 per share; and (iv)
options to purchase 1,850 shares of Class C Common Stock at an exercise
price of $38.75 per share; and (B) the directors of Farmer Mac have been
granted options to purchase 30,000 shares of Class C Common Stock at an
exercise price of $35.50 per share.
* Farm Credit Bank of Wichita; Farm Credit Bank of Texas and CoBank have
apparently placed their Class C Common Stock in nominee name. As such,
Farmer Mac has no record of whether any of these stockholders still own
Class C Common Stock.
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Farmer Mac's statutory charter provides that Farmer Mac shall issue two
classes of Voting Common Stock, Class A Voting Common Stock, par value $1.00 per
share ("Class A Common Stock") and Class B Voting Common Stock, par value $1.00
per share ("Class B Common Stock" and, together with the Class A Common Stock,
the "Voting Common Stock"). Class A Common Stock may be held only by banks,
insurance companies and other financial entities that are not System
Institutions. Class B Common Stock may be held only by System Institutions. The
charter also authorizes Farmer Mac to issue non-voting common stock and
non-voting preferred stock.
The holders of Voting Common Stock are entitled to one vote per share,
with cumulative voting at all elections of directors. Under cumulative voting,
each stockholder is entitled to cast the number of votes equal to the number of
shares of Voting Common Stock owned by that stockholder, multiplied by the
number of directors to be elected. All of a stockholder's votes may be cast for
a single candidate for director, or may be distributed among any number of
candidates. Holders of shares of Class A Common Stock are entitled to elect five
directors, and holders of Class B Common Stock are entitled to elect five other
directors. The President of the United States appoints the remaining five
directors on the Farmer Mac Board. Notwithstanding the source of appointment or
election to the Farmer Mac Board, each director owes fiduciary duties to all
stockholders.
Farmer Mac's by-laws provide that the ratio of dividends and liquidation
distributions payable on each share of Class C Common Stock to each share of
Voting Common Stock will be 3-to-1. Shares of Class C Common Stock carry no
voting rights, except that the vote of the holders of two-thirds of the
outstanding shares of Class C Common Stock is required in order to reduce the
ratio of dividends and liquidation distributions payable on such shares over
those payable on shares of Voting Common Stock.
Farmer Mac's by-laws provide that holders of Common Stock do not have
preemptive rights regarding any offering or sale by Farmer Mac of additional new
shares.
The charter provides that in the event of any liquidation, dissolution or
winding up of Farmer Mac's business, the holders of any outstanding preferred
stock will be paid in full at the par value thereof, plus all accrued dividends,
before the holders of Common Stock receive any payments. However, pursuant to
the terms of the Common Stock, in any liquidation, dissolution or winding up of
Farmer Mac, holders of the Common Stock would be entitled to receive all of the
assets of Farmer Mac available for distribution to its shareholders remaining
after payment in full of all amounts due on any preferred stock, subject to the
preference for Class C Common Stock discussed above.
The charter, which is Farmer Mac's governing instrument, may only be
amended by Congress and not by the stockholders.
Boston EquiServe is the transfer agent and registrar for the Common Stock.
<PAGE>
UNDERWRITING
Subject to the terms and conditions specified in the Underwriting
Agreement between Farmer Mac and SBC Warburg Dillon Read Inc. (the
"Underwriter"), the Underwriter has agreed to purchase from Farmer Mac, and
Farmer Mac has agreed to sell to the Underwriter, all of the Class C Common
Stock offered hereby.
The shares of Class C Common Stock offered hereby are being initially
offered by the Underwriter for sale at the price set forth on the cover page of
this Offering Circular, or at such price less a concession not in excess of
$2.05 per share on sales to certain dealers. The Underwriter may allow, and such
dealers may re-allow, a concession not to exceed $0.10 per share on sales of
certain other dealers. The offering of such shares is made for delivery when, as
and if accepted by the Underwriter and subject to prior sale and withdrawal,
cancellation or modification of the offer without notice. The Underwriter
reserves the right to reject any order for the purchase of the shares. After the
shares are released for sale to the public, the public offering price and such
concessions may be changed by the Underwriter.
Farmer Mac has granted to the Underwriter an over-allotment option to
purchase up to an aggregate of 50,000 additional shares of Class C Common Stock
at the public offering price less the underwriting discount set forth on the
cover page of this Offering Circular. The Underwriter may exercise such option
on or before the thirtieth day from the Underwriting Agreement and only to cover
over-allotments made of the shares in connection with this Offering.
Farmer Mac has agreed in the Underwriting Agreement to indemnify the
Underwriter against certain liabilities or to contribute to payments that the
Underwriter may be required to make in respect thereof.
Farmer Mac, its officers and Zions Bancorporation have agreed not to
offer, sell, contract to sell, grant any option to sell, or otherwise dispose
of, directly or indirectly, any shares of Class C Common Stock or securities
convertible into or exchangeable or exercisable for any shares of Class C Common
Stock for a period of 90 days after the date of this Offering Circular, without
the prior written consent of the Underwriter.
The Underwriter may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Class C Common Stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Underwriter to reclaim a selling concession
from a syndicate member when the Class C Common Stock originally sold by such
syndicate member is purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Class C Common Stock to
be higher than it would otherwise be in the absence of such transactions. These
transactions may be effected through Nasdaq or otherwise and, if commenced, may
be discontinued at any time.
LEGAL MATTERS
The validity of the Class C Common Stock offered hereby will be passed
upon for Farmer Mac by Fried, Frank, Harris, Shriver & Jacobson, a partnership
including professional corporations, Washington, D.C. Certain legal matters will
be passed upon for the Underwriter by Cahill Gordon & Reindel, a partnership
including a professional corporation, New York, New York.
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
<TABLE>
<CAPTION>
APPENDIX A
RECENT UNAUDITED FINANCIAL INFORMATION
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
1997 1996
------------- -------------
(unaudited)
ASSETS:
<S> <C> <C>
Cash and cash equivalents.................... $ 246,206 $ 68,912
Interest receivable.......................... 14,841 14,821
Guarantee fees receivable.................... 1,031 745
Loans held for securitization................ 23,821 12,999
Investments.................................. 647,993 85,799
Farmer Mac I and II Securities............... 436,531 416,839
Farmer Mac I and II payments receivable...... 2,102 2,421
Prepaid expenses and other assets............ 1,628 568
============= =============
TOTAL ASSETS................................... $ 1,374,153 $ 603,104
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Debentures, notes and bonds, net:
Due within one year.......................... $ 954,814 $ 259,164
Due after one year........................... 357,981 287,128
------------- -------------
Total debentures, notes and bonds, net....... 1,312,795 546,292
Accrued interest payable..................... 7,512 7,231
Accounts payable and accrued expenses........ 1,832 1,721
Reserve for loan losses on sold Guaranteed
Securities................................. 1,435 655
------------- -------------
TOTAL LIABILITIES............................ 1,323,574 555,899
------------- -------------
STOCKHOLDERS' EQUITY Common stock:
Class A Voting, $1 par value, 2,000,000
shares authorized, 995,950 and 990,000
shares issued and outstanding at September ... 996 990
30, 1997 and December 31, 1996, respectively
Class B Voting, $1 par value, 2,000,000
shares authorized, 500,301 and 593,401
shares issued and outstanding at September
30, 1997 and December 31, 1996, respectively . 500 593
Class C Non-Voting, $1 par value, 4,000,000
shares authorized, 2,677,942 and 2,658,897
shares issued and outstanding at September
30, 1997 and December 31, 1996.............. 2,678 2,659
Additional paid in capital................... 52,610 52,513
Note receivable for purchase of stock........ - (557)
Unrealized gain on securities
available-for-sale........................... 936 329
Accumulated deficit.......................... (7,141) (9,322)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY..................... 50,579 47,205
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..... $ 1,374,153 $ 603,104
============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERPATIONS
(Dollars in Thousands, Except Per Share Amounts)
Nine Months Ended September
30,
-------------------------------
1997 1996
--------------- --------------
(unaudited) (unaudited)
INTEREST INCOME:
<S> <C> <C>
Investments and cash equivalents....... $ 33,357 $ 4,813
Farmer Mac I and II Securities......... 22,612 22,210
Loans held for securitization.......... 1,552 468
--------------- --------------
TOTAL INTEREST INCOME.................. 57,521 27,491
INTEREST EXPENSE....................... 52,367 25,546
--------------- --------------
NET INTEREST INCOME.................... 5,154 1,945
OTHER INCOME:
Guarantee fees......................... 1,857 1,130
Gain on issuance of mortgage-backed
securities, net...................... 2,111 913
Miscellaneous.......................... 233 55
--------------- --------------
TOTAL OTHER INCOME..................... 4,201 2,098
--------------- --------------
OTHER EXENSES:
Compensation and employee benefits..... 2,647 1,703
Professional fees...................... 1,175 618
Insurance.............................. 169 161
Rent................................... 168 123
Regulatory fees........................ 47 214
Board of Directors fees and meeting
expenses.............................. 251 236
Administrative......................... 667 408
Provision for losses................... 780 202
--------------- --------------
TOTAL OTHER EXPENSES 5,904 3,665
--------------- --------------
INCOME BEFORE EXTRAORDINARY ITEM 3,451 378
Extraordinary gain from early
extinguishment of debt............... -- 384
--------------- --------------
INCOME BEFORE INCOME TAXES............. 3,451 762
Provision for income taxes............. 103 --
--------------- --------------
NET INCOME $ 3,348 $ 762
=============== ==============
EARNINGS PER SHARE BEFORE
EXTRAORDINARY ITEM
Classes A and B Voting Common Stock.... $ 0.33 $ 0.07
Class C Non-Voting Common Stock........ $ 1.00 $ 0.22
EARNINGS PER SHARE
Classes A and B Voting Common Stock.. $ 0.33 $ 0.15
Class C Non-Voting Common Stock........ $ 1.00 $ 0.44
</TABLE>
<PAGE>
No dealer, salesperson or other OFFERING CIRCULAR NOVEMBER 21, 1997
person has been authorized to give
any information or to make any
representation other than those
contained in this Offering Circular
or the information incorporated by
reference herein, and if given or 350,000 Shares
made, such information or
representation must not be relied
upon as having been authorized by
Farmer Mac or the Underwriter. This
Offering Circular does not
constitute an offer to sell, or a Farmer Mac
solicitation of an offer to buy, any
of the securities offered hereby in Federal Agricultural
any jurisdiction to any person to Mortgage Corporation
whom it is not lawful to make any
such offer or solicitation in such
jurisdiction or in which the person
making such offer or solicitation is
not qualified to do so. Neither the Class C Non-Voting
delivery of this Offering Circular Common Stock
nor any sale made hereunder shall,
under any circumstances, create an
implication that there has been no
change in the facts set forth in
this Offering Circular or in the
affairs of Farmer Mac since the date
hereof.
SBC Warburg Dillon Read Inc.
TABLE OF CONTENTS
- -------------------------------------
Available Information........... 2
Incorporation of Certain Documents
by Reference................. 2
Offering Circular Summary....... 3
Risk Factors.................... 8
Use of Proceeds................. 12
Price Range of Class C Common
Stock and Dividends............ 12
Capitalization.................. 13
Dilution........................ 14
Selected Consolidated Financial
Data ...........................15
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.......17
Principal Stockholders.......... 21
Description of Capital Stock.... 22
Underwriting.................... 23
Legal Matters................... 23
Appendix A - Recent Unaudited
Financial Information........A-1
