As filed with the Securities and Exchange Commission on
March 24, 1998
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997.
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
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FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
Federally chartered
instrumentality 52-1578738
of the United
States
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(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
919 18th Street, N.W., Suite
200, 20006
Washington, D.C.
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(Address of principal executive (Zip code)
offices)
(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
<PAGE>
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. ss.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
$18,039,093 and $178,354,742, respectively, based upon the average bid and asked
prices for the respective classes on March 20, 1998 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 1,009,180 shares of Class A Voting Common Stock, 500,301 shares
of Class B Voting Common Stock, and 3,078,399 shares of Class C Non-Voting
Common Stock outstanding as of March 20, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement to be filed on or about April 20, 1998 in connection with
the Annual Meeting of Stockholders to be held on June 4, 1998 (portions of which
are incorporated by reference into Part III of this Annual Report on Form 10-K).
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<PAGE>
PART I
Item 1. Business
General
The Federal Agricultural Mortgage Corporation ("Farmer Mac," the
"Corporation" or the "Registrant") is a federally chartered instrumentality of
the United States that was created by the Agricultural Credit Act of 1987 (12
U.S.C. ss.ss. 2279aa et seq.), which amended the Farm Credit Act of 1971
(collectively, as amended, the "Act"), to establish a secondary market for
agricultural real estate mortgage loans, including rural housing loans
("Qualified Loans"). Farmer Mac provides liquidity to the agricultural mortgage
market by: (i) purchasing newly originated Qualified Loans directly from lenders
on a continuing basis through its "cash window;" (ii) exchanging Qualified Loans
for securities issued and guaranteed by Farmer Mac ("Farmer Mac Guaranteed
Securities"), backed by such loans in "swap transactions;" (iii) purchasing
portfolios of "existing loans" on a negotiated basis; and (iv) purchasing
mortgage-backed bonds secured by Qualified Loans through its recently introduced
"AgVantage" program. Qualified 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 early 1996, amended the Act and 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 is now also a "first loss" guarantor - it guarantees
timely payments of principal (including any balloon payments) and interest on
Farmer Mac Guaranteed Securities backed by 100% of the underlying Qualified
Loans. Unlike its residential mortgage counterparts - the Federal National
Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac") - Farmer Mac is, however, subject to the periodic
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"1934 Act") and the requirement that public offerings of Farmer Mac Guaranteed
Securities (as distinguished from its equity and debt securities) be registered
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "1933 Act").
Farmer Mac conducts its business through two programs, "Farmer Mac I" and
"Farmer Mac II." The Farmer Mac I Program involves the purchase of Qualified
Loans, which are not guaranteed by any instrumentality or agency of the United
States, or obligations backed by such Qualified Loans or by Guaranteed Portions
(as defined below) and the securitization of such loans or obligations. The
Farmer Mac II Program involves the purchase of guaranteed portions (the
"Guaranteed Portions") of loans guaranteed by the United States Department of
Agriculture (the "USDA") pursuant to the Consolidated Farm and Rural Development
Act (7 U.S.C. ss.ss. 1921 et seq.) (the "ConAct") and the issuance of Farmer Mac
Guaranteed Securities backed by such Guaranteed Portions. Farmer Mac's sources
of revenue are (or are expected to be): (i) fees it receives in connection with
the issuance of its guarantees; (ii) gains on the sales of Farmer Mac Guaranteed
Securities backed by loans it purchases; and (iii) net interest income earned on
its portfolio of Farmer Mac Guaranteed Securities issued under both the Farmer
Mac I and Farmer Mac II Programs, investments, loans purchased pending
securitization and mortgage-backed bonds purchased under AgVantage.
Prior to the enactment of the 1996 Act, Farmer Mac completed seven
securitizations under the Farmer Mac I Program resulting in Farmer Mac
guarantees of approximately $748 million of securities (of which $228.9 million
were outstanding at December 31, 1997). From the enactment of the 1996 Act
through December 31, 1997, Farmer Mac completed 11 securitizations under the
Farmer Mac I Program resulting in Farmer Mac guarantees of $345.7 million of new
securities (of which $341.2 million were outstanding at December 31, 1997). In
addition, as of December 31, 1997, Farmer Mac had purchased $47.2 million of
Qualified Loans in the Farmer Mac I Program which it is holding pending
securitization and had outstanding mandatory delivery commitments to purchase
$10.8 million of Qualified Loans in the Farmer Mac I Program. From the inception
of the Farmer Mac II Program in 1991 through December 31, 1997, Farmer Mac
guaranteed approximately $364.7 million of Farmer Mac Guaranteed Securities
issued thereunder (of which approximately $272.8 million were outstanding at
December 31, 1997). The Farmer Mac II Program was not affected by the 1996 Act.
Farmer Mac Guaranteed Securities issued under the Farmer Mac I Program are
referred to as Farmer Mac I Securities; Farmer Mac Guaranteed Securities issued
under the Farmer Mac II Program are referred to as Farmer Mac II Securities. See
"Farmer Mac Guarantee Program."
Since the enactment of the 1996 Act, Farmer Mac has raised approximately
$55 million in new equity capital through the sale of Class A Voting Common
Stock and Class C Non-Voting Common Stock. As a result of these (and other
previous) issuances of Common Stock, there are currently outstanding 1,009,180
shares of Class A Voting Common Stock, 500,301 shares of Class B Voting Common
Stock and 3,078,399 share of Class C Non-Voting Common Stock. See Farmer Mac
Guarantee Program - Financing - Equity 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."
Farmer Mac funds its program operations primarily through the issuance of
debt obligations of various maturities ("Discount Notes" and "Medium-Term
Notes;" collectively, "Notes"). See "Farmer Mac Guarantee Program - Financing."
As of December 31, 1997, Farmer Mac had outstanding $816.7 million of Discount
Notes and $442.2 million of Medium-Term Notes, net of unamortized debt issuance
costs, discounts and premiums. Farmer Mac significantly increased its debt
issuance activities in 1997 as part of its strategy to increase its presence in
the capital markets. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations - Overview" and "- Results of Operations -
Net Interest Income."
The Farm Credit Administration (the "FCA"), acting through the Office of
Secondary Market Oversight (the "OSMO"), 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 specified in the Act,
which are being phased-in over the course of a transition period. By statute,
the FCA is required to promulgate risk-based capital regulations for Farmer Mac
no sooner than early 1999. For a discussion of the capital requirements and
Farmer Mac's capital, see "Government Regulation of Farmer Mac - Regulation
Capital Standards" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Although Farmer Mac is an institution of the Farm Credit System (a "System
Institution"), it is not liable for any debt or obligation of any other 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 26 persons, located primarily at its principal executive
offices at 919 18th Street, N.W., Suite 200, Washington, D.C. 20006. Its
telephone number is (202) 872-7700.
<PAGE>
FARMER MAC GUARANTEE PROGRAM
Farmer Mac I
General
Farmer Mac is authorized to purchase, or guarantee securities backed by or
representing interests in, Qualified Loans. A Qualified Loan is a loan secured
by a fee simple mortgage or a long-term 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 sufficient indicia of creditworthiness 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 Farmer Mac's requirements.
Qualified Loans are secured either by Agricultural Real Estate or by Rural
Housing. Agricultural Real Estate is defined by Farmer Mac as a parcel or
parcels of land, which may be improved by buildings or other structures
permanently affixed to the parcel or parcels, that (i) are used for the
production of one or more agricultural commodities; and (ii) 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 $3.49 million, which has
been adjusted for inflation as of October 1, 1997, unless the Agricultural Real
Estate consists of an aggregate of 1,000 acres or less. Farmer Mac has limited
the maximum loan amount to $6.0 million (adjusted annually for inflation),
regardless of acreage.
Rural Housing is defined by Farmer Mac 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 $139,000 (adjusted annually for
inflation). 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. To date,
Rural Housing Qualified Loans have not represented a significant part of Farmer
Mac's business.
Cash Window Purchases
Qualified Loan Purchases. Farmer Mac purchases Agricultural Real Estate
Qualified Loans directly from approved lenders ("Sellers") for cash on a
continuing basis through its "cash window." Farmer Mac primarily purchases fixed
and adjustable rate Qualified Loans, but may also purchase other types of
Qualified Loans, including convertible mortgage loans. Qualified Loans purchased
by Farmer Mac have a variety of maturities and often include balloon payments
and provisions that require a yield maintenance payment in the event of
prepayment (depending upon the level of interest rates at the time of
<PAGE>
prepayment). Farmer Mac seeks to develop and offer through the cash window loan
products that are in demand by agricultural borrowers and the lenders who serve
them and that can be securitized and efficiently sold into the capital markets.
In offering to purchase loans through the cash window, Farmer Mac emphasizes the
importance of conformity to its program requirements, including the interest
rate, amortization, final maturity and periodic payment specifications, in order
to facilitate the purchase of individual loans or groups of loans from many
lenders for aggregation into uniform pools that back Farmer Mac Guaranteed
Securities.
During the fourth quarter of 1997, Farmer Mac announced its "part-time
farmer" loan program designed for borrowers who live on agricultural properties
but derive a significant portion of their income from off-farm employment. These
loans are available for agricultural real estate of at least 5 acres or with
annual gross receipts of $5,000 from production of crops or livestock.
Farmer Mac regularly publishes a "rate sheet" listing the cash window loan
products it is willing to purchase, if the loan meets its Underwriting and
Appraisal Standards (discussed below), and indicative "net yields" at which such
purchases could be completed. Farmer Mac issues mandatory commitments to
purchase specified Agricultural Real Estate Qualified Loans for a specified
period of time. Under such commitments, lenders are obligated to sell Qualified
Loans to Farmer Mac at the commitment net yield. If a lender is unable to
deliver a Qualified Loan in accordance with a mandatory delivery commitment,
Farmer Mac requires the lender to pay a fee to extend the commitment or for
failure to deliver.
Mortgage-Backed Bond Purchases. In the first quarter of 1998, Farmer Mac
introduced "AgVantage," an alternative way of accessing the cash window. Under
AgVantage, Farmer Mac purchases (and guarantees timely payment of principal and
interest on) mortgage-backed bonds from Sellers in the cash window who have been
certified as "AgVantage certified facilities" (each, an "AgVantage Issuer")
based upon Farmer Mac's assessment of their agricultural loan underwriting and
servicing capabilities, as well as their creditworthiness. AgVantage bonds,
which are general obligations of the AgVantage Issuers, are secured by eligible
collateral in an amount ranging from 120% to 150% of the bonds' outstanding
principal amount. Eligible collateral consists of Qualified Loans having an
aggregate principal balance at least equal to 100% of the bonds' outstanding
principal amount and cash or securities issued by the U.S. Treasury or
guaranteed by an agency or instrumentality of the United States.
As of March 20, 1998, Farmer Mac had purchased $6.0 million of
mortgage-backed bonds from AgVantage Issuers.
Swap Transactions
Farmer Mac is also authorized to acquire Qualified Loans from lenders in
exchange for Farmer Mac Guaranteed Securities backed by such Qualified Loans.
Unlike cash window transactions, which generally involve loans with Farmer
Mac-specified terms, Farmer Mac anticipates negotiating these swap transactions
with the lender and acquiring loans with payment, maturity and interest rate
characteristics that Farmer Mac would not purchase through its cash window. Many
Qualified Loans will be eligible for swap transactions on the basis of their
conformity to Farmer Mac's "existing loan" criteria, which require that the
loans be outstanding for at least five years and have low (60% or less)
loan-to-value ratios and other indicia of performance, while Qualified Loans
<PAGE>
outstanding for less than five years will be eligible for swap transactions only
on the basis of their conformity to Farmer Mac's more stringent credit ratios as
of the date of their origination and subject to other performance analyses. In
December 1997, Farmer Mac completed its first swap transaction under the
authorities granted in the 1996 Act, issuing $1.05 million principal amount of
Farmer Mac I Securities in exchange for two Qualified Loans having an aggregate
principal balance of $1.05 million.
Negotiated Transactions
Farmer Mac may also purchase portfolios of Qualified Loans that qualify as
"existing loans" and otherwise meet the characteristics of loans qualifying for
swap transactions, as described above.
Underwriting and Appraisal Standards
Farmer Mac has 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 the management, administration and
conduct of underwriting and appraisals to all participants in the Farmer Mac I
Program. These 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 farmer, as well as the value of the mortgaged
property relative to the amount of the Qualified Loan. In each transaction,
Farmer Mac requires representations and warranties to ensure that the Qualified
Loans conform to these standards and any other requirements it may impose from
time to time.
The Underwriting Standards require, among other things, that the
loan-to-value ratio for any Qualified Loan not exceed 70% (which Farmer Mac
reduced from 75% in 1996 in light of its status as a "first loss guarantor"). In
the case of Rural Housing Qualified Loans and Qualified Loans under the
"part-time farmer" program, up to 85% of the appraised value of the property may
be financed if the amount above 70% is covered by private mortgage insurance. In
the case of newly originated Agricultural Real Estate Qualified Loans, 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 mortgaged 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 early 1997, Farmer Mac introduced a premium loan program for
loans to highly creditworthy borrowers. Under that program, Qualified Loans
meeting certain more stringent Underwriting Standards than the foregoing
loan-to-value and credit ratios would qualify for purchase at a lower net yield
than those applicable to loans not meeting the higher standards.
In the case of an existing loan, sustained performance is considered by
Farmer Mac to be a reliable alternative indicator of a farmer's ability to pay
the loan according to its terms. An existing loan generally will be deemed a
Qualified Loan, eligible for purchase or inclusion in a pool of loans to be
securitized, if it has been outstanding for at least five years and 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 previous three years
and no material restructurings or modifications for credit reasons during the
previous five years.
<PAGE>
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 of loans to
be securitized. 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 not weaken the overall performance of the pool.
The Appraisal Standards for newly originated Qualified 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 and who (a) is not associated, except by the engagement
for the appraisal, with the credit underwriters making the loan decision, though
both the appraiser and the credit underwriter may be directly or indirectly
employed by a common employer; (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.
Originators and Sellers
In addition to its Underwriting and Appraisal Standards, Farmer Mac has
established minimum eligibility requirements for lenders who originate or
purchase new or existing Qualified Loans for sale through the Farmer Mac cash
window or in negotiated transactions with Farmer Mac ("Originators"). 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 financial entity. In addition to the
ownership requirements discussed below, Originators are generally required to
have stockholders' equity of at least $1 million or at least $500,000 of net
worth (defined by Farmer Mac) in order to be approved as a Seller of Qualified
Loans to Farmer Mac. Originators are also required to have a staff experienced
in agricultural lending and servicing, to maintain a fidelity bond and either an
errors and omissions, mortgage impairment or mortgagee interest policy providing
coverage in an amount determined by Farmer Mac from time to time, and to provide
representations and warranties to Farmer Mac regarding the qualifications of
Qualified Loans sold to Farmer Mac.
There are also minimum Voting Common Stock ownership requirements
("Ownership Requirements") for Originators, subject to certain exceptions. Class
B Common Stock may be held only by System Institutions; Class A Common Stock may
be held only by banks, insurance companies and other financial entities that are
not System Institutions. Class B stockholders must own at least 100 shares of
<PAGE>
Class B Common Stock to be considered as Originators. There are Ownership
Requirements for each of four categories of Class A stockholders to be
considered as Originators. "Small Institutions," having not more than $50
million in assets, must own at least 100 shares of Class A Common Stock.
"Intermediate Institutions," having more than $50 million and not more than $100
million in assets, must own at least 200 shares of Class A Common Stock. "Large
Institutions," having more than $100 million and not more than $500 million in
assets, must own at least 500 shares of Class A Common Stock. "Major
Institutions" with more than $500 million in assets must own at least 2,000
shares of Class A Common Stock. 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. Once a holder has
purchased the requisite amount of Voting Common Stock, all "related
corporations" 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 the entity
sells (or swaps) loans into the Farmer Mac I Program. The Act provides that no
stockholder may own, directly or indirectly, more than 33% of the outstanding
number of shares of Class A Voting Common Stock. There are no restrictions on
the maximum purchase or holding of Class B Voting or Class C Non-Voting Common
Stock.
The foregoing Ownership Requirements do not apply to those Originators 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. The
Ownership Requirements also do not apply to eligible participants that Farmer
Mac may determine by resolution need not comply with the requirements. Farmer
Mac is also authorized to waive the Ownership Requirements for eligible
participants 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. The Ownership Requirements also do not apply
to eligible participants that Farmer Mac may determine by resolution need not
comply with the requirements. No such waiver resolution has as yet been
requested by a potential participant.
Farmer Mac reserves the right, in its sole discretion, to change the
Ownership Requirements for Originators that are Class B stockholders, or any of
the four categories of Originators that are Class A stockholders, in order to
permit maximum participation in Farmer Mac's programs. To date, no such changes
to the Ownership Requirements have been made.
Servicing
Farmer Mac does not directly service Qualified Loans held in its portfolio,
although it does act as "master servicer" with respect to Qualified Loans
underlying Farmer Mac I Securities. Qualified Loans can be serviced only by a
servicing entity that has entered into a central servicing arrangement with
Farmer Mac. Originators of Qualified Loans sold into the Farmer Mac I Program
have a right to retain certain servicing functions (typically direct borrower
contacts) and may enter into field servicing contracts with the appropriate
central servicers to specify such servicing functions.
<PAGE>
Farmer Mac I Securities
Farmer Mac I Securities are mortgage pass-through certificates issued and
guaranteed by Farmer Mac that represent beneficial interests in pools of
Agricultural Real Estate Qualified Loans or in obligations backed by pools of
Agricultural Real Estate Qualified Loans. Under the Act, public offerings of
Farmer Mac I Securities are required to be registered with the Commission under
the 1933 Act; accordingly, Farmer Mac maintains a shelf registration statement
pursuant to which public offerings of Farmer Mac I Securities are made. Farmer
Mac may also issue Farmer Mac I Securities in private, unregistered
transactions. Farmer Mac has appointed First Trust National Association, a
national banking association based in Minneapolis, Minnesota, to serve as
trustee for each trust underlying Farmer Mac I Securities.
Currently, the Farmer Mac I Securities issued and guaranteed by Farmer Mac
are single class, "grantor trust" pass-through certificates, which Farmer Mac
calls "Agricultural Mortgage-Backed Securities" or "AMBS." These securities
entitle each investor to receive a portion of the payments of principal and
interest on the underlying pool of Agricultural Real Estate Qualified Loans
equal to the investor's proportionate interest in the pool. AMBS are backed by
Qualified Loans Farmer Mac has acquired from one or more Sellers, either through
its cash window or in negotiated transactions. AMBS may back other Farmer Mac I
Securities, including real estate mortgage investment conduit securities
("REMICs") and other agricultural mortgage-backed securities.
Farmer Mac I Securities are not assets of Farmer Mac, except when acquired
for investment purposes, nor are Farmer Mac I Securities recorded as liabilities
of Farmer Mac. Farmer Mac, however, is liable under its guarantee on the
securities to make timely payments to investors of principal (including balloon
payments) and interest based on the scheduled payments on the underlying
Qualified Loans, even if Farmer Mac has not actually received such scheduled
payments. Farmer Mac I Securities enable Farmer Mac to further its statutory
purpose of increasing the liquidity of the agricultural mortgage market and
create a source of guarantee fee income for Farmer Mac without assuming any debt
refinancing risk on the underlying pooled mortgages. Because Farmer Mac
guarantees timely payments on Farmer Mac I Securities (without the former
statutory protection afforded by a minimum 10% cash reserve or subordinated
interest), it assumes the ultimate credit risk of borrower defaults on the
Qualified Loans underlying its guaranteed securities. Those loans are subject to
the Farmer Mac Underwriting Standards described above in "-Underwriting and
Appraisal Standards." See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Management - Credit Risk
Management."
Farmer Mac receives guarantee fees in return for its guarantee obligations
on Farmer Mac I Securities. These fees, which are calculated on an annual basis,
are paid as installment payments become due and are received on the underlying
Qualified Loans until those loans have been repaid or otherwise liquidated from
the pool (generally as a result of delinquency). The aggregate amount of
guarantee fees received by Farmer Mac depends upon the amount of Farmer Mac I
Securities outstanding and on the guarantee fee rate, which, by statute, is
capped at 50 basis points (0.50%) per annum. The amount of Farmer Mac I
Securities outstanding is influenced by the repayment rates on the underlying
Qualified Loans and by the rate at which Farmer Mac issues new Farmer Mac I
<PAGE>
Securities. In general, when the level of interest rates declines significantly
below the interest rates on loans underlying Farmer Mac I Securities, the rate
of prepayments is likely to increase; conversely, when interest rates rise above
the interest rates on the loans underlying Farmer Mac I Securities, the rate of
prepayments is likely to slow. In addition to changes in interest rates, the
rate of principal payments on Farmer Mac I Securities also is influenced by a
variety of economic, demographic and other considerations, including the
obligation of borrowers under most loans underlying Farmer Mac I Securities to
make a yield maintenance payment (depending upon the level of interest rates) in
the event of prepayment of the underlying loan, which tends to serve as a
deterrent to prepayments in a declining interest rate environment.
Funding
The primary sources of funding for the payment of claims, if any, made
under a Farmer Mac guarantee are the fees Farmer Mac receives for providing its
guarantees and Farmer Mac's general assets. A portion of the guarantee fees
received by Farmer Mac is required to be set aside in a segregated account as a
reserve against losses from its guarantee activities. Among other things, this
reserve account 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 to fulfill its
guarantee obligations. Although it may borrow from the Treasury, under certain
conditions, to meet its guarantee obligations, Farmer Mac expects that its
guarantees on Farmer Mac Guaranteed Securities eventually will substantially
exceed its resources, including amounts in its guarantee reserve account and its
limited ability to borrow from the Treasury. For information with respect to the
reserve account, see Note 6 to the Financial Statements. For a more detailed
discussion of Farmer Mac's borrowing authority from the Treasury, see "Farmer
Mac's Borrowing Authority from the U.S. Treasury."
Portfolio Diversification
Prior to enactment of the 1996 Act, the Act required that pools of
Qualified Loans backing Farmer Mac I Securities be diversified with respect to
geography, commodities produced on the related mortgaged properties and
principal balance. In accordance with that requirement, Farmer Mac had developed
"diversification standards" that guided the pooling of loans backing Farmer Mac
I Securities. The 1996 Act removed the diversification requirement.
Nevertheless, Farmer Mac has established a policy goal of diversifying its
portfolio of Qualified Loans both geographically and by commodity. For
information with respect to the diversification of Farmer Mac's existing
portfolio of Qualified Loans, see Note 10 to the Financial Statements.
Farmer Mac II
General
The Farmer Mac II Program is authorized under Sections 8.0(3) (12 U.S.C.
ss. 2279aa(3)) and 8.0(9) (12 U.S.C. ss. 2279aa(9)) of the Act. Under those
Sections: (i) Guaranteed Portions are 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
<PAGE>
repayment standards that all other Qualified Loans must meet, and pools of
Guaranteed Portions are exempted from any diversification and internal credit
enhancement that may be 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
USDA, acting through its various agencies, currently administers the
federal rural credit programs first developed in the mid-1930s. The USDA makes
direct loans and also issues guarantees 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 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 the 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 becomes enforceable 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,
the USDA 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 (Farmer Mac) 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 the USDA) or in
the opinion of the USDA, repurchase of the Guaranteed Portion is necessary to
service the related Guaranteed Loan adequately, 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.
<PAGE>
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 must 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 the USDA 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 early 1995, Farmer Mac revised the Farmer Mac II Program so that, in
addition to issuing Farmer Mac II Securities to Lenders in swap transactions or
to other investors for cash, it began purchasing Guaranteed Portions for
retention in its portfolio under a master Farmer Mac II 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. As
in the Farmer Mac I Program, Farmer Mac guarantees only the timely payment of
interest on and principal of the Farmer Mac II Securities. Farmer Mac does not
guarantee the repayment of the Guaranteed Portions.
Transactions Under Farmer Mac II Program
As of December 31, 1997, Farmer Mac had issued and guaranteed approximately
$364.7 million of Farmer Mac II Securities, of which approximately $272.8
million were outstanding as of that date. Of the $272.8 million of Farmer Mac II
Securities outstanding as of December 31, 1997, approximately $249.5 million are
held by Farmer Mac. The remaining outstanding Farmer Mac II Securities are held
by other investors. See Notes 4 and 10 to the Financial Statements.
Financing
Debt Issuances
Farmer Mac's Board of Directors has authorized the issuance of up to $2.0
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.) The Notes may
have maturities, bear interest and be redeemable prior to maturity, all as
determined by Farmer Mac. Farmer Mac also may issue Notes to maintain reasonable
<PAGE>
amounts for business operations, including liquidity, relating to the foregoing
activities authorized under the Act, and may invest the proceeds of such
issuances in accordance with the policies established by the Board from time to
time. The Board's current policy authorizes Farmer Mac to invest in U.S
Treasury, agency and instrumentality obligations; repurchase agreements;
commercial paper; guaranteed investment contracts; certificates of deposit;
federal funds and bankers acceptances; certain securities and debt obligations
of corporate issuers; asset-backed securities, and corporate money market funds.
For information with respect to Farmer Mac's outstanding investments and
indebtedness, see Notes 3 and 5 to the Financial Statements.
Equity Issuances
By statute, Farmer Mac is authorized to issue Voting Common Stock (which
may include additional shares of Class A and Class B Voting Common Stock),
non-voting common stock (which may include additional shares of Class C
Non-Voting Common Stock) and preferred stock. Voting Common Stock may be held
only by banks, other financial entities, insurance companies and System
Institutions that qualify as eligible participants in the Farmer Mac Programs.
There are no ownership restrictions applicable to non-voting common stock,
including Class C Non-Voting Common Stock. Any preferred stock issued by Farmer
Mac would have priority over the Common Stock in payment of dividends and
liquidation proceeds. The ratio of dividends paid and liquidation proceeds
distributed on each share of Class C Non-Voting Common Stock to each share of
Voting Common Stock will be three-to-one. The Class C Non-Voting Common Stock
is, and any preferred stock would be, freely transferable. The holders of
preferred stock would be paid in full at par value, plus all accrued dividends,
before the holders of shares of Common Stock received any payment upon
liquidation, dissolution, or winding up of the business of Farmer Mac.
From April 1997 through March 20, 1998, Farmer Mac had sold 19,180 shares
of Class A Voting Common Stock through a continuous direct offering program.
Farmer Mac intends to offer an aggregate of approximately 93,000 shares of Class
A Stock through this program to interested eligible investors. In November 1997,
Farmer Mac completed a public offering of 400,000 shares of its Class C
Non-Voting Common Stock. As a result of these (and other previous) issuances,
there are currently outstanding 1,009,180 shares of Class A Stock, 500,301
shares of Class B Voting Common Stock and 3,078,399 shares of Class C Stock.
Farmer Mac may obtain capital from future issuances of common stock (both
voting and non-voting) or preferred stock. Other than the direct offering of
Class A Voting Common Stock, which Farmer Mac intends to continue in 1998, and a
program pursuant to which members of Farmer Mac's Board of Directors may elect
to receive Class C Non-Voting Common Stock in lieu of some or all of their cash
retainer for serving as Directors, Farmer Mac has no current plans to issue any
additional shares of Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Balance Sheet Review."
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. See "Farmer Mac's Borrowing
Authority from the U.S. Treasury."
<PAGE>
Administrative Expenses
By statute, Farmer Mac is authorized to impose charges or fees in
reasonable amounts to recover the costs of administering its activities. In that
regard, Farmer Mac is authorized to require program participants 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 U.S. 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 Act provides that the U.S.
Treasury is required to purchase such obligations of Farmer Mac if Farmer Mac
certifies that: (i) a portion of the guarantee fees assessed by Farmer Mac has
been set aside as a reserve against losses arising out of Farmer Mac's guarantee
activities in an amount determined by Farmer Mac's Board to be necessary and
such reserve has been exhausted; and (ii) the proceeds of such obligations are
needed to fulfill Farmer Mac's guarantee obligations. Such obligations would
bear interest at a rate determined by the U.S. 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 obligations, and would be required to be repaid to
the U.S. Treasury within a "reasonable time," which the Act does not define.
The United States government does not guarantee payments due on Farmer Mac
Guaranteed Securities, 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.
GOVERNMENT REGULATION OF FARMER MAC
General
Public offerings of Farmer Mac Guaranteed Securities must be registered
with the Commission pursuant to the 1933 Act. Farmer Mac also is subject to the
periodic reporting requirements of 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 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
<PAGE>
apply its general enforcement powers to Farmer Mac and its activities. The
Director of OSMO (the "Director"), 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 [the
transition period for the phase-in of higher capital standards, as provided in
the 1996 Act] and beyond, if necessary."
Comptroller General/General Accounting Office
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.
In May 1997, in response to concerns expressed by certain members of
Congress regarding the investment practices of the government-sponsored
enterprises (GSEs), the General Accounting Office commenced a review of the
investment policies and practices of certain GSEs, including Farmer Mac, Fannie
Mae and Freddie Mac. Although a final report was issued by the GAO on March 11,
1998, it has not yet been made available to the GSEs or the public.
Capital Standards
General. The Act, as amended by the 1996 Act, establishes three capital
standards for Farmer Mac -- minimum, critical and risk-based. The minimum and
critical capital requirements are expressed in the Act as a percentage of
on-balance sheet assets and a lower percentage of "off-balance sheet
obligations" (primarily outstanding Farmer Mac Guaranteed Securities not owned
by Farmer Mac (or an affiliate)); each of these percentages will increase over
the course of a transition period ending January 1, 1999, when the highest
percentages of minimum and critical capital specified in the Act will be
applicable. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for a presentation of
Farmer Mac's current regulatory capital position. The Act does not specify the
required level of risk-based capital, but directs the FCA to establish a
risk-based capital test for Farmer Mac no sooner than early 1999. See " -
Risk-based capital" below. In the event that Farmer Mac were unable to comply
with existing capital requirements or higher capital requirements that may be
imposed in the future, the FCA could take enforcement actions against Farmer
Mac, including curtailing its business activities. See " - Enforcement levels"
below.
At December 31, 1997, Farmer Mac's minimum and critical capital
requirements were $30.0 million and $15.0 million, respectively, and its actual
capital level was $75.1 million. If the fully-phased in (highest) minimum
capital level had been in effect at December 31, 1997, Farmer Mac's actual
capital would have been $34.9 million above the requirement.
Minimum capital level. Prior to the enactment of the 1996 Act, the minimum
level of core capital required to be maintained by Farmer Mac was scheduled to
increase in December 1996 from 0.45% to 2.50% of all on-balance sheet assets
owned by Farmer Mac, while the amount required to be maintained against
"off-balance sheet obligations" was to remain at 0.45%. The 1996 Act imposed
higher levels of core capital than the 0.45% and 2.50% in the Act, but
established a transition period following the enactment of the 1996 Act before
Farmer Mac would be required to maintain the highest level of core capital on
and after January 1, 1999.
Under the 1996 Act, the highest minimum capital level for Farmer Mac, which
will be applicable on and after January 1, 1999, will be an amount of core
capital equal to the sum of 2.75% of Farmer Mac's aggregate on-balance sheet
assets, as determined by generally accepted accounting principles, plus 0.75% of
the aggregate off-balance sheet obligations of Farmer Mac, specifically
including: (i) the unpaid principal balance of outstanding Farmer Mac Guaranteed
Securities; (ii) instruments issued or guaranteed by Farmer Mac that are
substantially equivalent to Farmer Mac Guaranteed Securities; and (iii) other
off-balance sheet obligations of Farmer Mac.
During the one-year period ending December 31, 1998, Farmer Mac's minimum
capital level is required to be the sum of (i) 0.65% of its aggregate
off-balance sheet obligations, (ii) 1.95% of "designated on-balance sheet
assets" (assets acquired under Farmer Mac's "linked portfolio strategy"
(pursuant to which Farmer Mac may acquire and hold Farmer Mac Guaranteed
Securities) and Qualified Loans purchased and held by Farmer Mac, and (iii)
2.65% of on-balance sheet assets other than "designated on-balance sheet
assets."
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% of the
total minimum capital requirement at that time.
Risk-based capital. The 1996 Act directs the FCA to establish a risk-based
capital test for Farmer Mac, using stress-test parameters set forth therein, and
to commence the related public rulemaking process no sooner than February 1999.
While the Act does not specify the required level of risk-based capital, that
level is permitted to exceed the statutory minimum capital requirement
applicable to Farmer Mac. For several years, Farmer Mac has conducted its own
guaranty fee adequacy analyses, using stress-test models developed internally
and with the assistance of outside experts. Those analyses have taken into
account the diverse and dissimilar characteristics of the various asset
categories for which the Corporation must manage its risk exposures, and that
analytical process is ongoing as the mix of assets under management shifts with
growth in the business and the addition of new asset categories. Farmer Mac
believes that any risk-based capital test developed by the FCA should take
similar factors into account and should not result in risk-based capital
<PAGE>
significantly higher than the statutory minimum capital level. To date, the
FCA has not advised Farmer Mac as to the possible level of risk-based capital
that may be required or when the rulemaking process would likely conclude and a
final regulation be imposed on Farmer Mac. While a risk-based capital
requirement significantly above the statutory minimum capital level could have a
material adverse effect on Farmer Mac, the ultimate impact of any particular
risk-based capital test would have to be evaluated in light of the level of
risk-based capital required relative to Farmer Mac's then-existing capital
position, the categories of assets against which risk-based capital would have
to be maintained, growth in Farmer Mac's business, Farmer Mac's ability to raise
additional equity in the capital markets, alternative business strategies
available to Farmer Mac and legal, as well as public policy considerations
affecting the applicability of a risk-based capital requirement to Farmer Mac.
Accordingly, it is not possible to determine the impact, if any, of a final
risk-based capital regulation on Farmer Mac at this time.
Enforcement levels. The Act directs the FCA to classify the Corporation
within one of four enforcement levels for purposes of determining capital
compliance. Prior to the promulgation of a risk-based capital regulation for
Farmer Mac (which, as previously noted, could occur no sooner than February
1999), the Act provides that Farmer Mac shall be classified as within "level I"
(the highest compliance level) so long as its capital equals or exceeds the then
applicable minimum capital level. As of December 31, 1997, Farmer Mac was
classified as within level I.
Failure to comply with the applicable minimum capital level in the 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 were classified
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.
<PAGE>
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'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. If ongoing implementation of the authorities
granted to Farmer Mac in the 1996 Act continues to result in the expansion of
Farmer Mac's staff and equipment to an extent that indicates a need for larger
facilities, Farmer Mac will consider alternatives to its current lease
arrangement.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
<PAGE>
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 Class A Voting Common Stock trades on the NASDAQ Small Cap Marketsm
tier of the NASDAQ Stock Marketsm under the symbol "FAMCA;" the Class C
Non-Voting Common Stock trades on the NASDAQ National Market(R) under the symbol
"FAMCK." 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.
<PAGE>
Class A Common Stock
High Bid Low Bid
------------ ------------
($ per share)
1996
First Quarter.......................... $5.50 $ 3.75
Second Quarter......................... 6.25 5.50
Third Quarter.......................... 22.25 6.00
Fourth Quarter......................... 28.00 18.75
1997
First Quarter.......................... $28.50 $22.00
Second Quarter......................... 22.50 17.00
Third Quarter.......................... 15.50 13.50
Fourth Quarter......................... 18.88 11.00
1998
First Quarter (through March 20)....... $17.38 $16.25
Class C Common Stock High Bid Low Bid
------------ ------------
($ per share)
1996
First Quarter.......................... $7.00 $4.25
Second Quarter......................... 8.00 7.00
Third Quarter.......................... 24.25 8.00
Fourth Quarter......................... 30.50 18.50
1997
First Quarter.......................... $37.00 $24.25
Second Quarter......................... 35.25 24.50
Third Quarter.......................... 41.25 33.50
Fourth Quarter......................... 66.50 39.00
1998
First Quarter (through March 20)....... $63.13 $51.25
Farmer Mac is unaware of any publicly available quotations or prices with
respect to the Class B Voting Common Stock, which has a limited market and
trades infrequently.
It is estimated that there were 1,593 registered owners of the Class A
Voting Common Stock outstanding, 104 registered owners of the Class B Voting
Common Stock outstanding and 1,557 registered owners of the Class C Non-Voting
Common Stock outstanding as of March 20, 1998.
In April 1997, Farmer Mac implemented a direct stock purchase program for
the sale of Class A Voting Common Stock to financial institutions eligible to
own such stock (banks, insurance companies and other financial institutions that
are not System Institutions). Through March 20, 1998, Farmer Mac had sold 19,180
shares of Class A Voting Common Stock to 44 financial institutions in 45
transactions. The aggregate offering price for the sales was approximately
<PAGE>
$345,500. Farmer Mac's Class A Voting Common Stock is exempt from registration
under Section 3(a)(2) of the Securities Act of 1933 by virtue of Farmer Mac's
status as an instrumentality of the United States. No agent or underwriter was
involved in any of these transactions; thus, no underwriting discounts or
commissions were paid.
In November 1997, Farmer Mac sold 400,000 shares of its Class C Non-Voting
Common Stock in a public offering underwritten by SBC Dillon Read Inc. Total
underwriting discounts and commissions paid to SBC Dillon Read aggregated
$1,376,000 and total gross proceeds to Farmer Mac were $23,024,000. Like the
Class A Voting Common Stock, the Class C Non-Voting Common Stock is exempt from
registration under Section 3(a)(2) of the Securities Act of 1933 by virtue of
Farmer Mac's status as an instrumentality of the United States.
For information on Farmer Mac's dividend policy, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Balance Sheet Review" and Note 7 to the Financial Statements.
Item 6. Selected Financial Date
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
------------ ------------ ------------ ------------ ------------
Summary of Financial Condition: 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Investment securities $ 656,737 $ 85,799 $ 63,281 $ 9,437 $ 5,503
Farmer Mac I and II securities, net 442,311 419,260 417,169 367,994 398,380
Total Assets 1,348,135 603,104 512,464 477,238 525,254
Debentures, notes and bonds, net:
Due within one year 856,028 259,164 207,422 168,307 172,350
Due after one year 402,803 287,128 284,084 288,209 330,190
Total liabilities 1,273,074 555,899 500,752 465,019 511,703
Stockholders' equity 75,061 47,205 11,712 12,219 13,551
Selected Financial Ratios:
Return/(loss) on average assets 0.47% 0.14% (0.13%) (0.27%) (0.14%)
Return/(loss) on equity 7.57% 2.64% (5.41%) (10.34%) (4.99%)
Average equity to assets 6.27% 5.28% 2.42% 2.57% 2.71%
Year ended December 31,
-----------------------------------------------------------------
------------ ------------ ------------ ------------ ------------
Summary of Operations: 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(dollars in thousands, except per share amounts)
Interest income $ 80,153 $ 37,353 $ 36,424 $ 31,712 $ 32,642
Interest expense 72,992 34,623 34,709 30,303 30,848
------------ ------------ ------------ ------------ ------------
Net interest income 7,161 2,730 1,715 1,409 1,794
Guarantee fee income 2,575 1,623 1,263 1,050 1,203
Gain on issuance of mortgage-backed securities 2,362 1,070 - - -
Miscellaneous 253 63 171 177 176
------------ ------------ ------------ ------------ ------------
Total revenue 12,351 5,486 3,149 2,636 3,173
Other expenses 7,840 5,081 3,796 3,968 3,976
------------ ------------ ------------ ------------ ------------
Income/(loss) before income taxes and
extraordinary item 4,511 405 (647) (1,332) (803)
Income tax (benefit)/expense (115) 12 - - -
Extraordinary gain - 384 - - 127
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net income/(loss) 4,626 777 (647) (1,332) (676)
------------ ------------ ------------ ------------ ------------
Earnings/(Loss) Per Share:
Class A and B Voting Common Stock
Basic earnings before extraordinary item $ 0.48 $ 0.07 $ (0.14) $ (0.28) $ (0.17)
Basic net earnings $ 0.48 $ 0.15 $ (0.14) $ (0.28) $ (0.14)
Diluted earnings before extraordinary item $ 0.46 $ 0.07 $ (0.14) $ (0.28) $ (0.17)
Diluted net earnings $ 0.46 $ 0.14 $ (0.14) $ (0.28) $ (0.14)
Class C Non-Voting Common Stock
Basic earnings before extraordinary item $ 1.44 $ 0.22 $ (0.41) $ (0.85) $ (0.51)
Basic net earnings $ 1.44 $ 0.44 $ (0.41) $ (0.85) $ (0.43)
Diluted earnings before extraordinary item $ 1.39 $ 0.22 $ (0.41) $ (0.85) $ (0.51)
Diluted net earnings $ 1.39 $ 0.43 $ (0.41) $ (0.85) $ (0.43)
</TABLE>
<PAGE>
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,
1997, 1996 and 1995 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.
Forward-Looking Statements
Farmer Mac regularly communicates information concerning its business
activities to investors, securities analysts, the news media and others as part
of its normal operations. Some of these communications include forward-looking
statements pertaining to management's current expectations as to Farmer Mac's
future business plans, results of operations and/or financial condition.
Forward-looking statements are typically accompanied by, and identified with,
such terms as "anticipates," "believes," "expects," "intends," "should" and
similar phrases. Management's expectations for the Corporation's future
necessarily involve a number of assumptions and estimates and various factors
could cause actual results to differ materially from these expectations.
The following management's discussion and analysis includes
forward-looking statements addressing the Corporation's prospects for earnings,
loan volume and securitization growth; trends in net interest income and
provision for losses; changes in capital position; and other business and
financial matters. Among the factors that could cause actual results to differ
from the expectations expressed herein are the following: substantial changes in
interest rates, agricultural land values, commodity prices and the general
economy; protracted adverse weather, market or other conditions affecting
particular geographic regions or particular commodities related to agricultural
mortgage loans backing Farmer Mac Guaranteed Securities; legislative or
regulatory developments or interpretations of Farmer Mac's statutory charter
that could adversely affect Farmer Mac or the ability of certain lenders to
participate in its programs or the terms of any such participation; legislative
or regulatory restrictions on Farmer Mac's investment authority; the
availability of debt funding in sufficient quantities and at attractive spreads
to support continued growth; the rate of growth in agricultural mortgage
indebtedness; the size of the agricultural mortgage market; borrower preferences
for fixed-rate agricultural mortgage indebtedness; the willingness of lenders to
sell agricultural mortgage loans or AgVantage mortgage-backed bonds to Farmer
Mac; the willingness of investors to invest in agricultural mortgage-backed
securities versus other investments; competition in the origination or purchase
of agricultural mortgage loans and the sale of agricultural mortgage-backed and
debt securities; the imposition of significant risk-based capital requirements;
or changes in the Corporation's status as a government-sponsored enterprise.
Given the foregoing potential risks and uncertainties, no undue reliance
should be placed on any forward-looking statements expressed herein.
Furthermore, Farmer Mac undertakes no obligation to publicly release the results
of revisions to any forward-looking statements that may be made to reflect any
future events or circumstances.
<PAGE>
Overview
Net income for the year ended December 31, 1997 totaled $4.6 million,
compared to $0.8 million for the same period a year ago. Diluted earnings per
share for 1997 were $0.46 for Classes A and B common stock and $1.39 for Class C
common stock, as compared to $0.14 and $0.43, respectively, for 1996. Earnings
per share reflect the 3-to-1 dividend and liquidation preference accorded to
Class C common stock compared to Classes A and B common stock, as well as the
400,000 share Class C common stock offering completed in November 1997. Net
income for 1997 includes a $250 thousand tax benefit associated with the future
use of operating losses incurred in prior years.
Farmer Mac's improved financial results are attributable to a series of
positive developments beginning in early 1996, which marked a turnaround in its
business prospects and financial performance. Positive developments in 1996
included the enactment of the 1996 Act early in the year and the opening of the
cash window in mid-1996. Bolstered by these positive developments, in early
1997, Farmer Mac undertook a 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. The Board and
management believed that increasing Farmer Mac's presence in the capital markets
would improve the pricing of its agricultural mortgage-backed securities (AMBS),
and thereby enhance the attractiveness of the loan products offered through its
programs for the benefit of agricultural lenders and borrowers. Since the
implementation of the debt strategy, the Corporation has experienced a
tightening of its AMBS spreads relative to other comparable agency securities
and anticipates continued improvements in pricing as liquidity and investor
recognition of Farmer Mac increase.
In addition to tightening its AMBS spreads, the expanded debt issuance
strategy has resulted in an increase in net interest income, which contributed
significantly to Farmer Mac's improved operating results for 1997. Net interest
income is composed primarily of income from program assets (Farmer Mac I and II
Securities and loans held for securitization) and non-program assets (cash and
cash equivalents and investment securities). Income from non-program assets has
contributed most significantly to the recent increases in net interest income,
although program assets continue to generate the greatest proportion of the
Corporation's total net interest income. Farmer Mac increased the size of its
non-program investment portfolio as a result of the implementation of its
expanded debt issuance strategy. The proceeds of these increased debt issuances
have been invested primarily in high quality, short- and long-term floating rate
investments, which have generated significant amounts of net interest income.
Farmer Mac's eventual objective for the proceeds of its increased debt issuances
is investment in program assets, particularly Farmer Mac I and II Securities,
loans held for securitization and other program assets, such as AgVantage
mortgage-backed bonds. 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 assets.
In addition to increased net interest income, Farmer Mac has also realized
increased guarantee fee income and gain on issuance of mortgage-backed
securities as a result of increased guarantee volume since enactment of its
<PAGE>
revised legislative authorities. During 1997, $197.5 million of AMBS, backed by
loans acquired through the cash window, were issued to capital market investors,
compared to the $149.3 million of AMBS issued in 1996.
While Farmer Mac's financial condition has improved, future improvements
in operating results are expected to depend largely upon growth in Farmer Mac's
historical core business (guarantee fee income and gain on issuance of
mortgage-backed securities). Growth in the 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. Farmer Mac has begun
to attract the interest of non-traditional agricultural real estate lenders,
particularly mortgage bankers and agricultural supply and equipment companies,
for whom management believes the advantages of its programs 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. The addition of mortgage bankers and regional
financial institutions 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. In addition, the
recent introduction of "AgVantage" has begun to attract the interest of
traditional agricultural real estate lenders, to whom AgVantage offers the
liquidity opportunity to convert qualified agricultural mortgage loans into cash
without having to sell the loans to Farmer Mac. Based on management's evaluation
of the business potential of its programs and their existing and 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 a 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. Because many of these
institutions are, or will be, new to the Farmer Mac programs, however,
management cannot predict the timing or the level of their participation.
During 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 increased interest in the Corporation's programs and
improved the understanding of those programs by participants. During 1997,
Farmer Mac expanded its product line with the announcement of additional loan
products, including a "part-time farmer" loan, designed for borrowers who live
on agricultural properties but derive a significant portion of their income from
off-farm employment. This loan product 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 features permitting conversion to fixed
rates and flexible prepayment terms, and a 10-year, fixed rate loan. In late
1997, Farmer Mac consummated the first transaction under its "swap" program,
which allows lenders to exchange new or seasoned Qualified Loans for Farmer Mac
Guaranteed Securities. 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.
<PAGE>
Farmer Mac continues to face the challenge of expanding its business in
the highly static market for agricultural and rural home mortgage loans. Having
obtained the statutory authority to operate under similar guidelines to those of
Fannie Mae and Freddie Mac does not ensure the long-term success of Farmer Mac's
programs, though they are receiving steadily greater acceptance among lenders,
reflecting the competitive rates, terms and products offered and the advantages
Farmer Mac believes its programs provide. For Farmer Mac to succeed in realizing
its business development and profitability goals over the long-term,
agricultural mortgage lenders, whether traditional or non-traditional, must
realize the benefits of selling loans or loan-backed securities to Farmer Mac
and must modify their business practices accordingly.
A detailed discussion of Farmer Mac's financial results for the years
ended December 31, 1997, 1996 and 1995 follows.
<PAGE>
Average Balances and Rates
The following table provides information regarding interest-earning assets
and interest-bearing liabilities for the years ended December 31, 1997, 1996 and
1995.
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------- ------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------------------------------------------------------------------------------------------------------
--------------------------- ---------- ----------- ------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Farmer Mac I and II
Securities, net $ 429,081 $ 30,541 7.12% $408,534 $ 29,672 7.26% $397,265 $ 29,097 7.32%
Investments and cash
equivalents 756,920 47,371 6.26% 127,465 6,964 5.46% 114,050 7,327 6.43%
Loans held for
secuitization 26,869 2,241 8.34% 8,513 717 8.42% - - -
------------- ------------- ---------- ----------- ------------------------------------------------------
------------- ------------- ---------- ----------- ------------------------------------------------------
Total earning assets 1,212,870 80,153 6.61% 544,512 37,353 6.86% 511,315 36,424 7.12%
Other assets 43,008 20,168 13,451
------------- ----------- ------------
------------- ----------- ------------
Total assets $1,255,878 $564,680 $524,766
------------- ----------- ------------
------------- ----------- ------------
Liabilities and
Stockholders' Equity:
Debentures, notes $1,182,591 $ 72,992 6.17% $537,802 $ 34,623 6.44% $507,015 $ 34,709
Other liabilities 23,751 12,045 5,871
------------- ----------- ------------
------------- ----------- ------------
Total liabilities 1,206,342 549,847 512,886
Stockholders' equity 49,536 14,833 11,880
------------- ----------- ------------
------------- ----------- ------------
Total liabilities and
stockholders' equity $1,255,878 $564,680 $524,766
------------- ------------- ---------- ----------- ------------------------------------------------------
------------- ------------- ---------- ----------- ------------------------------------------------------
Net interest income/
spread $ 7,161 0.44% $ 2,730 0.42% $ 1,715 0.28%
------------- ---------- ------------------------- ----------- --------
------------- ---------- ------------------------- --------------------
Net yield on interest
earning assets 0.59% 0.50% 0.33%
---------- ----------- -----------
</TABLE>
Rate/Volume Analysis
The table below sets forth information regarding changes in the components
of net interest income for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 vs. 1996 1996 vs. 1995
----------------------------------- ----------------------------------
----------------------------------- ----------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
Rate Volume Total Rate Volume Total
----------- ----------- ----------- ----------- ---------- ----------
----------------------- ----------- ----------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income from interest-earning assets
Farmer Mac I and II Securities $ (541) $ 1,410 $ 869 $ (245) $ 820 $ 575
Investments and cash equivalents 863 39,544 40,407 (1,168) 805 (363)
Loans held for securtization 94 1,430 1,524 - 717 717
----------- ----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ----------- ---------- ----------
Total 416 42,384 42,800 (1,413) 2,342 929
Expense from interest-bearing liabilities (1,869) 40,238 38,369 (2,130) 2,044 (86)
----------- ----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ----------- ---------- ----------
Change in net interest income $ 2,285 $ 2,146 $ 4,431 $ 717 $ 298 $ 1,015
----------- ----------- ----------- ----------- ---------- ----------
</TABLE>
Results of Operations
Net Interest Income. Net interest income totaled $7.2 million for the year
ended December 31, 1997 compared to $2.7 million for year ended December 31,
1996. The increase in net interest income compared to 1996 was due to an
increase in the average balance of interest-earnings assets and a 9 basis point
increase in net interest yield. The increase in the average balance of
interest-earning assets was primarily due to an increase in the balance of
investments and cash equivalents as a result of Farmer Mac's expanded debt
issuance program begun in early 1997. To a lesser extent, increases in Farmer
Mac I and II securities and loans held for securitization also contributed to
the increase. The increase in net interest yield was due to a shift in the
<PAGE>
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. The increase in the Corporation's
stockholders' equity, which represents "non-interest-bearing funding," also
contributed to the increase in net interest yield.
Net interest income totaled $1.7 million for the year ended December 31,
1995. The $1.0 million increase from 1995 to 1996 was primarily attributable to
a decrease in Farmer Mac's average funding costs. The decrease in funding costs
was due to higher coupon Medium-Term Notes being replaced with lower coupon
Medium-Term Notes during 1996.
Other Income. Other income totaled $5.2 million for the year ended
December 31, 1997, an increase of $2.4 million compared to $2.8 million for the
year ended December 31, 1996. The increase in other income was due to increases
in guarantee fee income and the gain on issuance of agricultural mortgage-backed
securities (AMBS). Guarantee fee income increased from $1.6 million for 1996 to
$2.6 million for 1997, as the outstanding balance of guaranteed securities
increased from $631.3 million at December 31, 1996 to $842.9 million at December
31, 1997. Gain on issuance of AMBS totaled $2.4 million for 1997 compared to
$1.1 million for 1996. Farmer Mac issued $197.5 million of AMBS in 1997 compared
to $149.3 million in 1996.
Other income totaled $1.4 million for the year ended December 31, 1995.
The $1.4 million increase in other income from 1995 to 1996 was due to increases
in guarantee fee income and gain on issuance of AMBS. Guarantee fee income
increased $360 thousand from 1995 to 1996. The change in guarantee fee income
was attributable to the level of Farmer Mac I and II Securities outstanding in
each of the comparable periods. In 1996, Farmer Mac recognized $1.1 million in
gains on the issuance of AMBS. No such gains were recognized on Farmer Mac I
Securities issued prior to the 1996 Act.
Other Expenses. Other expenses totaled $7.8 million for the year ended
December 31, 1997 compared to $5.1 million for the year ended December 31, 1996.
The increase in other expenses was attributable to increased compensation and
other costs related to expanded operations under Farmer Mac's revised
legislative authorities. Farmer Mac's provision for loan losses, a component of
other expenses, totaled $990 thousand for 1997 compared to $263 thousand for
1996. The increase in the provision for losses was attributable to the increase
in outstanding Farmer Mac AMBS for which Farmer Mac assumes 100% credit risk
(see "Risk Management - Credit risk management").
Other expenses totaled $3.8 million for the years ended December 31, 1995.
The $1.3 million increase from 1995 to 1996 was largely attributable to
increased costs associated with the implementation of Farmer Mac's expanded
authorities.
Income Tax Benefit/Expense. During the year ended December 31, 1997,
Farmer Mac reduced the valuation allowance related to its net deferred tax asset
by $1.7 million, of which $1.5 million was attributable to taxable income earned
in 1997 and $250 thousand was attributable to the future use of the net
operating loss carryforwards. As a result, Farmer Mac recorded a tax benefit of
$115 thousand for the year ended December 31, 1997. At December 31, 1997, Farmer
Mac had a net deferred tax asset of $250 thousand, net of a $1.5 million
<PAGE>
valuation allowance. A valuation allowance is required to reduce the net
deferred tax asset to an amount that is likely to be realized. Management will
continue to assess the required valuation allowance on an ongoing basis. For
further information regarding Farmer Mac's net deferred tax asset, see Note 8 to
the Financial Statements.
For the year ended December 31, 1996, Farmer Mac recognized income tax
expense of $12 thousand. No tax expense was recognized in 1995. Little or no tax
expense was recognized in 1996 and 1995 due to the utilization of net operating
loss carryforwards.
Extraordinary Gain. In 1996, the Corporation recognized an
extraordinary gain of $384 thousand from the early extinguishment of
$8.0 million of debt. There was no early extinguishment of debt in 1997 or
1995.
Balance Sheet Review
During 1997, Farmer Mac's assets increased by $745.0 million, from $603.1
million at December 31, 1996 to $1.3 billion at December 31, 1997. This increase
was due to a $679.6 million increase in non-program assets (cash and cash
equivalents and investment securities) and a $57.2 million increase in program
assets (Farmer Mac I and II securities and loans held for securitization). The
increase in non-program assets resulted from Farmer Mac's expanded debt issuance
strategy and consisted of short- and long-term floating-rate investments. The
increase in program investments was due to increases in Farmer Mac II Securities
and loans held for securitization. During 1997, Farmer Mac issued $95.0 million
in securities under the Farmer Mac II Program, compared to $92.5 million in
1996. Of the total Farmer Mac II securities issued during 1997, $80.6 million
were purchased by Farmer Mac for investment purposes. The increase in loans held
for securitization at December 31, 1997 compared to December 31, 1996 was due to
increased Farmer Mac I cash window activity.
At December 31, 1997, Farmer Mac had $1.3 billion of Discount Notes and
Medium-Term Notes (net of unamortized debt issuance costs, discounts and
premiums) outstanding, an increase of $712.5 million compared to December 31,
1996. The increase in outstanding debt was primarily attributable to the
expanded debt issuance strategy and corresponds to the increase in non-program
and program assets.
In November 1997, Farmer Mac sold 400,000 shares of Class C Non-Voting
Common Stock in a public offering at $61.00 per share, which generated
approximately $23.0 million in net proceeds. The stock offering, combined with
1997 earnings, resulted in a $27.8 million increase in stockholders' equity at
December 31, 1997 compared to December 31, 1996. At December 31, 1997 and 1996,
Farmer Mac's actual capital levels exceeded its minimum regulatory capital
requirements. Farmer Mac has not paid and does not expect to pay dividends on
its Common Stock in the near future.
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 on its portfolio of Farmer Mac I and II Securities
and other investments, and loans purchased through the cash window. Farmer Mac
<PAGE>
is subject to interest-rate risk on its portfolio of Farmer Mac I and II
Securities 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 timing of the repricing
of Farmer Mac's assets and liabilities. For Farmer Mac I Securities, this risk
is mitigated to a great extent by yield maintenance provisions, which require
payments to be made to Farmer Mac when 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 had
the loans not prepaid. The existence of these provisions reduces (but does not
eliminate) Farmer Mac's exposure to reinvestment risk. Yield maintenance
provisions are not contained in any Guaranteed Portions underlying Farmer Mac II
Securities, which comprised approximately 56% of Farmer Mac's portfolio of
Farmer Mac I and II Securities at December 31, 1997. There is significantly less
interest-rate risk related to Farmer Mac's portfolio of other investments since
it consists entirely of investments that reprice within one year.
Farmer Mac's primary strategy to manage interest-rate risk related to
Farmer Mac I and II Securities and investments is to "match fund" the portfolio
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 Farmer Mac I and II Securities and investments, while allowing Farmer Mac
the ability to adjust debt maturities in response to prepayments. For
information regarding the contractual maturities of interest-earning assets and
interest-bearing liabilities, see Notes 3, 4 and 5 to the Financial Statements.
In monitoring interest-rate risk, management does not use repricing gap analyses
since actual repricing dates will likely differ from those expected because
borrowers have the right to prepay the underlying mortgages. Instead, Farmer Mac
monitors the sensitivity of its assets and liabilities to changes in interest
rates as discussed further below.
Farmer Mac is also subject to interest-rate risk on loans purchased
through the cash window. When Farmer Mac commits to purchase a Qualified Loan,
it is exposed to interest-rate risk between the time it commits to purchase the
loans and the time it forward sells AMBS backed by those loans. As of December
31, 1997, Farmer Mac had committed to purchase $10.8 million of Qualified Loans
through the Farmer Mac I cash window. With respect to outstanding commitments to
purchase Qualified Loans and the $47.2 million in loans held for securitization
at December 31, 1997, Farmer Mac had committed to sell forward $23.8 million of
AMBS for future settlement. The remaining $34.2 million net purchase position at
December 31, 1997 consisted of adjustable-rate and fixed-rate loans not subject
to forward sale commitments. The Corporation manages interest-rate risk related
to fixed-rate loans not offset by forward sale commitments through the use of
off-balance sheet derivative financial instruments, such as futures contracts.
Farmer Mac 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 by the Asset Liability Committee and the Finance
Committee of the Board of Directors to ensure compliance with the Corporation's
interest-rate risk policy limits.
<PAGE>
Credit risk management. Farmer Mac' primary exposure to credit risk is the
risk of loss from defaults by borrowers on the loans underlying Farmer Mac
Guaranteed Securities. Farmer Mac guarantees the timely payment of principal,
including any balloon payments, and interest on Farmer Mac I Securities (a
similar guarantee is provided on Farmer Mac II Securities; however, Farmer Mac's
credit exposure on these securities is covered 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). For Farmer Mac I Securities issued prior to the
enactment of the 1996 Act, Farmer Mac's credit risk exposure is supported by
subordinated interests. Before Farmer Mac is required to make a guarantee
payment, full recourse must first be taken against the subordinated interest. As
of December 31, 1997, the subordinated interests represented approximately 10%
of the outstanding balance of all Farmer Mac I Securities issued prior to the
enactment of the 1996 Act. The 1996 Act eliminated the subordinated interest
requirement and Farmer Mac now assumes 100% of the credit risk on Farmer Mac I
Securities issued since the 1996 Act (referred to as AMBS). Farmer Mac mitigates
the credit risk related to guarantees on all Farmer Mac I securities through
Underwriting and Appraisal Standards and by requiring collateral in the form of
the real estate supporting the Qualified Loans backing the securities (see
"Business Farmer Mac I - Underwriting and Appraisal Standards").
As of December 31, 1997 and 1996, the outstanding principal balance of
Farmer Mac Guaranteed Securities was as follows:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
---------------------------
(in thousands)
<S> <C> <C>
Farmer Mac I AMBS $ 341,213 $ 148,918
Other Farmer Mac I Securities 228,904 271,341
Farmer Mac II Securities 272,777 211,024
------------- ------------
------------- ------------
$ 842,894 $ 631,283
------------- ------------
</TABLE>
Farmer Mac evaluates the credit quality of the Farmer Mac I portfolio by
monitoring factors such as loan-to-value, commodity and geographic
distributions, and delinquency rates. The primary factor influencing credit
quality is loan-to-value. The following table sets forth the distribution of
loans underlying Farmer Mac I Securities by loan-to-value as of December 31,
1997 and 1996. For information regarding commodity and geographic distributions,
see Note 10 to the Financial Statements.
<TABLE>
<CAPTION>
1997 1996
------------------------------------- --------------------------------------
------------------------------------- --------------------------------------
Other Other
AMBS (1) Farmer Farmer
AMBS (1) Mac I (2) Total AMBS (1) Mac I (2) Total
----------- ------------------------ ------------ -------------------------
------------------------ ------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
0.00% to 40.00% $ 26,969 $ 74,154 $ 101,123 $ 13,292 $ 79,504 $ 92,796
40.01% to 50.00% 65,324 61,057 126,381 25,389 71,211 96,600
50.01% to 60.00% 122,368 65,480 187,848 42,917 80,907 123,824
60.01% to 70.00% 125,759 28,213 153,972 64,301 39,718 104,019
70.01% to 80.00% 793 - 793 3,019 - 3,019
----------- ----------- ------------ ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------ ------------
Total $ 341,213 $ 228,904 $ 570,117 $ 148,918 $ 271,340 $ 420,258
----------- ----------- ------------ ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------ ------------
</TABLE>
(1) Farmer Mac bears the entire risk of loss.
(2) Securities are supported by subordinated interests, which represented 10% of
the initial balance of the loans underlying the securities at issuance.
At December 31, 1997 and 1996, loans that were 90 days or more past due,
including loans in foreclosure or bankruptcy, represented 0.26% and 0.73% of the
principal amount of all loans underlying Farmer Mac I Securities. All loans that
were 90 days or more past due related to Qualified Loans purchased prior to the
1996 Act. Management believes that no losses will be incurred by Farmer Mac on
these loans because of the subordinated interests with respect to the related
securities.
Farmer Mac maintains a reserve for loan losses to cover losses incurred on
loans purchased under the Farmer Mac I Program since the 1996 Act. At December
31, 1997, Farmer Mac's reserve for loan losses totaled $1.6 million. Management
evaluates the adequacy of the reserve for loan losses on a quarterly basis and
considers a number of factors, including: historical charge-off and recovery
activity (noting any particular trends in preceding periods); trends in
<PAGE>
delinquencies, bankruptcies and non-performing loans; trends in loan volume and
size of credit risks; current and anticipated economic conditions; the condition
of agricultural segments and geographic areas experiencing or expected to
experience particular economic adversities, particularly areas where Farmer Mac
may have a geographic or commodity concentration; the degree of risk inherent in
the composition of the guaranteed portfolio; the results of its quality control
reviews; and its underwriting standards.
To a lesser extent, Farmer Mac is also exposed to institutional credit
risk related to Sellers, its investment portfolio and interest-rate contracts.
Farmer Mac manages institutional credit risk related to Seller/Servicers by
requiring such institutions to meet certain standards and by monitoring their
financial condition and servicing performance. The credit risk inherent in the
investment portfolio is mitigated by Farmer Mac's policy of investing in highly
rated instruments and concentration limits, which reduces exposure to any one
counterparty. The composition of Farmer Mac's investment portfolio also limits
its credit risk. At December 31, 1997, Farmer Mac's investment portfolio
consisted primarily of short-term highly liquid investments or long-term
floating-rate agency mortgage-backed securities. Farmer Mac's management of
credit risk related to interest-rate contracts is discussed in Note 10 to the
Financial Statements.
Liquidity and Capital Resources
Liquidity. Farmer Mac's business programs present funding needs that are
driven by the purchase of Qualified Loans, payment of principal and interest on
Farmer Mac guaranteed securities and the maturities of debt. Farmer Mac's
primary sources of funds to meet these needs are issuances of debt obligations,
principal and interest payments on mortgages underlying Farmer Mac guaranteed
securities and net operating cash flows. Because of Farmer Mac's regular
participation in capital markets and its status as a government-sponsored
enterprise, Farmer Mac has been able to access the capital markets at favorable
rates. Farmer Mac also maintains a portfolio of cash equivalents, comprised of
commercial paper and other short-term investments, to draw upon as necessary. At
December 31, 1997 and 1996, Farmer Mac's cash and cash equivalents totaled
$177.6 million and $68.9 million, respectively.
Capital Requirements. The Act, as amended by the 1996 Act, establishes
three capital standards for Farmer Mac - minimum, critical and risk-based. The
minimum capital requirement is expressed as a percentage of on-balance sheet
assets and off-balance sheet obligations, with the critical capital requirement
equal to one-half of the minimum capital amount. Higher minimum and critical
capital requirements are being phased-in over a transition period, which ends
January 1, 1999, when the highest level of minimum capital will be applicable.
The Act does not specify the required level of risk-based capital. It
directs the FCA to establish a risk-based capital test for Farmer Mac, using
stress-test parameters set forth therein, and provides that the related public
rulemaking process shall commence no sooner than February 1999. For a discussion
of risk-based capital, including the potential impact of future risk-based
capital requirements on Farmer Mac, see "Government Regulation of Farmer Mac --
Regulation -- Capital Standards -- Risk-based capital."
Certain enforcement powers are given to the FCA depending upon Farmer
Mac's compliance with the capital standards. See "Government Regulation of
<PAGE>
Farmer Mac -- Regulation -- Capital Standards -- Enforcement levels." As of
December 31, 1997 and 1996, Farmer Mac was classified as within "level I" (the
highest compliance level). The following table sets forth Farmer Mac's minimum
capital requirement as of December 31, 1997 based on current requirements and
assuming fully phased-in requirements were in effect:
<TABLE>
<CAPTION>
Current Requirement Fully Phased-In Requirement
---------------------------------------- ----------------------------------------
---------------------------------------------------------------------------------
Capital Capital
Amount Ratio Required Amount Ratio Required
------------- ------------- -------------------------- ------------ ------------
------------- ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Designated assets:
Farmer Mac I and II Securities $ 442,311 1.20% $ 5,308 $ 442,311 2.75% $ 12,164
Loans held for securitization 47,177 1.20% 566 47,177 2.75% 1,297
Other on-balance sheet assets 858,647 2.55% 21,895 858,647 2.75% 23,613
Outstanding balance of Guaranteed
Mortgage Securities held by others 409,087 0.55% 2,250 409,087 0.75% 3,068
Other off-balance sheet obligations 3,429 0.55% 19 3,429 0.75% 26
------------ ------------
------------ ------------
Minimum capital level 30,038 40,168
Actual capital 75,061 75,061
------------ ------------
------------ ------------
Capital surplus $ 45,023 $ 34,893
------------ ------------
</TABLE>
In the opinion of management, Farmer Mac has sufficient liquidity and
capital for the next twelve months.
Other Matters
New Accounting Standards. In 1996, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," as amended by SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125." For Farmer
Mac, SFAS No. 125 applies to the accounting for the purchase and sale of
Qualified Loans under its programs, as well as other transactions involving
transfers of financial assets. Provisions of SFAS No. 125 were effective
beginning January 1, 1997, except those related to secured financing
transactions, such as repurchase and dollar repurchase agreements, which are
effective January 1, 1998. Implementation of SFAS No. 125 has not had, and
is not expected to have, a material effect on Farmer Mac's financial results.
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." These standards, which are effective in 1998, provide for
additional disclosures only and will have no effect on Farmer Mac's financial
position or results of operations.
Year 2000. The year 2000 problem relates to the inability of some computer
programs to process date-sensitive information due to the use of two digits
(rather than four) to define the applicable year. As a result, these computer
programs may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Management has
conducted an assessment of its information systems, as well as those of its
primary vendors, and believes that the year 2000 problem will not have a
material effect on Farmer Mac's financial results.
<PAGE>
Item 9. Financial Statements
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 and subsidiaries ("Farmer Mac") as of December
31, 1997 and 1996, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997. 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 audit 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.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Farmer Mac as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
January 23, 1998
<PAGE>
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
-----------------------------
1997 1996
------------- --------------
-----------------------------
(in thousands)
<S> <C> <C>
Assets:
Cash and cash equivalents $ 177,617 $ 68,912
Investment securities (Note 3) 656,737 85,799
Farmer Mac I and II securities, net (Note 4) 442,311 419,260
Loans held for securitization 47,177 12,999
Interest receivable 19,968 14,821
Guarantee fees receivable 1,474 745
Prepaid expenses and other assets 2,851 568
------------- --------------
------------- --------------
Total assets $ 1,348,135 $ 603,104
------------- --------------
------------- --------------
Liabilities and Stockholders' Equity:
Liabilities:
Debentures, notes and bonds, net (Note 5):
Due within one year $ 856,028 $ 259,164
Due after one year 402,803 287,128
Accrued interest payable 9,783 7,231
Accounts payable and accrued expenses 2,815 1,721
Allowance for losses on guaranteed securities (Note 6) 1,645 655
------------- --------------
------------- --------------
Total Liabilities 1,273,074 555,899
Stockholders' Equity (Note 7):
Common stock:
Class A Voting, $1 par value, no maximum authorization,
1,000,100 and 990,000 shares issued and outstanding at
December 31, 1997 and 1996 1,000 990
Class B Voting, $1 par value, no maximum authorization,
500,301 and 593,401 shares issued and outstanding at
December 31, 1997 and 1996 500 593
Class C Voting, $1 par value, no maximum authorization,
3,078,214 and 2,658,897 shares issued and outstanding
at December 31, 1997 and 1996 3,078 2,659
Additional paid-in capital 75,148 52,513
Loan receivable for purchase of stock - (557)
Unrealized gain on securities available for sale 1,198 329
Accumulated deficit (5,863) (9,322)
------------- --------------
------------- --------------
Total stockholders' equity 75,061 47,205
Commitments (Notes 10 and 11)
Total Liabilities and Stockholders' Equity $ 1,348,135 $ 603,104
------------- --------------
------------- --------------
See accompanying notes to consolidated financial statements.
</TABLE>
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Interest income:
Farmer Mac I and II securities $ 30,541 $ 29,672 $ 29,097
Investments and cash equivalents 47,371 6,964 7,327
Loans held for securitization 2,241 717 -
------------ ------------ -----------
Total interest income 80,153 37,353 36,424
Interest expense 72,992 34,623 34,709
------------ ------------ -----------
Net interest income 7,161 2,730 1,715
Other income:
Guarantee fees 2,575 1,623 1,263
Gain on issuance of AMBS, net 2,362 1,070 -
Miscellaneous 253 63 171
------------ ------------ -----------
Total other income 5,190 2,756 1,434
Other expenses:
Compensation and employee benefits 3,422 2,361 1,928
Professional fees 1,500 828 412
Board of Directors fees and expenses 331 320 328
Rent 224 173 166
Regulatory fees 212 250 289
General and administrative 1,161 886 576
Provision for losses 990 263 97
------------ ------------ -----------
Total other expenses 7,840 5,081 3,796
------------ ------------ -----------
Income/(loss) before income taxes and extraordinary item 4,511 405 (647)
Income tax (benefit)/expense (115) 12 -
------------ ------------ -----------
Income/(loss) before extraordinary item 4,626 393 (647)
Extraordinary gain from early extinguishment of debt - 384 -
------------ ------------ -----------
Net income/(loss) $ 4,626 $ 777 $ (647)
------------ ------------ -----------
Earnings/(loss) per Class A and B Voting Common Stock:
Basic earnings/(loss) before extraordinary item $ 0.48 $ 0.07 $ (0.14)
Basic net earnings/(loss) $ 0.48 $ 0.15 $ (0.14)
Diluted earnings/(loss) before extraordinary item $ 0.46 $ 0.07 $ (0.14)
Diluted net earnings/(loss) $ 0.46 $ 0.14 $ (0.14)
Earnings/(loss) per Class C Non-Voting Common Stock:
Basic earnings/(loss) before extraordinary item $ 1.44 $ 0.22 $ (0.41)
Basic net earnings/(loss) $ 1.44 $ 0.44 $ (0.41)
Diluted earnings/(loss) before extraordinary item $ 1.39 $ 0.22 $ (0.41)
Diluted net earnings/(loss) $ 1.39 $ 0.43 $ (0.41)
See accompanying notes to consolidated financial statements.
</TABLE>
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Loan Unrealized
Class A Class B Class C Additional Receivable Gain on
Common Common Common Paid-in for Stock Securities Accumulated
Stock Stock Stock Capital Purchase Available Deficit Total
----------- ---------- ---------- ----------- ---------- ----------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 670 $ 500 $ 1,170 $ 19,331 $ - $ - $ (9,452) $ 12,219
Change in unrealized gain
on securities available
for sale 140 140
Net Loss (647) (647)
----------- ---------- ---------- ----------- ---------- ----------- ---------- -----------
Balance, December 31, 1995 670 500 1,170 19,331 - 140 (10,099) 11,712
Proceeds from issuance
of Class A common
stock 320 2,240 2,560
Issuance of Class B and
Class C common stock
for note receivable 93 44 420 (557) -
Proceeds from issuance
of Class C common
stock 1,438 30,479 31,917
Issuance of Class C
common stock as
compensation 7 43 50
Change in unrealized gain
on securities available
for sale 189 189
Net income 777 777
----------- ---------- ---------- ----------- ---------- ----------- ---------- -----------
Balance, December 31, 1996 990 593 2,659 52,513 (557) 329 (9,322) 47,205
Proceeds from issuance
of Class A common
stock 10 166 176
Proceeds from issuance
of Class C common
stock 400 22,480 22,880
Net proceeds from
exercise of stock
warrants 19 125 144
Repurchase of Class B
common stock (93) (136) (1,167) (1,396)
Repayment of note
receivable 557 557
Change in unrealized gain
on securities available
for sale 869 869
Net income 4,626 4,626
----------- ---------- ---------- ----------- ---------- ----------- ---------- -----------
Balance, December 31, 1997 $ 1,000 $ 500 $ 3,078 $ 75,148 $ - $ 1,198 $ (5,863) $ 75,061
----------- ---------- ---------- ----------- ---------- ----------- ---------- -----------
See accompanying notes to consoldiated financial statements.
</TABLE>
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
------------- -------------- -------------
1997 1996 1995
------------- -------------- -------------
(in thousands)
<S> <C> <C> <C>
Cash flow from operating activity:
Income/(loss) from Operations $ 4,626 $ 777 $ (647)
Adjustments to reconcile net income/(loss) to cash provided by
operating activities:
Amortization of premium on Farmer Mac I & II securities 3,082 3,072 4,791
Discount note amortization 46,602 11,131 9,522
Increase in guarantee fees receivable (729) (172) (119)
(Increase) decrease in interest receivable (5,147) 751 (1,549)
(Increase) decrease in prepaid expenses and other assets (2,236) (294) 27
Amortization and depreciation 179 105 203
Increase (decrease) in accounts payable and accrued expenses 1,094 981 (232)
Increase in loans held for securitization (34,178) (12,999) -
Increase (decrease) in accrued interest payable 2,552 (1,163) 944
Provision for losses 990 263 97
Gain on early extinguishment of debt - (384) -
Other - (1) (49)
------------- -------------- -------------
Net cash provided by operating activities 16,835 2,067 12,988
Cash flow from investing activity:
Farmer Mac I & II purchases (80,641) (84,452) (104,674)
Purchases of available-for-sale investments (427,269) (30,548) (58,689)
Purchases of held-to-maturity investments (211,228) (21,081) (20,176)
Proceeds from maturity of available-for-sale investments 47,407 7,677 14,371
Proceeds from maturity of held-to-maturity investments 21,001 23,969 19,125
Proceeds from Farmer Mac I & II principal repayments 54,508 84,508 46,898
Purchases of office equipment (88) (61) (7)
------------- -------------- -------------
Net cash (used) provided by investing activities (596,310) (19,988) (103,152)
Cash flows from financing activities:
Proceeds from issuance of medium-term notes 154,913 39,897 68,536
Payments to redeem medium-term notes (30,420) (80,760) (42,095)
Proceeds from issuance of discount notes 21,290,333 1,993,048 2,785,917
Payments to redeem discount notes (20,749,007) (1,908,215) (2,786,987)
Proceeds from common stock issuance 23,757 34,527 -
Purchase and retirement of stock (1,396) - -
------------- -------------- -------------
Net cash provided (used) by financing activities 688,180 78,497 25,371
------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents 108,705 60,576 (64,793)
Cash and cash equivalents at beginning of period 68,912 8,336 73,129
------------- -------------- -------------
Cash and cash equivalents at end of period $ 177,617 $ 68,912 $ 8,336
------------- -------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 20,083 $ 24,581 $ 24,146
Income Taxes $ 34 $ 20 $ -
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. ORGANIZATION
The Federal Agricultural Mortgage Corporation ("Farmer Mac" or the
"Corporation"), 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 authorized to provide liquidity to the agricultural mortgage
market by: (i) purchasing newly originated Qualified Loans directly from lenders
on a continuing basis through its "cash window;" (ii) exchanging Qualified Loans
for securities issued and guaranteed by Farmer Mac ("Farmer Mac Guaranteed
Securities"), backed by such loans in "swap transactions;" (iii) purchasing
portfolios of "existing loans" on a negotiated basis; and (iv) purchasing
mortgage-backed bonds secured by Qualified Loans through its recently introduced
"AgVantage" program. Qualified Loans purchased by Farmer Mac are aggregated into
pools that back securities issued and guaranteed by Farmer Mac ("Farmer Mac
Guaranteed Securities"), which are sold periodically into the capital markets.
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 Qualified Loans that are not guaranteed by any instrumentality
or agency of the United States. The Farmer Mac II Program involves the purchase
of guaranteed portions (the "Guaranteed Portions") of loans guaranteed by the
United States Department of Agriculture (the "USDA"). The Farm Credit System
Reform Act of 1996 (the "1996 Act"), enacted on February 10, 1996, changed the
manner in which Farmer Mac is authorized to do business through the Farmer Mac I
Program, thereby improving its operating flexibility. Prior to the 1996 Act,
Farmer Mac was dependent upon third party "poolers" to aggregate Qualified 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 is
now authorized to purchase Qualified Loans directly from lenders and to issue
and guarantee securities backed by such loans without the earlier cash reserve
or subordinated interest requirement. Farmer Mac is now also a "first loss"
guarantor -- it guarantees timely payments of principal (including any balloon
payments) and interest on Farmer Mac Guaranteed Securities backed by 100% of the
underlying Qualified Loans.
In 1991, Farmer Mac formed Farmer Mac Mortgage Securities Corporation, a wholly
owned subsidiary incorporated under the laws of the State of Delaware, which
commenced business in 1992. 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; (ii) to incur indebtedness in connection
<PAGE>
with its activities; and (iii) 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. 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
this subsidiary is to act as the registrant under a registration statement filed
with the Securities and Exchange Commission in connection with the 1992
registration of securities under the Federal securities laws. Farmer Mac
Acceptance Corporation commenced business in May 1992.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Farmer Mac conform with generally
accepted accounting principles. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates. The
following comprises the significant accounting policies that 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
contractual maturity, adjusted, in the case of mortgage-backed securities, for
actual prepayments.
Other 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.
<PAGE>
Interest income on Farmer Mac I and II Securities and investment securities is
recognized on an accrual basis unless the collection of interest is considered
doubtful. 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 had the
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.
(d) Loans Held For Securitization
Loans held for securitization are loans Farmer Mac has purchased through its
cash window with the intent of securitizing and selling into the capital
markets. The loans are carried at the lower of cost or market value on an
aggregate basis. Market values are based on outstanding sale commitments or
current market prices for loans not subject to forward sale commitments.
(e) Issuance of Farmer Mac I and II Securities
Farmer Mac issues guaranteed securities backed by loans acquired through the
Farmer Mac I and II programs. A gain is recorded on the issuance of Farmer Mac I
Securities to the extent sale proceeds, net of issuance costs and hedging gains
and losses, exceed the cost basis in the underlying loans. The issuance of
Farmer Mac I and II Securities generates guarantee fees for the Corporation.
These fees are recognized as earned over the lives of the underlying loans.
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 $1.1 million, $1.0 million
and $0.9 million of guarantee fees in 1997, 1996 and 1995, respectively, relate
to Farmer Mac I and II Securities held in portfolio.
(f) Debentures, Notes and Bonds, Net
Debentures, notes and bonds are classified as due within one year or due after
one year based on their contractual maturity. Debt issuance costs are deferred
and amortized to interest expense using the effective interest method over the
estimated life of the related debt.
(g) Reserve for Loan Losses
Management maintains the reserve for loan losses at levels it deems adequate to
absorb losses incurred on outstanding Farmer Mac I Securities issued after the
1996 Act. No reserve has been made for Farmer Mac I Securities issued prior to
the 1996 Act because of the unguaranteed subordinated interests, or for Farmer
Mac II Securities because of the Secretary of Agriculture's guarantee. The
reserve for loan losses is increased through periodic provisions charged to
expense and reduced by charge-offs, net of recoveries. In estimating losses
<PAGE>
incurred on outstanding Framer Mac I Securities, management considers economic
conditions, geographic and agricultural commodity concentrations, the credit
profile of the guaranteed securities and Qualified Loans, delinquency trends,
and historical charge-off and recovery activity.
(h) Earnings/(Loss) Per Share
In 1997, Farmer Mac implemented SFAS No. 128, "Earnings per Share." This
Statement replaced primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic earnings per share is based on the weighted
average shares outstanding. Diluted earnings per share is based on the weighted
average number of common shares outstanding adjusted to include all dilutive
potential common stock. The computation of earnings per share reflects the
3-to-1 dividend ratio applicable to each share of Class C Non-Voting Common
Stock relative to each share of Class A and B Voting Common Stock.
The following schedule reconciles basic and diluted earnings/(loss) per share
for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------ ----------------------------- ----------------------------------------------
-----------------------------------------------------------------------------------------------------------
Effect of Effect of Effect of
Basic Stock Diluted Basic Stock Diluted Basic Stock Diluted
EPS options EPS EPS options EPS EPS options EPS
-----------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income/(loss) before
extraordinary item $ 4,626 $ - $ 4,626 $ 393 $ - $ 393 $ (647) $ - $ (647)
Weighted average
shares:
Classes A and B 1,501 - 1,501 1,490 - 1,490 1,170 - 1,170
Class C 2,716 118 2,834 1,263 50 1,313 1,170 - 1,170
Earnings/(loss) per
share: (1)
Classes A and B $ 0.48 $ 0.46 $ 0.07 $ 0.07 $ (0.14) $ (0.14)
Class C $ 1.44 $ 1.39 $ 0.22 $ 0.22 $ (0.41) $ (0.41)
(1) Reflects the 3-to-1 dividend and liquidation preference accorded to Class C compared to Classes A and B.
</TABLE>
Options granted on November 4, 1997 to purchase 3,100 shares of Class C common
stock at $54.75 per share were excluded from the computation of diluted earnings
per share because the options' exercise price was higher than the average market
price for the year ended December 31, 1997.
(i) Income Taxes
Deferred tax assets and liabilities are recognized based on the expected future
tax effect of existing differences between the financial reporting and tax
reporting bases of assets and liabilities using enacted statutory tax rates.
Income tax expense is equal to the income taxes payable in the current year plus
the net change in the deferred tax asset or liability balance.
<PAGE>
(j) Interest-Rate Contracts and Hedge Instruments
Interest-rate contracts, including interest-rate swaps and caps, are entered
into with the intent of synthetically creating interest-earning assets and debt
instruments. As such, the net differential received or paid is recorded as an
adjustment to interest income or expense of the associated assets or
liabilities, on an accrual basis.
Hedge instruments, currently consisting solely of futures contracts, are used by
Farmer Mac to manage interest-rate risk exposure related to commitments to
purchase Qualified Loans and loans held for securitization. Unrealized gains and
losses on futures contracts are deferred as an adjustment to the cost basis of
the loans until realized. When the futures contracts are terminated, the
realized gains or losses are recognized as part of gain on issuance of
mortgage-backed securities, net.
(k) Reclassifications
Certain reclassifications of prior year information were made to conform with
the 1997 presentation.
3. INVESTMENTS
The amortized cost and estimated fair values of investments at December 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------- ---------------------------------------------------
---------------------------------------------------- ---------------------------------------------------
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gain Loss Fair Value Cost Gain Loss Fair Value
---------------------------------------------------- ---------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
Corporate debt
securities $ - $ - $ - $ - $ 2,000 $ 1 $ - $ 2,001
Mortgage-backed
securities 194,625 3,598 - 198,223 352 - 1 351
------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------
Total held-to-maturity 194,625 3,598 - 198,223 2,352 1 1 2,352
Available-for-sale:
Corporate debt
securities 176,009 4 89 175,924 - - - -
Mortgage-backed
securities 284,432 1,283 - 285,715 78,599 329 - 78,928
------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------
Total available-for-sale 460,441 1,287 89 461,639 78,599 329 - 78,928
Cash investment in
guarantee investment
contract 473 - 1 472 4,519 - 4 4,515
------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------
Total $ 655,539 $ 4,885 $ 90 $ 660,334 $ 85,470 $ 330 $ 5 $ 85,795
------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------
</TABLE>
The amortized cost, estimated fair value and yield of investments by remaining
contractual maturity at December 31, 1997 are set forth below. Mortgage-backed
securities, which do not have a single maturity date, are included as having
contractual maturities greater than ten years. The expected maturities of
mortgage-backed securities will differ from contractual maturities because
borrowers have the right to prepay the underlying mortgages with or without
prepayment penalties.
<TABLE>
<CAPTION>
Held-to Maturity Available-for-Sale Total
--------------------------------- --------------------------------- ---------------------------------
-------- --------
Amortized CoFair Value Yield Amortized CosFair Value Yield Amortized CosFair Value Yield
------------------------ -------- ------------------------ -------- ------------------------ --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due within one year $ - $ - - $ 29,999 $ 30,003 5.79% $ 29,999 $ 30,003 5.79%
Due after one year
through five years - - - 116,010 116,010 5.96% 116,010 116,010 5.96%
Due after five years
through ten years - - - 30,000 29,911 6.38% 30,000 29,911 6.38%
Due after ten years 194,625 198,223 5.75% 284,432 285,715 6.55% 479,057 483,938 6.22%
------------------------ -------- ------------ ----------- -------- ------------ ----------- --------
Total (1) $ 194,625 $198,223 5.75% $460,441 $461,639 6.34% $655,066 $659,862 6.16%
------------------------ -------- ------------ ----------- -------- ------------ ----------- --------
</TABLE>
(1) Total excludes cash investment in guaranteed investment contract which
matures within 1 year.
There were no sales of investment securities during the years ended December 31,
1997 and 1996.
4. FARMER MAC I AND II SECURITIES
The following table sets forth the amortized costs, unrealized gains and losses
and estimated fair values of the Farmer Mac I and II Securities at December 31,
1997 and 1996. All Farmer Mac I and II Securities were classified as
held-to-maturity as of December 31, 1997 and 1996.
<PAGE>
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- ---------------------------------------
--------------------------------------- ---------------------------------------
Farmer Farmer Farmer Farmer
Mac I Mac II Total Mac I Mac II Total
--------------------------------------- ---------------------------------------
------------------------------------------------------------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Unpaid principal balance $ 184,356 $ 249,451 $ 433,807 $ 208,256 $ 199,418 $ 407,674
Unamortized premium 8,504 - 8,504 11,574 12 11,586
------------ ------------- ------------ ------------ ------------- ------------
------------ ------------- ------------ ------------ ------------- ------------
Amortized cost 192,860 249,451 442,311 219,830 199,430 419,260
Unrealized gain 5,658 - 5,658 4,027 - 4,027
Unrealized loss 606 1,231 1,837 782 338 1,120
------------ ------------- ------------ ------------ ------------- ------------
------------ ------------- ------------ ------------ ------------- ------------
Fair value $ 197,912 $ 248,220 $ 446,132 $ 223,075 $ 199,092 $ 422,167
------------ ------------- ------------ ------------ ------------- ------------
</TABLE>
The amortized cost, estimated fair value and yield of investments by remaining
contractual maturity at December 31, 1997 are set forth below. The expected
maturities of Farmer Mac I and II Securities will differ from contractual
maturities because borrowers have the right to prepay the underlying mortgages
with or without prepayment penalties.
<TABLE>
<CAPTION>
Amortized
Cost Fair Value Yield
------------------------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Due within one year $ 2,079 $ 2,013 8.67%
Due after one year through five years 43,682 42,961 8.18%
Due after five years through ten years 66,927 67,543 7.95%
Due after ten years 329,623 333,615 7.94%
------------ ------------ -------------
Total $ 442,311 $ 446,132 7.97%
------------ ------------ -------------
</TABLE>
There were no sales of Farmer Mac I and II Securities during the years ended
December 31, 1997 and 1996.
5. DEBENTURES, NOTES AND BONDS, NET
Farmer Mac borrowings are comprised of Discount Notes and Medium-Term Notes,
both of which are unsecured general obligations of the Corporation. Discount
Notes generally have maturities of less than 90 days, whereas Medium-Term Notes
have maturities of one to 30 years. The following table sets forth information
related to Farmer Mac's borrowings for 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------- -------------------------------------------
Outstanding at Average Outstanding
December 31, During Year Maximum Outstanding at Average Outstanding Maximum
Outstanding December 31 During Year Outstanding
--------- ----------- --------- At Any --------- --------------------- at Any
Amount Cost Amount Cost Month End Amount Cost Amount Cost Month End
------------- --------- ----------- --------- ----------- --------------------- ---------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Due within one
year:
Discount notes $ 816,680 5.63% $820,747 5.44% $994,548 $228,752 5.31% $206,350 5.28% $253,376
Current portion
of Medium-
Term Notes 39,348 7.03% 31,053 6.94% 39,348 30,412 6.80% 42,459 6.72% 55,104
------------- --------- ---------------------
856,028 5.69% 259,164 5.48%
Due after one
year:
Medium-Term
Notes due in:
1998 - - 39,326 7.03%
1999 91,206 6.63% 41,187 7.23%
2000 76,123 7.07% 76,070 7.07%
2001 59,045 7.35% 59,009 7.35%
2002 50,826 6.88% 5,826 7.30%
2003 14,271 7.56% 14,356 7.56%
Thereafter 111,332 7.51% 51,354 7.58%
------------- --------- ---------------------
402,803 7.13% 287,128 7.27%
------------- --------- ---------------------
Total $1,258,831 6.15% $546,292 6.42%
------------- --------- ---------------------
</TABLE>
Medium-Term Notes due after one year includes $226.0 million of Medium-Term
Notes that are callable by Farmer Mac without penalty. In addition, $120.0
million of Medium-Term Notes due after one year were issued in conjunction with
interest-rate swaps, which convert the fixed-rate interest cost to a
variable-rate. The following schedule summarizes the earliest repricing date of
borrowings outstanding at December 31, 1997, including the effect of
interest-rate swaps, assuming callable debt is redeemed at (1) maturity and (2)
the initial call date.
<TABLE>
<CAPTION>
Earliest Repricing Date of Borrowings Outstanding
Assuming Callable Debt is Redeemed at
---------------------------------------------------------
--------------------------- ----------------------------
Maturity Call Date
--------------------------- ----------------------------
-------------- ----------- --------------- ------------
Amount Cost Amount Cost
-------------- ----------- --------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Debt repricing in:
1998 $ 976,021 5.68% $ 1,031,675 5.72%
1999 66,210 6.86% 61,181 7.10%
2000 76,123 7.07% 46,139 7.44%
2001 59,045 7.35% 47,446 7.63%
2002 5,829 7.30% 17,893 7.36%
2003 14,271 7.56% 15,198 7.38%
Thereafter 61,332 7.52% 39,299 7.60%
-------------- ----------- --------------- ------------
Total $ 1,258,831 6.02% $ 1,258,831 6.02%
-------------- ----------- --------------- ------------
</TABLE>
During 1996, Farmer Mac called $8.0 million of debt, resulting in an
extraordinary gain of $384 thousand. No debt was called during 1997.
Authority to Borrow from the Treasury of the United States
The Charter Act authorizes Farmer Mac to borrow, under certain conditions, up to
$1.5 billion from the Secretary of the Treasury, if necessary, to fulfill its
obligations 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, 1997, Farmer Mac had no such debt
outstanding.
<PAGE>
6. RESERVE FOR LOAN LOSSES
The following is a summary of the changes in the reserve for loan losses for the
years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 655 $ 392 $ 295
Provision for losses 990 263 97
Charge-offs - - -
------------ ------------ ------------
Balance, end of year $ 1,645 $ 655 $ 392
------------ ------------ ------------
</TABLE>
<PAGE>
7. 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. 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. The ratio of any dividends
paid and liquidation proceeds distributed 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.
The following is a summary of significant Common Stock transactions that
occurred during the years ended December 31, 1997 and 1996:
In January 1996, Farmer Mac issued 93,100 shares of Class B Voting Common
Stock and 44,162 shares of Class C Non-Voting Common Stock to Western Farm
Credit Bank ("WFCB") pursuant to a Strategic Alliance Agreement between
WFCB and Farmer Mac for an aggregate purchase price of $557 thousand. In
addition, Farmer Mac issued warrants to WFCB to purchase 18,784 shares of
Class C Non-Voting Common Stock at a price of $7.67 per share. Funds used
to purchase the Class B and C shares were loaned to WFCB by Farmer Mac.
The terms of the loan provided 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 April 1996, Farmer Mac sold 320,000 shares of Class A Voting Common
Stock to Zions First National Bank, Salt Lake City, Utah, at a price of
$8.00 per share.
In December 1996, Farmer Mac sold 1,437,500 shares of Class C Non-Voting
Common Stock in a public offering at a price of $24.00 per share.
In January 1997, Farmer Mac repurchased the Class B Voting Common Stock
acquired by WFCB as part of the Strategic Alliance Agreement in
conjunction with the settlement of litigation that Farmer Mac commenced
against WFCB alleging certain breaches of the Strategic Alliance
Agreement. WFCB repaid all principal and interest due on the related loan
receivable. In connection with the settlement, WFCB exercised the warrants
and acquired the shares of Class C Non-Voting Common Stock.
In November 1997, Farmer Mac sold 400,000 shares of Class C Non-Voting
Common Stock in a public offering at a price of $61.00 per share.
<PAGE>
Stock Option Plan
Farmer Mac has adopted stock options plans for officers, directors and
non-officer employees to acquire shares of Class C Non-Voting Common Stock. For
all stock options issued under the plans, the exercise price is equal to the
market value on the grant date.
1992 Plan. In 1992, Farmer Mac adopted a stock option plan for key management
employees. Under the 1992 plan, stock options granted are exercisable
immediately, and, if not exercised, will expire ten years from the date of
grant. The exercise price of options granted under the 1992 plan in 1992 and
1993 is $6.56 per share. The maximum number of options that may be issued under
the 1992 plan is 115,000, all of which have been issued.
1996 Plan. In 1996, Farmer Mac adopted a stock option plan for key management
employees. Under the 1996 plan, stock options granted vest in thirds over a
three-year period, and, if not exercised, will expire ten years from the date of
grant. The exercise price of options granted under the 1996 plan in 1996 is
$7.875. The maximum number of options that may be issued under the 1996 plan is
112,830, all of which have been issued.
1997 Plan. In 1997, Farmer Mac adopted a stock option plan for directors,
officers and non-officer employees. Under the 1997 plan, stock options granted
vest in thirds over a three-year period, and, if not exercised, will expire ten
years from the date of grant. The exercise price of options granted in 1997
under the plan ranges from $35.50 to $54.75 per share. The maximum number of
options that may be issued under the 1997 plan is 250,000, of which 59,878 have
been issued as of December 31, 1997.
The following table summarizes stock option activity for 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
------------- --------------------------- ------------
Shares Weighted Weighted
Average Average
Exercise Exercise
Price Shares Price
------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 217,830 $ 7.24 105,000 $ 6.56
Granted 59,878 36.63 112,830 7.88
Excercised - - - -
Canceled 100 54.75 - -
------------- ------------ ------------- ------------
Outstanding, end of year 277,608 $ 13.56 217,830 $ 7.24
------------- ------------ ------------- ------------
Options excercisable at year end 199,979 142,610
</TABLE>
<PAGE>
The following table summarizes information regarding options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options
Options Outstanding Excercisable
------------------------------- ---------------
------------------------------------------------
Weighted
Average
Remaining
Exercise Number of Contracutal Number of
Price Shares Life Shares
- - --------------------------------------------------------------
<S> <C> <C> <C>
$ 6.56 105,000 5.0 years 105,000
7.88 112,830 8.5 years 75,220
35.50 54,828 9.5 years 18,276
38.75 1,850 9.6 years 450
54.75 3,100 9.8 years 1,033
--------------- ---------------
277,608 7.4 years 199,979
--------------- ---------------
</TABLE>
Farmer Mac uses the intrinsic value method of accounting for employee stock
options and, accordingly, no compensation expense was recognized in 1997 and
1996 for employee stock option plans. Had Farmer Mac elected to use the fair
value method of accounting for employee stock options, net income and earnings
per share for the years ended December 31, 1997 and 1996 would have been reduced
to the pro forma amounts indicated in the following table:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
------------------------- -------------------------
As As
Reported Proforma Reported Proforma
------------------------- -------------------------
------------------------- ----------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Net income $ 4,626 $ 4,103 $ 777 $ 637
Earnings per Class A and B Voting
Common Stock:
Basic net earnings $ 0.48 $ 0.43 $ 0.15 $ 0.12
Diluted net earnings $ 0.46 $ 0.41 $ 0.14 $ 0.12
Earnings per Class C Non-Voting
Common Stock:
Basic net earnings $ 1.44 $ 1.28 $ 0.44 $ 0.36
Diluted net earnings $ 1.39 $ 1.23 $ 0.43 $ 0.35
</TABLE>
The weighted-average fair values of options granted in 1997 and 1996 were $19.19
and $3.73, respectively. The fair values were estimated using the Black Scholes
option pricing model based on the following assumptions:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Risk-free interest rate 6.3% 6.7%
Expected years until exercise 5 years 5 years
Expected stock volatility 51.4% 42.8%
Dividend yield 0.0% 0.0%
</TABLE>
<PAGE>
8. INCOME TAXES
The components of the provision for federal income taxes for the years ended
December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
----------------------- ----------
(in thousands)
<S> <C> <C> <C>
Current $ 136 $ 12 $ -
Deferred 1,463 300 (216)
----------- ---------- ----------
----------- ---------- ----------
1,599 312 (216)
Change in net deferred tax
asset valuation allowance (1,714) (300) 216
----------- ---------- ----------
----------- ---------- ----------
Net federal income tax
(benefit) expense $ (115) $ 12 $ -
----------- ---------- ----------
</TABLE>
A reconciliation of tax at the statutory federal tax rate to the income tax
provision for the years ended December 31, 1997, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
----------------------- -----------
(in thousands)
<S> <C> <C> <C>
Tax expense (benefit) at
statutory rate $ 1,534 $ 268 $ (220)
Change in net deferred tax
asset valuation allowance (1,714) (300) 216
Other 65 44 4
---------- ----------- -----------
---------- ----------- -----------
$ (115) $ 12 $ -
---------- ----------- -----------
---------- ----------- -----------
Statutory tax rate 34.0% 34.0% 34.0%
Effective tax rate (2.5%) 1.5% 0.0%
</TABLE>
<PAGE>
Components of the deferred tax assets and liabilities as of December 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
-----------------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for uncollectible yield
maintenance fee receivable $ 94 $ 124
Reserve for loan losses 559 270
Net operating loss carryforwards 867 2,732
Alternative minimum tax credit 147 12
Other 118 118
----------- ----------
----------- ----------
Total deferred tax asset 1,785 3,256
Deferred tax liability 44 51
----------- ----------
----------- ----------
Net deferred tax asset, before
valuation allowance 1,741 3,205
Valuation allowance (1,491) (3,205)
----------- ----------
----------- ----------
Net deferred tax asset $ 250 $ -
----------- ----------
</TABLE>
The net operating loss carryforwards totaling $2.6 million, or $867 thousand tax
effected, at December 31, 1997 expire in 2010.
A valuation allowance is required to reduce the net deferred tax asset to an
amount that is likely to be realized. Because the level of future profitability
remains uncertain, a valuation allowance has been established for a significant
portion of the net deferred tax asset. During 1997, Farmer Mac reduced the
valuation allowance by $1.7 million, of which $1.5 million was attributable to
taxable income earned in 1997 and $250 thousand was attributable to the future
use of the net operating loss carryforwards. Management will continue to assess
the required valuation allowance on an ongoing basis.
9. EMPLOYEE BENEFITS
On December 28, 1989, Farmer Mac adopted a defined contribution pension plan for
all of its employees. Farmer Mac contributes 13.2% of the lesser of an
individual's gross salary and $160,000 ($150,000 in 1996 and 1995), plus 5.7% of
the difference between (i) the lesser of the gross salary and $160,000 ($150,000
in 1996 and 1995) and (ii) the Social Security Taxable Wage Base. Pension
expense for the years ended December 31, 1997, 1996 and 1995 was $251 thousand,
$216 thousand and $188 thousand, respectively.
10. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS, CONCENTRATIONS OF CREDIT RISK
AND CONTINGENCIES
Off-Balance Sheet Financial Instruments
Farmer Mac is a party to transactions involving financial instruments with
off-balance sheet risk. These financial instruments include Farmer Mac
Guaranteed Securities, commitments to purchase and sell Qualified Loans,
interest-rate contracts and hedge instruments. 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 Guaranteed Securities Farmer Mac guarantees the timely payment of
principal, including any balloon payments, and interest on Farmer Mac I
Securities (a similar guarantee is provided on Farmer Mac II Securities;
however, Farmer Mac's credit exposure on these securities is covered 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). For Farmer Mac I
Securities issued prior to the enactment of the 1996 Act, Farmer Mac's credit
<PAGE>
risk exposure is supported by subordinated interests. As of December 31, 1997,
the subordinated interests represented approximately 10% of the outstanding
balance of all Farmer Mac I Securities issued prior to the enactment of the 1996
Act. Before Farmer Mac is required to make a guarantee payment, full recourse
must first be taken against the subordinated interest. The 1996 Act eliminated
the subordinated interest requirement and Farmer Mac assumes 100% of the credit
risk on Farmer Mac I Securities issued since the 1996 Act (referred to as
Agricultural Mortgage-Backed Securities (AMBS)). Farmer Mac mitigates the credit
risk related to guarantees on all Farmer Mac I securities by establishing credit
underwriting standards and by requiring collateral in the form of the real
estate supporting the Qualified Loans backing the securities.
As of December 31, 1997 and 1996, the outstanding principal balance of
securities guaranteed and not held in Farmer Mac's portfolio was as follows:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
---------------------------
(in thousands)
<S> <C> <C>
Guaranteed securities:
Farmer Mac I AMBS $ 341,213 $ 148,918
Other Farmer Mac I Securities 44,548 65,506
Farmer Mac II Securities 23,326 11,606
------------- ------------
------------- ------------
$ 409,087 $ 226,030
------------- ------------
</TABLE>
Commitments Farmer Mac enters into mandatory delivery commitments to purchase
Qualified Loans from seller/servicers. Under such commitments, seller/servicers
are obligated to sell Qualified Loans to Farmer Mac at the commitment net yield.
If a seller/servicer is unable to deliver the Qualified Loans required under a
mandatory delivery commitment within the specified time period, Farmer Mac
requires the seller/servicer to pay a fee to extend the commitment or for
failure to deliver.
Farmer Mac is exposed to interest-rate risk related to purchase commitments
between the time it commits to purchase Qualified Loans and the time it forward
sells AMBS backed by those loans. As of December 31, 1997, Farmer Mac had
committed to purchase $10.8 million of Qualified Loans through the Farmer Mac I
cash window. With respect to outstanding commitments to purchase Qualified Loans
and the $47.2 million in loans held for securitization at December 31, 1997,
Farmer Mac had committed to sell forward $23.8 million of AMBS for future
settlement. The remaining $34.2 million net purchase position at December 31,
1997 consisted of adjustable-rate and fixed-rate loans not subject to forward
sale commitments. The Corporation manages interest-rate risk related to
fixed-rate loans not offset by forward sale commitments through the use of
off-balance sheet derivative financial instruments, such as futures contracts.
As of December 31, 1996, Farmer Mac had entered into forward sales totaling
$19.7 million to offset outstanding purchase commitments totaling $6.7 million
and loans held for securitization totaling $13.0 million.
Interest-rate contracts and Hedge instruments Farmer Mac uses interest rate
swaps and caps to reduce interest-rate risk related to specific assets or
liabilities. Interest-rate swaps are contractual agreements between two parties
for the exchange of periodic payments based on a notional amount and agreed-upon
fixed and variable rates. Interest-rate swaps are entered into in conjunction
with the purchase of investments or issuance of debt to synthetically create
LIBOR-based variable rate instruments. Interest-rate caps are agreements in
which one party makes a one-time up-front premium payment to another party in
exchange for the right to receive payments based on a notional amount and the
amount, if any, by which the agreed-upon index rate exceeds the specified "cap"
<PAGE>
rate. Interest-rate caps are purchased to uncap certain variable-rate
investments. The following schedule summarizes, by contractual maturity date,
the notional amounts and weighted-average interest rates of outstanding
interest-rate contracts at December 31, 1997. No interest-rate contracts were
outstanding at December 31, 1996.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
2003-
1998 1999 2000 2001 2002 2007 Thereafter Total
---------- ----------- ---------- ---------- ------------- ----------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Asset-linked:
Amortizing basis swaps $ - $ - $ - $ - - $ - $ 210,955 $210,955
Debt-Linked:
Receive fixed swaps - $ 25,000 - - $ 45,000 - $ 50,000 $120,000
Weighted-average
receive rate - 6.03% - - 6.82% - 7.50% 6.94%
Purchase caps - - - - $100,000 - - $100,000
Weighted-average
strike rate - - - - 8.50% - - 8.50%
Total notional amount $430,955
</TABLE>
-----------
Although interest-rate contracts reduce Farmer Mac's exposure to interest-rate
risk, they do increase credit risk exposure. Credit risk arise from the
possibility that a counterparty will be unable to perform according to the terms
of the contract. Credit risk related to interest-rate contracts is mitigated by
dealing with counterparties with high credit ratings, establishing and
maintaining collateral requirements and by entering into netting agreements.
Netting agreements provide for netting all amounts receivable and payable under
all transactions covered by the netting agreement between Farmer Mac and a
single counterparty. Farmer Mac's exposure to credit risk related to
interest-rate contracts is based on the cost to replace all outstanding
interest-rate contracts for each counterparty with which Farmer Mac was in a net
gain position ("net replacement value"), including the effect of netting
agreements. At December 31, 1997, Farmer Mac's exposure to credit risk based on
net replacement values was $1.5 million, none of which was collateralized.
Hedge instruments, currently consisting solely of futures contracts, are used by
Farmer Mac to manage interest-rate risk exposure related to commitments to
purchase Qualified Loans and loans held for securitization. The total notional
balance of open futures contracts at December 31, 1997 was $1.2 million.
Concentrations of Credit Risk
The following tables set forth the geographic and commodity diversification, as
well as the range of loan-to-value ratios, of Farmer Mac I Securities, as of
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------------------- -------------------------------------
------------------------------------- -------------------------------------
Other Other
Farmer Farmer
AMBS Mac 1 Total AMBS Mac 1 Total
------------ ------------------------ ------------ ------------------------
------------------------- ----------- ------------ ------------ -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
By geographic regions: (1)
Mid-North $ 49,794 $ 32,321 $ 82,115 $ 20,807 $ 39,348 $ 60,155
Mid-South 17,260 24,572 41,832 1,696 25,819 27,515
Northeast 17,072 5,305 22,377 11,452 6,780 18,232
Northwest 149,840 30,215 180,055 67,253 32,833 100,086
Southeast 8,541 35,623 44,164 4,177 39,824 44,001
Southwest 98,706 100,868 199,574 43,533 126,737 170,270
------------ ------------ ----------- ------------ ------------ -----------
------------ ------------ ----------- ------------ ------------ -----------
Total $341,213 $228,904 $570,117 $148,918 $271,341 $420,259
------------ ------------ ----------- ------------ ------------ -----------
------------ ------------ ----------- ------------ ------------ -----------
By commodity:
Crops $179,390 $133,830 $313,220 $ 64,807 $156,210 $221,017
Livestock 73,483 37,624 111,107 30,020 41,350 71,370
Permanent plantings 88,340 57,450 145,790 54,091 73,781 127,872
------------ ------------ ----------- ------------ ------------ -----------
------------ ------------ ----------- ------------ ------------ -----------
Total $341,213 $228,904 $570,117 $148,918 $271,341 $420,259
------------ ------------ ----------- ------------ ------------ -----------
------------ ------------ ----------- ------------ ------------ -----------
By loan -to-value:
0.00% to 40.00% $ 26,969 $ 74,154 $101,123 $ 13,292 $ 79,504 $ 92,796
40.01% to 50.00% 65,324 61,057 126,381 25,389 71,211 96,600
50.01% to 60.00% 122,368 65,480 187,848 42,917 80,907 123,824
60.01% to 70.00% 125,759 28,213 153,972 64,301 39,718 104,019
70.01% to 80.00% 793 - 793 3,019 - 3,019
------------ ------------ ----------- ------------ ------------ -----------
------------ ------------ ----------- ------------ ------------ -----------
Total $341,213 $228,904 $570,117 $148,918 $271,340 $420,258
------------ ------------ ----------- ------------ ------------ -----------
------------ ------------ ----------- ------------ ------------ -----------
</TABLE>
(1) Geographic regions - Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South (KS,
OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA, RI, TN, VA,
VT, WV); Northwest (ID, MT, ND, NE, OR, SD, WA, WY); Southeast (AL, AR, FL, GA,
LA, MS, SC); Southwest (AZ, CA, CO, NM, NV, UT).
Loan-to-value ratios are based on collateral values at origination of the loan.
Current loan-to-value ratios may be higher or lower than the original
loan-to-value ratios.
Contingencies
At December 31, 1996, Farmer Mac was a plaintiff in a legal action commenced
against WFCB in connection with the Strategic Alliance Agreement between the two
parties. In January 1997, the litigation was settled. As part of the settlement,
the parties terminated the Strategic Alliance Agreement (resulting in the
termination of the "AgFunding" program that had been operated thereunder) and
agreed to certain other terms, including: the waiver by Farmer Mac of the
restrictions in the Agreement limiting the ability of WFCB to sell the
approximately 63,000 shares of Farmer Mac Class C Non-Voting Common Stock sold
<PAGE>
to WFCB under the Agreement; the repurchase by Farmer Mac of the approximately
93,000 shares of Class B Voting Common Stock sold to WFCB under the Agreement;
and the repayment by WFCB of the $557 thousand note with interest. The
settlement did not have a material adverse effect on Farmer Mac's financial
condition.
11. FAIR VALUE DISCLOSURES
The following table sets forth the estimated fair values and carrying values of
financial assets and liabilities at December 31, 1997 and 1996. Significant
estimates, assumptions, and present value calculations were 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.
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
----------------------------------------------------------
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
----------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 177,617 $ 177,617 $ 68,912 $ 68,912
Investments 660,334 656,737 85,795 85,799
Farmer Mac I and II securities, net 446,132 442,311 422,167 419,260
Loans held for securitization 49,802 47,177 13,014 12,999
Off-balance sheet items in a gain position:
Purchase commitments 54 - - -
Interest-rate contracts 2,247 - - -
Financial liabilities:
Debentures, notes and bonds, net:
Due within one year 856,479 856,028 259,310 259,164
Due after one year 413,737 402,803 296,449 287,128
Off-balance sheet items in a loss position:
Sale commitments 220 - 15 -
Interest-rate contracts 3,393 - - -
Futures contracts 3 - - -
</TABLE>
The following methods and assumptions were used to estimate the fair value of
Farmer Mac's financial instruments:
Cash and cash equivalents. For these short-term financial instruments, the
carrying value is a reasonable estimate of fair value.
Investment securities. The fair values of investment securities were based on
quoted market prices, prices quoted for similar financial instruments or
discounted expected cash flows based on market rates for similar financial
instruments.
Farmer Mac I and II Securities,net. The fair values of the Farmer Mac I and II
Securities 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, 1997 and 1996.
Loans held for securitization. The fair values of the loans held for
securitization were estimated by using a duration weighted valuation model. The
duration of each loan was multiplied by the change in the yields from the date
Farmer Mac committed to purchase the loan to the valuation date to determine the
effect of the respective rate change, which was then applied to the loan amount
to arrive at a fair value.
<PAGE>
Debentures, notes and bonds, net. For Discount Notes, the carrying value
approximates the fair value. For Medium-Term Notes, 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.
Commitments. The fair values of commitments were based on the estimated fair
value of the loans, derived in the same manner as loans held for securitization,
less the commitment price.
Interest-rate contracts. The fair values of interest-rate contracts were based
on discounted cash flows using market rates for similar financial instruments.
Futures contracts. The fair values of futures contracts were based on quoted
market prices.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997 Quarter Ended 1996 Quarter Ended
------------------------------------------------------------------------------------
---------- -------------------- -------------------- -------------------- ----------
Dec 31 Sept 30 June 30 Mar 31 Dec 31 Sept 30 June 30 Mar 31
---------- -------------------- -------------------- -------------------- ----------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $22,631 $22,738 $21,302 $13,482 $ 9,861 $ 8,761 $ 9,809 $ 8,921
Interest expense 20,625 20,768 19,474 12,125 9,076 8,125 9,027 8,394
---------- -------------------- -------------------- -------------------- ----------
Net interest income 2,006 1,970 1,828 1,357 785 636 782 527
Guarantee fee income 718 725 607 525 492 478 328 324
Gain on issuance of mortgage-
backed securities 251 592 1,053 466 156 - 913 -
Miscellaneous 20 16 21 196 9 4 16 35
---------- -------------------- -------------------- -------------------- ----------
Total revenues 2,995 3,303 3,509 2,544 1,442 1,118 2,039 886
Other expenses 1,936 2,079 2,167 1,658 1,416 1,331 1,289 1,044
---------- -------------------- -------------------- -------------------- ----------
Income/(loss) before income
taxes and extraordinary item 1,059 1,224 1,342 886 26 (213) 750 (158)
Income tax (benefit)/expense (219) 40 36 28 12 - - -
Extraordinary gain - - - - - 384 - -
---------- -------------------- -------------------- -------------------- ----------
Net income/(loss) $ 1,278 $ 1,184 $ 1,306 $ 858 $ 14 $ 171 $ 750 $ (158)
---------- -------------------- -------------------- -------------------- ----------
Earnings/(Loss) Per Share:
Class A and B Voting Common Stock:
Basic earnings before
extraordinary item $ 0.13 $ 0.12 $ 0.14 $ 0.09 $ - $ (0.04) $ 0.14 $ (0.03)
Basic net earnings $ 0.13 $ 0.12 $ 0.14 $ 0.09 $ - $ 0.04 $ 0.14 $ (0.03)
Diluted earnings before
extraordinary item $ 0.12 $ 0.12 $ 0.13 $ 0.09 $ - $ (0.04) $ 0.14 $ (0.03)
Diluted net earnings $ 0.12 $ 0.12 $ 0.13 $ 0.09 $ - $ 0.03 $ 0.14 $ (0.03)
Class C Non-Voting Common Stock:
Basic earnings before
extraordinary item $ 0.38 $ 0.38 $ 0.41 $ 0.27 $ 0.01 $ (0.12) $ 0.43 $ (0.10)
Basic net earnings $ 0.38 $ 0.38 $ 0.41 $ 0.27 $ 0.01 $ 0.10 $ 0.43 $ (0.10)
Diluted earnings before
extraordinary item $ 0.37 $ 0.36 $ 0.40 $ 0.26 $ 0.01 $ (0.12) $ 0.43 $ (0.10)
Diluted net earnings $ 0.37 $ 0.36 $ 0.40 $ 0.26 $ 0.01 $ 0.09 $ 0.43 $ (0.10)
</TABLE>
<PAGE>
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
4, 1998 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 Management
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.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements.
Refer to Item 9, 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.
(a) 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 (Form 10-K filed March 29, 1996).
* 3.2 - Amended and restated Bylaws of the Registrant (Form 10-K
filed March 27, 1997).
?* 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).
_______________________________
* Incorporated by reference to the indicated prior filing
** Filed herewith.
? Management contract or compensatory plan.
<PAGE>
?* 10.1.2 - 1996 Stock Option Plan (Form 10-Q filed August 14, 1996.)
?* 10.1.3 - 1997 Stock Option Plan (Form 10-Q filed August 14, 1997).
?* 10.1.4 - Amended and Restated 1997 Incentive Plan (Form 10-Q filed
August 14, 1997).
?* 10.1.5 - Amended and Restated 1997 Incentive Plan (Form 10-Q filed
August 14, 1997).
?* 10.2- Employment Agreement dated May 5, 1989 between Henry D.
Edelman and the Registrant (Previously filed as exhibit 10.4
to Form 10-K filed February 14, 1990).
?* 10.2.1 - Amendment No. 1 dated 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 (Form
10-K filed March 29, 1996).
?* 10.2.5 - Amendment No. 5 dated as of June 13, 1996 to Employment
Contact between Henry D. Edleman and the Registrant (Form
10-Q filed August 14, 1996).
?* 10.2.6 - Amendment No. 6 dated as of August 7, 1997 to Employment
Contract between Henry D. Edelman and the Registrant (Form
10-Q filed August 14, 1997).
____________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
? Management contract or compensatory plan.
<PAGE>
?* 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).
?* 10.3.6 - Amendment No. 6 dated June 1, 1995 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Form 10-Q
filed August 14, 1995).
?* 10.3.7 - Amendment No. 7 dated as of February 8, 1996 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form
10-K filed March 29, 1996).
?* 10.3.8 - Amendment No. 8 dated as of June 13, 1996 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form
10-Q filed August 14, 1996).
?* 10.3.9 - Amendment No. 9 dated as of August 7, 1997 to Employment
Contact between Nancy E. corsiglia and the Registrant (Form
10-Q filed August 14, 1997).
______________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
? Management contract or compensatory plan.
<PAGE>
?* 10.4 - Employment Agreement dated June 13, 1989 between Thomas R.
Clark and the Registrant (Previosuly 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 Registrnat
(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 exhivit 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).
?* 10.4.6 - Amendment No. 6 dated as of February 8, 1996 to Employment
Contract between Thomas R. Clark and the Registrant (Form
10-K filed March 29, 1996).
?* 10.4.7 - Amendment No. 7 dated as of June 13, 1996 to Employment
Contract between Thomas R. Clark and the Registrant (Form
10-Q filed August 14, 1996).
?* 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).
______________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
? Management contract or compensatory plan.
<PAGE>
?* 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 (Form
10-K filed March 29, 1996).
?* 10.5.3 - Amendment No. 3 dated as of June 13, 1996 to Employment
Contract between Charles M. Lewis and the Registrant (Form
10-K filed March 29, 1996).
?* 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 (Form
10-K filed March 29, 1996).
?* 10.6.6 - Amendment No. 6 dated as of June 13, 1996 to Employment
Contract between Michael T. Bennett and the Registraant
(Form 10-Q filed August 14, 1996).
______________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
? Management contract or compensatory plan.
<PAGE>
?* 10.6.7 - Amendment No. 7 dated as of August 7, 1997 to Employment
Contract between Michale T. Bennett and the Registrant (Form
10-Q filed August 14, 1997).
?* 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 Register (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
(Form 10-K filed March 29, 1996).
?* 10.7.6 - Amendment No. 6 dated as of June 13, 1996 to Employment
Contract between Christopher A. Dunn and the Registrant
(Form 10-Q filed August 14, 1996).
?* 10.7.7 - Amendment No. 7 dated as of August 7, 1997 to Employment
Contract between Christopher A. Dunn and the Registrant
(Form 10-Q filed August 14, 1997).
?* 10.8 - Employment Contract dated as of September 1, 1997 between
Tom D. Stenson and the Registrant (Form 10-Q filed November
14, 1997).
______________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
? Management contract or compensatory plan.
<PAGE>
* 10.9 - 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).
* 21 - Subsidiaries.
* 21.2 - 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 filed a report on Form 8-K on November 26, 1997 reporting
the completion of the sale of 400,000 shares of its Class C Non-Voting Common
Stock.
______________________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
? Management contract or compensatory plan.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the 1934 Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
- - ------------------------------------ -------------------------------------------
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
March 24, 1998
- - ------------------------------ Chairman of the Board
Charles Eugene Branstool and Director
President and Chief Executive March 24, 1998
Henry D. Edelman Officer (Principal Executive
Officer)
Vice President - Business March 24, 1998
Nancy E. Corsiglia Development and Treasurer
(Principal Financial and
Accounting Officer)
<PAGE>
Name Title Date
Director March 24, 1998
- - -----------------------------
John C. Dean
Director March 24, 1998
- - -----------------------------
Kenneth E. Graff
Director March 24, 1998
- - -----------------------------
W. David Hemingway
Director March 24, 1998
- - -----------------------------
Mitchell A. Johnson
Director March 24, 1998
- - -----------------------------
Lowell Junkins
Director March 24, 1998
- - -----------------------------
James A. McCarthy
Director March 24, 1998
- - -----------------------------
Robert J. Mulder
Director March 24, 1998
- - -----------------------------
John G. Nelson
Director March 24, 1998
- - -----------------------------
David J. Nolan
Director March 24, 1998
- - -----------------------------
Marilyn Peters
Director March 24, 1998
- - -----------------------------
John Dan Raines, Jr.
Director March 24, 1998
- - -----------------------------
Darryl W. Rhodes
Vice Chairman March 24, 1998
- - -----------------------------
Gordon Clyde Southern
Director March 24, 1998
- - -----------------------------
Clyde A. Wheeler
<PAGE>
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 24, 1998
- - ------------------------------------------ ------------------------------------
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 24, 1998
- - ----------------------------------- and Director
Charles Eugene Branstool
/s/ Henry D. Edelman President and Chief March 24, 1998
- - ----------------------------------- Executive Officer
Henry D. Edelman Principal Executive
Officer)
/s/ Nancy E. Corsiglia Vice President - Business March 24, 1998
- - ----------------------------------- Development and Treasurer
Nancy E. Corsiglia (Principal Financial and
Accounting Officer)
<PAGE>
Name Title Date
/s/ John C. Dean Director March 24, 1998
- - -----------------------------------
John C. Dean
/s/ W. David Hemingway Director March 24, 1998
- - -----------------------------------
W. David Hemingway
/s/ Lowell Junkins Director March 24, 1998
- - -----------------------------------
Lowell Junkins
/s/ James A. McCarthy Director March 24, 1998
- - -----------------------------------
James A. McCarthy
/s/ Robert J. Mulder Director March 24, 1998
- - -----------------------------------
Robert J. Mulder
/s/ John G. Nelson Director March 24, 1998
- - -----------------------------------
John G. Nelson
/s/ David J. Nolan Director March 24, 1998
- - -----------------------------------
David J. Nolan
/s/ Michael C. Nolan Director March 24, 1998
- - -----------------------------------
Michael C. Nolan
/s/ Marilyn Peters Director March 24, 1998
- - ------------------------------------
Marilyn Peters
/s/ John Dan Raines, Jr. Director March 24, 1998
- - ------------------------------------
John Dan Raines, Jr.
/s/ Darryl W. Rhodes Director March 24, 1998
- - ------------------------------------
Darryl W. Rhodes
/s/ Gordon Clyde Southern Vice Chairman March 24, 1998
- - ------------------------------------
Gordon Clyde Southern
/s/ Clyde A. Wheeler Director March 24, 1998
- - ------------------------------------
Clyde A. Wheeler
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Earnings per share represent those for Class C stock. Basic earnings per share
for Classes A & B stock are $0.48. Diluted earnings per share are $0.46 for for
Classes A & B stock.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 177,617
<SECURITIES> 1,099,048
<RECEIVABLES> 21,442
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 201,778
<PP&E> 132
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,348,135
<CURRENT-LIABILITIES> 870,271
<BONDS> 402,803
0
0
<COMMON> 4,578
<OTHER-SE> 70,483
<TOTAL-LIABILITY-AND-EQUITY> 1,348,135
<SALES> 85,343
<TOTAL-REVENUES> 85,343
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,840
<LOSS-PROVISION> 990
<INTEREST-EXPENSE> 72,992
<INCOME-PRETAX> 4,511
<INCOME-TAX> (115)
<INCOME-CONTINUING> 4,626
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,626
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.39
</TABLE>
