As filed with the Securities and Exchange Commission on
March 24, 1999
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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, 1998.
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. [X]
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
$18,969,530 and $157,708,830, respectively, based upon the closing prices for
the respective classes on March 12, 1999, as reported by The Nasdaq Stock
Market. 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 1,025,380 shares of Class A Voting Common Stock, 500,301 shares
of Class B Voting Common Stock, and 3,092,330 shares of Class C Non-Voting
Common Stock outstanding as of March 12, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement to be filed on or about April 26, 1999 in connection with
the Annual Meeting of Stockholders to be held on June 3, 1999 (portions of which
are incorporated by reference into Part III of this Annual Report on Form 10-K).
<PAGE>
PART I
Item 1. Business
General
The Federal Agricultural Mortgage Corporation, commonly known as "Farmer
Mac," is a federally chartered instrumentality of the United States that was
created to establish a secondary market for agricultural real estate and rural
housing mortgage loans ("Qualified Loans"). Farmer Mac 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 provide for
the existence of an agricultural secondary mortgage market. 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 securities issued and guaranteed by Farmer
Mac for Qualified Loans that back those securities through its "swap" program;
(iii) issuing long-term standby commitments to purchase newly originated and
existing (seasoned) Qualified Loans; (iv) purchasing portfolios of existing
loans on a negotiated basis; and (v) purchasing mortgage-backed bonds secured by
Qualified Loans through its "AgVantage" program.
Farmer Mac conducts its business through two programs, "Farmer Mac I" and
"Farmer Mac II." Under the Farmer Mac I Program, Farmer Mac purchases, or
commits to purchase, Qualified Loans, which are not guaranteed by any
instrumentality or agency of the United States, or obligations backed by
Qualified Loans. Under the Farmer Mac II Program, Farmer Mac purchases the
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").
Pursuant to its statutory authority, Farmer Mac guarantees timely payments
of principal and interest on securities backed by Qualified Loans or Guaranteed
Portions ("Farmer Mac Guaranteed Securities") and sells those securities in the
capital markets or retains them in its portfolio. At December 31, 1998,
outstanding Farmer Mac Guaranteed Securities totaled $1.1 billion. For more
information about Farmer Mac's securities and its financial performance, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Farmer Mac's principal sources of revenue are: (i) fees it receives in
connection with the issuance of its guarantee and commitments to purchase
Qualified Loans; (ii) gains on the sales of Farmer Mac Guaranteed Securities
backed by Qualified Loans it purchases; and (iii) net interest income earned on
its retained portfolio of Farmer Mac Guaranteed Securities, its investments,
Qualified Loans purchased pending securitization and mortgage-backed bonds
purchased under AgVantage.
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, 1998, Farmer Mac had outstanding $1.4 billion of Discount
Notes and $406.7 million of Medium-Term Notes, net of unamortized debt issuance
costs, discounts and premiums. During 1998, Farmer Mac continued to implement
its debt issuance strategy of increasing its presence in the capital markets in
order to improve the mortgage rates available to farmers, ranchers and rural
homeowners. 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 its Office of
Secondary Market Oversight, has general regulatory and enforcement authority
over Farmer Mac, including the authority to promulgate rules and regulations
governing the activities of Farmer Mac and to apply its general enforcement
powers to Farmer Mac and its activities. Farmer Mac is required to meet certain
minimum and critical capital requirements specified in the Act, which were
phased in over the course of a transition period that ended on January 1, 1999,
when the highest minimum and critical capital requirements became applicable. By
statute, the FCA is required to establish a risk-based capital test for Farmer
Mac, which is expected to be published later this year in the form of a notice
of proposed rulemaking. For a discussion of Farmer Mac's statutory capital
requirements and its capital levels, 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."
Farmer Mac has three classes of common stock outstanding - Class A Voting,
Class B Voting and Class C Non-Voting (collectively, the "Common Stock"). The
Class A and Class B Voting Common Stock are collectively referred to herein as
the "Voting Common Stock." See "Market for Registrant's Common Equity and
Related Stockholder Matters," in Part II of this report, for information with
respect to Farmer Mac's Common Stock.
Farmer Mac is an institution of the Farm Credit System (a "System
Institution"), although it is not liable for any debt or obligation of any other
System Institution. Likewise, neither the Farm Credit System nor any other
individual System Institution is liable for any debt or obligation of Farmer
Mac.
Farmer Mac employs 28 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
Under the Farmer Mac I Program, Farmer Mac issues and guarantees
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 (seasoned) or newly
originated mortgage loan that conforms to Farmer Mac's requirements.
Qualified Loans must be 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 shall not be greater than $3.5 million,
which has been adjusted for inflation as of October 1, 1998, or such higher
amount as may be necessary to finance up to of 1,000 acres of Agricultural Real
Estate. Farmer Mac has limited the maximum loan amount to $6.0 million,
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 $141,745, which has been adjusted
for inflation as of October 1, 1998. In addition to the dwelling itself, a Rural
Housing Qualified 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
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 1998, Farmer Mac implemented its "part-time farmer" loan program
designed for borrowers who live on Agricultural Real Estate but derive a
significant portion of their income from off-farm employment. To qualify as a
part-time farm, the Agricultural Real Estate security must include a
single-family, owner-occupied, detached residence that generally constitutes at
least 30% of the total appraised value of the property and is used as the
borrower's primary residence. As of December 31, 1998, Farmer Mac had $19.1
million of outstanding part-time farmer loans in its portfolio.
By the end of 1998, there were 286 lenders approved as Sellers in the
Farmer Mac I Program, operating throughout the contiguous 48 states. During the
year, the top 10 Sellers generated 59% of the $226 million of Farmer Mac I cash
window loan volume (excluding the "proprietary" loan products discussed below),
with no one Seller having accounted for more than 8% of that total. In addition,
affiliates of Zions First National Bank ("Zions"), Farmer Mac's largest Class A
and Class C stockholder, sold Farmer Mac a total of $95 million of proprietary
loan products, with Zions assuming certain interest rate risks associated with
the proprietary characteristics of those loans. Had the purchases of proprietary
products from Zions and others been included in the foregoing cash window loan
total, Zions' sales of proprietary products would have represented 28% of Farmer
Mac's total cash window volume for the year and the top 10 Sellers would have
generated 68% of the total $340 million of Farmer Mac I cash window loan volume.
For more information with respect to loan volume, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Results of
Operations - Business Volume."
Mortgage-Backed Bond Purchases. During 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 issued by Sellers who also 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 equal to at least 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 December 31, 1998, 16
AgVantage transactions had been completed with 10 AgVantage Issuers resulting in
Farmer Mac guarantees of $143.6 million of bonds (of which $10.8 million
remained outstanding at that date, reflecting the short-term nature of the
obligations that had been issued).
Swap Transactions
Farmer Mac also acquires 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, swap transactions usually are negotiated with the lender and typically
involve the acquisition of loans with payment, maturity and interest rate
characteristics that Farmer Mac would not purchase through its cash window. Many
Qualified Loans are eligible for swap transactions on the basis of their
conformity to Farmer Mac's "existing loan" criteria, which are discussed under
"-- Underwriting and Appraisal Standards" below, while Qualified Loans not
meeting those criteria are 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 1998, Farmer Mac
consummated two swap transactions with one System Institution aggregating $84.4
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview."
Long-Term Standby Purchase Commitments
In 1998, Farmer Mac introduced a variation on swap transactions for Sellers
seeking to obtain the benefits of a Farmer Mac guarantee on Qualified Loans
retained in their portfolios. Under a "long-term standby purchase commitment,"
Farmer Mac commits to purchase any Qualified Loan in a segregated pool of loans
subject to the commitment, if: (a) the Qualified Loan becomes four months
delinquent; (b) the Qualified Loan meets Farmer Mac's cash window requirements
at the time the Seller requests that Farmer Mac purchase the loan; or (c) the
Seller requests that Farmer Mac purchase all of the identified Qualified Loans.
In the case of a delinquent Qualified Loan, Farmer Mac will pay the Seller a
predetermined price for the loan - generally, principal plus accrued interest;
in the case of a Qualified Loan under clause (b) or (c), the price for the
Qualified Loan(s) would be negotiated at the time of purchase. This structure
permits the Seller to retain the segregated loans in its portfolio while
reducing its credit and concentration exposures and, consequently, its
regulatory capital requirements. In consideration for Farmer Mac's assumption of
the credit risk on the segregated loans, the recipient of the commitment pays
fees to Farmer Mac on the outstanding balance of the loans approximating what
would have been Farmer Mac's guarantee fee had the loan been exchanged with
Farmer Mac in a swap transaction.
During the fourth quarter of 1998, Farmer Mac entered into a long-term
standby purchase commitment with a System Institution for the purchase of
Qualified Loans to be subsequently identified by the institution. During the
first quarter of 1999, Farmer Mac entered into a long-term standby purchase
commitment with another System Institution covering an identified pool of $407.7
million of seasoned Qualified Loans.
Negotiated Purchases
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. To date, no such transactions have been
completed.
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 borrower, as well as the value of the
mortgaged property relative to the amount of the Qualified Loan. Farmer Mac
requires Sellers to make representations and warranties regarding the
conformance of Qualified Loans 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 (other than a part-time farmer 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 newly originated Agricultural Real
Estate Qualified Loans that are not part-time farmer 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 (seasoned) loan, sustained performance is
considered by Farmer Mac to be a reliable alternative indicator of a borrower's
ability to pay the loan according to its terms. An existing loan generally will
be 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.
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,
which amount Farmer Mac may change in light of recent modifications to Federal
law respecting private mortgage insurance coverage. For newly originated
Agricultural Real Estate Qualified Loans on part-time farm properties, the
borrower must generate sufficient income from all sources to repay all
creditors. A borrower's capacity to repay debt obligations is determined by two
tests: (i) the borrower's monthly mortgage-payment-to-income ratio should be 28%
or less and (ii) the borrower's monthly debt payment-to-income ratio should be
36% or less.
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 ("compensating strengths"); and (b) those loans are made
to producers of particular agricultural commodities in a segment of agriculture
in which such compensating strengths are typical of the financial condition of
sound borrowers. 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 relative market forces.
Sellers
In addition to its Underwriting and Appraisal Standards, Farmer Mac has
established minimum eligibility requirements for Sellers. A Seller 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 Farmer Mac stock ownership
requirements discussed below, Sellers generally are required to have
stockholders' equity of at least $1 million or at least $500,000 of net worth
(as defined by Farmer Mac) in order to be approved as a Seller of Qualified
Loans to Farmer Mac. Sellers 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.
In order to facilitate a wide distribution of Farmer Mac's Voting Common
Stock and give program participants an ownership interest in the secondary
market, Farmer Mac has established minimum Voting Common Stock ownership
requirements ("Ownership Requirements") for Sellers, 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 Class B Common Stock to be considered as Sellers.
There are separate Ownership Requirements for each of four categories of Class A
stockholders to be considered as Sellers based on the size of their respective
institutions. "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 a Seller 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 a Seller and
compliance with the Ownership Requirements will be made at the time the entity
sells (or swaps) loans into the Farmer Mac I Program.
By statute, no stockholder may own, directly or indirectly, more than 33%
of the outstanding number of shares of Farmer Mac's 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 Sellers 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 may 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. To date, no such waiver resolution has been requested by a potential
participant.
Farmer Mac reserves the right, in its sole discretion, to change the
Ownership Requirements for Sellers that are Class B stockholders, or any of the
four categories of Sellers 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 and none are currently anticipated.
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 Guaranteed Securities issued under the Farmer Mac I
Program. Qualified Loans can be serviced only by a servicing entity that has
entered into a central servicing contract with Farmer Mac. Sellers 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.
Farmer Mac I Securities
Farmer Mac issues securities that are guaranteed by it as to timely
payment of principal and interest and that are backed either by Qualified Loans,
or obligations backed by Qualified Loans, or by Guaranteed Portions.
Collectively, these are called "Farmer Mac Guaranteed Securities." 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."
By statute, public offerings of Farmer Mac Guaranteed Securities are
required to be registered with the U.S. Securities and Exchange Commission (the
"SEC") under the federal securities laws; accordingly, Farmer Mac maintains a
shelf registration statement with the SEC pursuant to which public offerings of
such securities can occur. Farmer Mac may also issue Farmer Mac Guaranteed
Securities in private, unregistered transactions. U.S. Bank Trust National
Association, a national banking association based in Minneapolis, Minnesota,
serves as trustee for each trust underlying Farmer Mac I Securities, although
Farmer Mac anticipates assuming the trustee function and, thus, eliminating the
cost associated with a third party trustee as soon as practicable.
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. Currently, the Farmer Mac I Securities
issued 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. Because it guarantees
timely payments on Farmer Mac I Securities (without the protection afforded by
the minimum 10% cash reserve or subordinated interest required prior to the
enactment of changes to Farmer Mac's statutory charter in 1996), Farmer Mac
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 default). 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 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.
Transactions Under the Farmer Mac I Program
As of December 31, 1998, Farmer Mac had purchased $1.6 billion of loans
through the Farmer Mac I Program, of which $760.4 million were purchased prior
to the enactment of changes to Farmer Mac's statutory charter in 1996 (the "1996
Act") and $817.1 million were purchased subsequent to the enactment of the 1996
Act. Of the loans purchased subsequent to the enactment of the 1996 Act, $731.7
million were purchased through the cash window and $85.4 million were acquired
in swap transactions. At December 31, 1998, outstanding Farmer Mac I Securities
totaled $796.0 million, of which $228.5 million are held by Farmer Mac. For
information regarding Farmer Mac I Program activity in 1998, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations - Business Volume."
Funding of Guarantee Claims
The primary sources of funding for the payment of claims made under Farmer
Mac guarantees 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 its total outstanding
guarantees eventually to exceed its resources, including amounts in its
guarantee reserve account and its limited ability to borrow from the Treasury;
however, Farmer Mac does not expect claims under outstanding guarantees to
exceed amounts available to satisfy those claims. 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
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 Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Management" and 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
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 and serviced by
USDA-qualified loan originators (each, a "Lender") for various purposes.
Under the Farmer Mac II Program, Farmer Mac is one of several competing
purchasers from Lenders of Guaranteed Portions of farm ownership loans, farm
operating loans, business and industry loans and other loans that are made by
these Lenders and 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, which guarantee is
supported by the full faith and credit of the United States.
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.
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 Securities
Farmer Mac issues and guarantees the timely payment of principal and
interest on Farmer Mac II Securities, which are backed by Guaranteed Portions.
Farmer Mac does not guarantee the repayment of the Guaranteed Portions, only the
Farmer Mac II Securities that are backed by Guaranteed Portions. In addition to
issuing Farmer Mac II Securities to Lenders in swap transactions or to other
investors for cash, Farmer Mac also purchases Guaranteed Portions for retention
in its portfolio under a master Farmer Mac II Security.
Transactions Under Farmer Mac II Program
As of December 31, 1998, Farmer Mac had issued and guaranteed $484.2
million of Farmer Mac II Securities, of which $119.8 million were issued in
1998. Of the $484.2 million of Farmer Mac II Securities issued and guaranteed
through December 31, 1998, $336.9 million were outstanding as of that date. Of
the $336.9 million of outstanding Farmer Mac II Securities, approximately $306.8
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.
<PAGE>
Financing
Debt Issuances
Farmer Mac issues debt obligations, primarily Discount Notes and
Medium-Term Notes, to obtain funds for the Farmer Mac I and Farmer Mac II
Programs to cover transaction costs, guarantee payments and the costs of
purchasing Guaranteed Portions, Qualified Loans and securities (including Farmer
Mac Guaranteed Securities backed by Guaranteed Portions and/or Qualified Loans.)
Farmer Mac's Board of Directors has authorized the issuance of up to $4.0
billion of Notes, subject to periodic review of the adequacy of that level
relative to Farmer Mac's borrowing requirements. Farmer Mac 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 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.
Under the 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 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 would 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. To date, Farmer Mac has not paid any dividends on its
outstanding Common Stock, and does not expect to pay dividends in the near
future, and has not issued any preferred stock. Farmer Mac's ability to declare
and pay a dividend could be restricted if it were to fail to comply with
regulatory capital requirements. See Note 7 to the Financial Statements and
"Government Regulation of Farmer Mac - Regulation - Capital Standards -
Enforcement levels."
To facilitate the acquisition of Class A Voting Common Stock by lenders
seeking to become approved Sellers in the Farmer Mac program, Farmer Mac
commenced a continuous direct stock offering program for the sale of Class A
Voting Common Stock in early 1997. Under that program, Farmer Mac has sold
35,380 shares of Class A Voting Common Stock to lenders in satisfaction of
Farmer Mac's Ownership Requirements with respect to Voting Common Stock. Farmer
Mac intends to offer an aggregate of approximately 100,000 shares of Class A
Stock through this program to interested eligible investors. As a result of
these (and other previous) issuances, there are currently outstanding 1,025,380
shares of Class A Stock, 500,301 shares of Class B Stock and 3,092,330 shares of
Class C Stock. Farmer Mac may obtain capital from future issuances of common
stock (both voting and non-voting) or preferred stock, although it has no
current plans to issue any additional shares of Common Stock, except in
connection with the direct offering of Class A Voting Common Stock, which it
intends to continue in 1999, and except for programs pursuant to which members
of management or the Board of Directors may be granted Class C Non-Voting Common
Stock as part of their compensation arrangements.
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."
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 SEC under the federal securities laws. Farmer Mac also is required to
file reports with the SEC pursuant to the SEC's periodic reporting requirements.
Regulation
Office of Secondary Market Oversight
As a System Institution, Farmer Mac is subject to the regulatory authority
of the FCA. Through the FCA's Office of Secondary Market Oversight ("OSMO"), the
FCA has general regulatory and enforcement authority over Farmer Mac, including
the authority to promulgate rules and regulations governing the activities of
Farmer Mac, and to apply its general enforcement powers to Farmer Mac and its
activities. The Director of OSMO, who was selected by and reports to the FCA
Board, is responsible for the examination of Farmer Mac and the general
supervision of the safe and sound performance by Farmer Mac of the powers and
duties vested in it by the Act. The Act requires an annual examination of the
financial transactions of Farmer Mac and authorizes the FCA to assess Farmer Mac
for the cost of its regulatory activities, including the cost of any
examination. Farmer Mac is required to file quarterly reports of condition with
the FCA, as well as copies of all documents filed with the SEC under the federal
securities laws.
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." Although the "capital deferral period"
expired on January 1, 1999, Farmer Mac has not been advised whether this
cooperative monitoring effort between the Treasury and the FCA will continue or
be terminated.
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 July 1998, at the request of a member of Congress, the General
Accounting Office initiated a study to assess the ability of Farmer Mac "to add
value to the provision of agricultural mortgage credit." The GAO indicated that
its study would include an assessment of Farmer Mac's "policies, procedures and
practices in conjunction with the activities Farmer Mac has undertaken to carry
out its statutory mission of creating an efficient secondary market in
agricultural mortgages." The GAO has informed Farmer Mac that it is in the
process of preparing a draft report, which the GAO anticipates releasing in
final form during the second quarter of 1999.
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 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 increased over the course of a transition
period which ended on January 1, 1999, when the highest percentages of minimum
and critical capital specified in the Act were triggered. 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, which is expected to be published for comment later in 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, 1998, Farmer Mac's minimum and critical capital
requirements were $50.2 million and $25.1 million, respectively, and its actual
core capital level was $80.7 million. If the fully-phased in (highest) minimum
capital level had been in effect at December 31, 1998, Farmer Mac's actual
capital would have been $22.9 million above the requirement.
Minimum capital level. The highest minimum capital level for Farmer Mac,
which became applicable on and after January 1, 1999, is 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.
Critical capital level. By statute, Farmer Mac's critical capital level at
any time must 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
guarantee 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 Farmer Mac must manage its risk exposures, and have evolved
as the mix and character of assets under management shifts with growth in the
business and the addition of new asset categories. Farmer Mac believes that the
risk-based capital test being developed by the FCA should take similar factors
into account and should not result in risk-based capital requirements
significantly higher than the statutory minimum capital level.
The FCA has commenced the process of developing a risk-based capital test
for Farmer Mac, but has not advised Farmer Mac as to the possible level of
risk-based capital that may be required or whether it intends to propose
risk-based capital requirements significantly higher than the statutory minimum
capital level. In July 1998, the FCA released for public comment a study
prepared by consultants retained by the FCA estimating historical loss rates for
agricultural real estate loans that may be employed in determining the credit
risk component of the risk-based capital test. In January 1999, Farmer Mac
submitted its comments to the study, which raised a number of issues and
concerns with the approach taken in the study. The FCA has indicated that it
anticipates publishing a notice of proposed rulemaking setting forth a proposed
risk-based capital test late in 1999. At this time, Farmer Mac is unable to
predict when the rulemaking process would likely conclude and when a final
regulation imposing a risk-based capital requirement on Farmer Mac would become
effective.
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 Farmer Mac within
one of four enforcement levels for purposes of determining capital compliance.
Prior to the effective date of a final risk-based capital regulation for Farmer
Mac, which is not likely to occur any earlier than 2000, 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, 1998, 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 effectiveness of the
final 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 of OSMO 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 of OSMO 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 of OSMO has the discretionary authority to reclassify Farmer
Mac to a level that is one level below its then current level (i.e., from level
III to level IV) if the Director determines that Farmer Mac is engaging in any
action not approved by the Director that could result in a rapid depletion of
core capital or if the value of property subject to mortgages backing Farmer Mac
Guaranteed Securities has decreased significantly.
Item 2. Properties
On September 30, 1991, Farmer Mac entered into a long-term lease for its
principal offices, which are located at 919 18th Street, N.W., Suite 200,
Washington, D.C. 20006. The lease, which is for a term of ten years, covers
approximately 7,500 square feet of office space. Farmer Mac's offices are
suitable and adequate for its present needs.
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 SmallCap Market tier
of The Nasdaq Stock Market under the symbol "FAMCA." The Class B Voting Common
Stock, which has a limited market and trades infrequently, is not listed or
quoted on any exchange or other medium, and Farmer Mac is unaware of any
publicly available quotations or prices with respect to that class. The Class C
Non-Voting Common Stock trades on The Nasdaq National Market tier of The Nasdaq
Stock Market under the symbol "FAMCK."
The information below with respect to the Class A and Class C Common Stock
represents the high and low closing sale prices as reported by The Nasdaq Stock
Market for the periods indicated.
<PAGE>
<TABLE>
<CAPTION>
Sale Prices
Class A Common Stock
---------------------------
High Low
---------------------------
(dollars per share)
1997
<S> <C> <C>
First Quarter...................... $30.00 $23.00
Second Quarter..................... 25.00 18.00
Third Quarter...................... 18.25 13.50
Fourth Quarter..................... 19.50 13.00
1998
First Quarter...................... $18.88 $16.25
Second Quarter..................... 20.25 16.63
Third Quarter...................... 20.25 18.13
Fourth Quarter..................... 18.38 17.00
1999
First Quarter (through March 12)... $18.50 $17.38
Class C Common Stock
1997
First Quarter...................... $38.50 $24.75
Second Quarter..................... 36.25 25.75
Third Quarter...................... 42.25 33.75
Fourth Quarter..................... 68.00 38.75
1998
First Quarter...................... $64.50 $51.75
Second Quarter..................... 73.50 52.00
Third Quarter...................... 68.50 34.75
Fourth Quarter..................... 40.50 27.25
1999
First Quarter (through March 12)... $52.00 $39.25
</TABLE>
As of March 12, 1999, it is estimated that there were 1,603 registered
owners of the Class A Voting Common Stock, 104 registered owners of the Class B
Voting Common Stock and 1,532 registered owners of the Class C Non-Voting Common
Stock outstanding.
As discussed above in "Farmer Mac Guarantee Program - Financing Equity
Issuances," in early 1997, Farmer Mac commenced a continuous direct stock
offering program for the sale of Class A Voting Common Stock to facilitate the
acquisition of Class A Voting Common Stock by lenders seeking to become approved
Sellers in the Farmer Mac program. Through March 12, 1999, Farmer Mac had sold
35,380 shares of Class A Voting Common Stock to 97 financial institutions in 98
transactions. The aggregate offering price for the sales was approximately
$662,000. Farmer Mac's Class A Voting Common Stock is exempt from SEC
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.
For information with respect to Farmer Mac's dividend policy, see
"Business - Financing - Equity Issuances" and Note 7 to the Financial
Statements.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
Summary of Financial Condition: 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 540,626 $ 177,617 $ 68,912 $ 8,336 $ 73,129
Investment securities 643,562 656,737 85,799 63,281 9,437
Farmer Mac guaranteed securities 552,205 442,311 419,260 417,169 367,994
Loans held for securitization 168,064 47,177 12,999 - -
Total Assets 1,935,300 1,348,135 603,104 512,464 477,238
Notes and bonds payable
Due within one year 1,473,688 856,028 259,164 207,422 168,307
Due after one year 365,451 402,803 287,128 284,084 288,209
Total liabilities 1,854,386 1,273,074 555,899 500,752 465,019
Stockholders' equity 80,914 75,061 47,205 11,712 12,219
Selected Financial Ratios:
Return/(loss) on average assets 0.35% 0.47% 0.14% (0.13%) (0.27%)
Return/(loss) on equity 7.36% 7.57% 2.64% (5.41%) (10.34%)
Average equity to assets 4.75% 6.27% 5.28% 2.42% 2.57%
Year ended December 31,
--------------------------------------------------
Summary of Operations: 1998 1997 1996 1995 1994
-------- -------- --------- -------- --------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income $ 103,561 $ 80,153 $ 37,353 $ 36,424 $ 31,712
Interest expense 92,992 72,992 34,623 34,709 30,303
-------- -------- --------- -------- --------
Net interest income 10,569 7,161 2,730 1,715 1,409
Guarantee fee income 3,727 2,575 1,623 1,263 1,050
Gain on issuance of AMBS 1,400 2,362 1,070 - -
Miscellaneous 142 253 63 171 177
-------- -------- --------- -------- --------
Total revenue 15,838 12,351 5,486 3,149 2,636
Other expenses 9,323 7,840 5,081 3,796 3,968
-------- -------- --------- -------- --------
Income/(loss) before income taxes
and extraordinary item 6,515 4,511 405 (647) (1,332)
Income tax expense/(benefit) 772 (115) 12 - -
Extraordinary gain - - 384 - -
-------- -------- --------- -------- --------
Net income/(loss) 5,743 4,626 777 (647) (1,332)
-------- -------- --------- -------- --------
Earnings/(Loss) Per Share:
<S> <C> <C> <C> <C> <C>
Class A and B Voting Common Stock
Basic earnings before
extraordinary item $ 0.53 $ 0.48 $ 0.07 $ (0.14) $ (0.28)
Basic net earnings $ 0.53 $ 0.48 $ 0.15 $ (0.14) $ (0.28)
Diluted earnings before
extaordinary item $ 0.52 $ 0.46 $ 0.07 $ (0.14) $ (0.28)
Diluted net earnings $ 0.52 $ 0.46 $ 0.14 $ (0.14) $ (0.28)
Class C Non-Voting Common Stock
Basic earnings before
extraordinary item $ 1.60 $ 1.44 $ 0.22 $ (0.41) $ (0.85)
Basic net earnings $ 1.60 $ 1.44 $ 0.44 $ (0.41) $ (0.85)
Diluted earnings before
extraordinary item $ 1.55 $ 1.39 $ 0.22 $ (0.41) $ (0.85)
Diluted net earnings $ 1.55 $ 1.39 $ 0.43 $ (0.41) $ (0.85)
</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,
1998, 1997 and 1996 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
Certain statements made in this Form 10-K are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995
pertaining to management's current expectations as to Farmer Mac's future
financial results, business prospects and business developments. Forward-looking
statements include, without limitation, any statement that may predict,
forecast, indicate or imply future results, performance or achievements, and
typically are accompanied by, and identified with, such terms as "anticipates,"
"believes," "expects," "intends," "should" and similar phrases. The following
management's discussion and analysis includes forward-looking statements
addressing Farmer Mac's prospects for earnings and growth in loan purchase,
guarantee and securitization volume; trends in net interest income and provision
for losses; changes in capital position; year 2000 readiness efforts; and other
business and financial matters. Management's expectations for Farmer Mac's
future necessarily involve a number of assumptions, estimates and the evaluation
of risks and uncertainties. Various factors could cause Farmer Mac's actual
results or events to differ materially from the expectations as expressed or
implied by the forward-looking statements, including: uncertainties regarding
the rate and direction of development of the secondary market for agricultural
mortgage loans; the possible establishment of additional statutory or regulatory
restrictions applicable to Farmer Mac, such as the imposition of regulatory
risk-based capital requirements in excess of statutory minimum and critical
capital levels or restrictions on Farmer Mac's investment authority; 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; the
non-compliance of Farmer Mac's internal systems or the systems of critical
vendors with respect to the year 2000 date change; 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; the availability of debt
funding in sufficient quantities and at favorable rates 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 into the Farmer Mac secondary market; the
willingness of investors to invest in agricultural mortgage-backed securities;
competition in the origination or purchase of agricultural mortgage loans and
the sale of agricultural mortgage-backed and debt securities; or changes in
Farmer Mac's status as a government-sponsored enterprise.
The foregoing factors are not exhaustive. Other sections of this report
may include additional factors that could adversely impact Farmer Mac's business
and its financial performance. Furthermore, new risk factors emerge from time to
time and it is not possible for management to predict all such risk factors, nor
assess the impact of such factors on Farmer Mac's business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from the expectations expressed or implied by the forward-looking
statements. Given these 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.
Overview
During 1998, Farmer Mac built upon the solid foundation laid in 1997 with
significant improvement in its financial results and business volume. On a fully
taxable equivalent basis, net income increased 40% from $3.0 million in 1997 to
$4.2 million in 1998. (Prior to third quarter 1998, net income included
provisions for income taxes based on an effective tax rate significantly lower
than Farmer Mac's statutory tax rate, due to the recognition of previously
deferred tax benefits. On a fully taxable equivalent basis, the provision for
taxes, and thereby net income, is adjusted to reflect an effective tax rate
equal to Farmer Mac's statutory tax rate). Earnings per share were $0.38 for
Classes A and B Common Stock for 1998, compared to $0.30 for 1997 on a fully
taxable equivalent basis. Class C earnings per share were $1.14 for 1998,
compared to $0.89 for 1997.
Farmer Mac's improved financial results were attributable to a 28% increase
in revenues, compared to a 13% increase in operating expenses (total expenses
excluding the provision for loan losses). Growth in revenues was attributable to
increased net interest income from on-balance sheet Farmer Mac Guaranteed
Securities and other investments and increased guarantee fees, partially offset
by reduced gain on sale of AMBS as a result of fewer capital market sales of
AMBS due to market volatility in the latter half of 1998. That volatility
resulted in lower rates on Treasury securities, but wider spreads on Farmer Mac
debt securities and even wider spreads on AMBS. These conditions diminished the
economic attractiveness of capital market sales of AMBS, due to lower potential
gains on sale, but facilitated Farmer Mac's retention of the AMBS in its
portfolio at favorable spreads. The retention of AMBS in Farmer Mac's portfolio
will generate net interest income over the long term with a present value in
excess of the foregone up-front gain on issuance.
Net interest income grew 48% in 1998 due to growth in program assets
(Farmer Mac I and II Securities and loans held for securitization) and
non-program assets (cash and cash equivalents and investments). The increase in
program assets reflected continued growth in the Farmer Mac II Program and
increased purchases of loans through the Farmer Mac I Program that have not been
securitized and sold into the capital markets, including loans backing AMBS that
have been issued and retained by Farmer Mac. Non-program assets increased in
accordance with Farmer Mac's debt issuance program begun in early 1997 to
increase its market presence and investor recognition of its securities and,
thereby, improve both spreads on its debt and mortgage-backed securities and the
mortgage rates available to farmers, ranchers and rural homeowners. Farmer Mac's
principal objective for the proceeds of its debt issuances is their eventual
investment in program assets. 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 significantly in non-program assets.
Guarantee fee income grew 45% in 1998 as outstanding Farmer Mac Guaranteed
Securities increased by 34% to $1.1 billion. Growth in outstanding Farmer Mac
Guaranteed Securities reflects an increase in Farmer Mac I loan purchases, which
increased 84% from $230.5 million in 1997 to $424.3 million in 1998. This growth
in volume is attributable to increased participation by both traditional and
non-traditional lenders, as a result of Farmer Mac's business development
efforts. In particular, the involvement of non-traditional lenders, such as
mortgage bankers who can utilize their existing facilities and personnel to
access the agricultural mortgage market at low marginal costs, has increased the
number of outlets offering Farmer Mac loans, as well as resulted in new
marketing initiatives to advertise the benefits and availability of Farmer Mac
loans.
As Farmer Mac's volume has increased so has the demand for, and increase in
the number of, new competitive products to meet the needs of borrowers and
lenders, further broadening Farmer Mac's business base. Examples include a
partial open-prepayment loan and long-term standby purchase commitment facility,
both introduced in late 1998. The partial open-prepayment loan offers borrowers
greater flexibility by allowing them to prepay their mortgages without penalty
after the third year. The long-term standby purchase commitment, which is a
variation on a swap transaction, permits a lender to segregate a pool of loans
in its portfolio and transfer the credit risk on those loans to Farmer Mac, in
return for the payment to Farmer Mac of fees on the outstanding balance of the
segregated loans approximating what would have been Farmer Mac's guarantee fee
had the loans been exchanged with Farmer Mac in a swap transaction. In late
1998, Farmer Mac and a System Institution committed to enter into a long-term
standby transaction covering $407.7 million of loans, which closed in early
1999. Farmer Mac believes that this long-term standby transaction, together with
the closing in 1998 of two swap transactions totaling $84.4 million with another
System Institution, effectively demonstrate how Farmer Mac can better serve
traditional agricultural lenders that have large mortgage portfolios and seek
more effective and efficient ways to free up capital to support additional
business activity and manage their liquidity and credit risk.
Notwithstanding the increase in outstanding Farmer Mac Guaranteed
Securities and the adverse changes in the agricultural economy in 1998, Farmer
Mac did not experience any significant change in credit performance. While
delinquencies are expected to increase in 1999 due to both the growing number of
loans held or securitized by Farmer Mac that are approaching their anticipated
peak default years and the current stress in the agricultural economy, Farmer
Mac believes overall credit quality remains strong. Furthermore, increased
demand by high quality borrowers for mortgages on favorable credit terms, as a
result of the stress in the agricultural economy, should provide Farmer Mac with
new opportunities to serve agricultural lenders and borrowers, resulting in
additional loan purchase volume.
As an institution, Farmer Mac has grown steadily stronger during the last
three years. Throughout that period, Farmer Mac's growth has depended, and
will continue to depend, upon ongoing increases in the volume of loans covered
by its guarantee. As the Board and management continue to pursue the principal
corporate objective of increasing guarantee volume without sacrificing quality,
certain factors and conditions remain likely to constrain Farmer Mac's progress,
particularly: the organizational bias of many institutions that dominate
agricultural lending today toward retaining loans in portfolio rather than
selling them, notwithstanding the corporate finance and capital planning
benefits they might realize through participation in Farmer Mac's programs; the
ability of some lending institutions to subsidize their agricultural mortgage
loan rates through price averaging with non-mortgage loans, or by low-return use
of their equity, which reduce the relative competitiveness of Farmer Mac's loan
rates; uncertainties surrounding the level of future participation in Farmer
Mac's programs by non-traditional lenders, which could influence the competitive
responses of the more traditional lenders and contribute to Farmer Mac's volume;
and downturns in the agricultural economy, as evidenced by the low commodity
prices, reduced export demand and adverse weather conditions experienced in 1998
and continuing into 1999, which could adversely affect the development of the
Farmer Mac secondary market, particularly if they reduce farm income and
decrease land values.
In addition, as an instrumentality of the United States created by Congress
and regulated by governmental agencies, Farmer Mac's future development is
subject to political and regulatory considerations. In 1998, the GAO conducted
two reviews of Farmer Mac's activities, the first of which addressed the
investment activities of Farmer Mac and other government-sponsored enterprises
and the second of which reviewed Farmer Mac's statutory mandate and its ability
to fulfill that mandate. Farmer Mac believes that its investment practices
represent a prudent business strategy for a growing company, and that its growth
in the three years since Congress expanded its statutory authorities
demonstrates the value of a government-sponsored agricultural secondary market.
In addition, the FCA is in the process of developing a risk-based capital test
to be applied to Farmer Mac following a public rulemaking process. The details
of this risk-based capital standard, and its financial consequences to Farmer
Mac, are not yet known. These political and regulatory processes, which will
continue to require the attention of Farmer Mac's Board and management, may
restrain future growth, to the extent that Farmer Mac's current activities or
future initiatives are inhibited by regulatory or political actions.
Having passed the milestone of $1 billion in outstanding Farmer Mac
Guaranteed Securities in 1998, Farmer Mac has established an annuity stream of
guarantee fee income that will strengthen its business for many years into the
future. Each sequential year's growth compounds that annuity benefit. As
significant as Farmer Mac's outstanding guarantee volume is, that volume
represents only a small percentage of the total outstanding agricultural
mortgage indebtedness that Farmer Mac believes is eligible for its programs.
While continued growth in loan volume is expected in 1999, Farmer Mac faces the
challenges of establishing a new market where none previously existed.
Acceptance of Farmer Mac's programs is increasing among lenders, reflecting the
competitive rates, terms and products offered and the advantages we believe
Farmer Mac's programs provide. But 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 value the
benefits of selling loans to Farmer Mac or otherwise obtaining the benefits of
the Farmer Mac guarantee and must be persuaded to modify their business
practices accordingly.
A detailed discussion of Farmer Mac's financial results for the years
ended December 31, 1998, 1997 and 1996 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, 1998, 1997 and
1996.
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- --------------------------- --------------------------
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:
Cash and cash
equivalents $ 440,815 $ 24,306 5.44% $ 291,525 $ 16,052 5.43% $ 50,016 $ 2,619 5.24%
Investments 658,665 38,915 5.89% 534,423 31,319 5.85% 77,449 4,345 5.61%
Farmer Mac guaranteed
securities 474,083 32,922 6.89% 413,966 30,541 7.33% 408,534 29,672 7.26%
Loans held for
securitization 108,743 7,418 6.82% 28,416 2,241 7.88% 8,513 717 8.42%
------------------------- ------------------------- -----------------------
Total earning assets 1,682,306 103,561 6.11% 1,268,330 80,153 6.28% 544,512 37,353 6.86%
Other assets 23,519 27,802 20,168
--------- ---------- -------
Total assets $ 1,705,825 $1,296,132 $ 564,680
--------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities and
Stockholders' Equity:
Discount notes $ 1,253,557 $ 68,102 5.36% $ 861,559 $ 46,632 5.34% $ 210,271 $ 11,136 5.30%
Medium term notes 360,410 24,890 6.90% 372,918 26,360 7.07% 327,531 23,487 7.17%
--------- ------- ------- --------- ------- ----- --------- -------- -----
Total bearing
liabi1ities 1,613,967 92,992 5.70 1,234,477 72,992 5.86% 537,802 34,623 6.44%
Other liabilities 13,484 9,880 12,045
--------- ---------- --------
Total liabilities 1,627,451 1,244,357 549,847
Stockholders' equity 78,374 51,775 14,833
--------- ---------- --------
Total liabilities and
stockholders' equity $ 1,705,825 $ 1,296,132 $ 564,680
--------- ---------- --------
Net interest income/
spread $ 10,569 0.41% $ 7,161 0.42% $ 2,730 0.42%
------- ------- ------- ----- -------- ------
Net yield on interest
earning assets 0.63% 0.56% 0.50%
------- ----- ------
</TABLE>
The table below sets forth the effect of changes in rates and average
balances on the components of net interest income for the years ended December
31, 1998 and 1997. Combined rate/volume variances are allocated based on their
relative size.
<TABLE>
<CAPTION>
1998 vs. 1997 1997 vs. 1996
--------------------------- --------------------------
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
Cash and cash equivalents $ 22 $ 8,232 $ 8,254 $ 100 $ 13,333 $ 13,433
Investments 218 7,378 7,596 193 26,781 26,974
Farmer Mac guaranteed securi (1,875) 4,256 2,381 357 512 869
Loans held for securtization (341) 5,518 5,177 (48) 1,572 1,524
------- ------- ------- ------- -------- ------- -
Total (1,976) 25,384 23,408 602 42,198 42,800
Expense from interest-bearing liabilities
Discount notes 176 21,294 21,470 83 35,413 35,496
Medium term notes (617) (853) (1,470) (337) 3,210 2,873
------- ------- ------- ------ ------- -------
Total (441) 20,441 20,000 (254) 38,623 38,369
Change in net interest income $(1,535) $ 4,943 $ 3,408 $ 856 $ 3,575 $ 4,431
------- ------- ------- ------ ------- -------
</TABLE>
Results of Operations
Net Interest Income. Net interest income totaled $10.6 million in 1998
compared to $7.2 million in 1997. The increase in net interest income was due to
an increase in the average balance of interest-earnings assets and a 7 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 average balance
of cash equivalents and investments as a result of Farmer Mac's expanded debt
issuance program begun in early 1997. Increases in Farmer Mac Guaranteed
Securities and loans held for securitization also contributed to the increase.
For further information, see "- Balance Sheet Review." The increase in net
interest yield was due to an increase in the balance of "non-interest-bearing"
funding, which consists primarily of stockholders' equity, as a result of the
$23.0 million stock issuance that occurred in late 1997.
Net interest income totaled $2.7 million in 1996. The $4.4 million
increase from 1996 to 1997 was due largely to the same factors discussed above,
as the average balance of interest-earnings assets more than doubled in 1997 and
net interest yield increased 6 basis points. The increase in net interest yield
was attributable to the increase in the average balance of stockholders' equity
as a result of the stock issuance that occurred in late 1996.
Other Income. Other income increased slightly from $5.2 million in 1997 to
$5.3 million in 1998, as an increase in guarantee fee income was largely offset
by a decrease in gain on sale of AMBS. Guarantee fee income, which is earned
annually on the cumulative outstanding balance of guaranteed securities,
including those issued in prior years, increased from $2.6 million in 1997 to
$3.7 million in 1998 due to a corresponding increase in the outstanding balance
of guaranteed securities. While AMBS issuances increased during 1998 compared to
1997, gains on sale of AMBS decreased due to the temporary changeover to a
retained portfolio strategy in the latter half of 1998 (see "Overview"). In
1998, Farmer Mac recognized a $1.4 million gain on the sale of $141.7 million of
AMBS, compared to a $2.4 million gain on the sale of $197.5 million of AMBS in
1997. Miscellaneous income, the third component of other income, totaled $142
thousand in 1998, compared to $253 thousand in 1997. For year-end 1997,
miscellaneous income included the difference between the amount Farmer Mac had
accrued for expenses in 1996 related to litigation and the actual amount
incurred, which was lower as a result of the settlement of that litigation in
January 1997.
Other income increased $2.4 million in 1997 to $5.2 million compared to
total other income of $2.8 million in 1996. The increase in other income from
1996 to 1997 was due to increases in both guarantee fee income and gain on sale
of AMBS. Guarantee fee income increased $952 thousand during 1997 due to an
increase in outstanding guarantees, while gain on sale of AMBS increased $1.3
million due to an increase in the amount of AMBS sold to capital market
investors.
Other Expenses. Other expenses, excluding the provision for loan losses,
totaled $7.7 million in 1998, compared to $6.9 million in 1997 and $4.8 million
in 1996. The increases in operating expenses were attributable to increased
compensation and other costs related to expanded operations since the enactment
in 1996 of the revised legislative authorities to Farmer Mac's statutory
charter. Farmer Mac's provision for losses totaled $1.6 million in 1998,
compared to $990 thousand in 1997 and $263 thousand in 1996. The increases in
the provision for losses were due to an increase in outstanding AMBS for which
Farmer Mac assumes 100% of the credit risk (see " - Risk Management - Credit
risk management").
Income Tax Benefit/Expense. In 1998 and 1997, Farmer Mac recognized $1.5
million and $1.7 million, respectively, of previously unrecognized tax benefits.
As a result, Farmer Mac reported tax expense of $772 thousand in 1998 and a net
tax benefit of $115 thousand in 1997. The tax benefits recognized in 1998 and
1997, which related primarily to net operating losses incurred in prior years,
had not been recognized due to uncertainty regarding the level of future
profitability. As certainty regarding future profitability increased, however,
Farmer Mac recognized the deferred tax benefits. As of June 30, 1998, all
previously unrecognized tax benefits had been recognized. Accordingly, Farmer
Mac's effective tax rate in future periods will approximate its statutory tax
rate of 34 percent. For further information regarding income taxes, see Note 8
to the Financial Statements.
Extraordinary Gain. In 1996, Farmer Mac 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 1998 or 1997.
Business Volume. During 1998, purchases of Qualified Loans under the Farmer
Mac I Program increased 84%, from $230.5 million in 1997 to $424.3 million in
1998. Purchase volume in 1998 includes $84.4 million of loans acquired through
"swap transactions" and $339.9 million of loans acquired through Farmer Mac's
cash window. During 1997, virtually all of Farmer Mac's loan purchases came
through the cash window. Cash window transactions usually involve purchases of
newly originated loans, while swap transactions typically represent acquisitions
of seasoned loans.
In addition to the increase in purchase volume in 1998, Farmer Mac also
entered into a long-term standby purchase commitment covering $407.7 million of
seasoned Qualified Loans, which was completed in January 1999.
During 1998, Farmer Mac issued $301.7 million of AMBS, of which $141.7
million were sold to capital market investors, $84.4 million were issued in
exchange for Qualified Loans in swap transactions and $75.6 million were
retained by Farmer Mac. During 1997, Farmer Mac issued $197.5 million of AMBS,
all of which were sold to capital market investors. The decrease in AMBS sold to
capital market investors, and corresponding increase in retained AMBS, was due
to the temporary changeover to a retained portfolio strategy during the third
quarter of 1998 (see "Overview").
Indicators of future guarantee volume, particularly cash window activity,
include outstanding commitments to purchase Farmer Mac I loans and the total
balance of loans in the Farmer Mac I "pipeline." Farmer Mac enters into
mandatory delivery commitments to purchase loans. If a Seller obtains a
mandatory commitment and is unable to deliver the loans required thereunder
within the specified time period, Farmer Mac requires the Seller to pay a fee to
extend or cancel the commitment. At December 31, 1998, outstanding commitments
to purchase Farmer Mac I loans totaled $23.8 million, compared to $10.8 million
at December 31, 1997. The Farmer Mac I pipeline represents loans submitted for
approval or approved but not yet purchased. (Not all loans in the pipeline are
purchased, as some are denied for credit reasons or withdrawn by the Seller.)
The Farmer Mac I pipeline totaled $210.2 million at December 31, 1998, compared
to $81.8 million at December 31, 1997.
Balance Sheet Review
Assets. At December 31, 1998, total assets were $1.9 billion compared to
$1.3 billion at December 31, 1997. The increase in assets was due to increases
in both program assets (Farmer Mac Guaranteed Securities and loans held for
securitization) and non-program assets (cash and cash equivalents and
investments). Non-program assets increased from $834.4 million at December 31,
1997 to $1.2 billion at December 31, 1998. This increase was due to continued
implementation of Farmer Mac's debt issuance program begun in early 1997. The
change in program assets, which increased by $230.8 million during 1998,
reflects continued growth in the Farmer Mac II Program and increased purchases
of mortgages through the Farmer Mac I Program, which have not yet been
securitized and sold into the capital markets, including the $75.6 million of
AMBS retained in Farmer Mac's portfolio during 1998 due to capital market
conditions. For further information regarding Farmer Mac I and II Securities
held by Farmer Mac, see Note 4 to the Financial Statements.
Liabilities. Total liabilities increased from $1.3 billion at December 31,
1997 to $1.8 billion at December 31, 1998. Most of Farmer Mac's liabilities are
due within one year since most of Farmer Mac's assets are short- or long-term
floating rate investments. Notes payable due after one year totaled $365.5
million at December 31, 1998, compared to $402.8 million at December 31, 1997.
Long-term debt at December 31, 1997 includes $120.0 million of debt issued in
conjunction with interest rate swaps, which convert the fixed rate interest cost
to a floating rate (see "- Risk Management"). As of December 31, 1998, no such
interest rate swaps were outstanding as the swaps and related debt were called
during the year. During 1998, $175.7 million of long-term debt was called.
Capital. At December 31, 1998, Farmer Mac's stockholders' equity totaled
$80.9 million, an increase of $5.9 million from December 31, 1997. This increase
was primarily due to net income earned during 1998. At December 31, 1998 and
December 31, 1997, Farmer Mac's regulatory required minimum capital was $50.2
million and $30.0 million, compared with actual regulatory capital of $80.7
million and $75.1 million, respectively (see " Liquidity and Capital Resources -
Capital Requirements").
Off-Balance Sheet Farmer Mac Guaranteed Securities. At December 31, 1998,
outstanding off-balance sheet Farmer Mac Guaranteed Securities totaled $597.6
million, compared to $409.1 million at December 31, 1997. For further
information regarding off-balance sheet Farmer Mac Guaranteed Securities, see "-
Risk Management - Credit risk management."
Risk Management
Interest-rate risk management. Interest-rate risk is the risk that
interest rate changes could materially affect the value, or future earnings, of
Farmer Mac. Farmer Mac is exposed to two primary sources of interest-rate risk:
(a) Farmer Mac I and II Securities and other assets held for investment and (b)
loans held for securitization.
Farmer Mac is subject to interest-rate risk on all assets held for
investment because of possible timing differences in the cash flows of the
assets and related liabilities. This risk is primarily related to Farmer Mac I
and II Securities because of the ability of borrowers to prepay their mortgages
before the scheduled maturities. Mortgage prepayments can cause fluctuations in
the value of Farmer Mac to the extent that they change the cash flows of Farmer
Mac's assets. Yield maintenance provisions associated with many of the loans
underlying Farmer Mac I Securities reduce, but do not eliminate, this risk.
Yield maintenance provisions require borrowers to make an additional payment to
Farmer Mac when they prepay their loans. This payment is calculated such that,
when reinvested with the prepaid principal, they should generate substantially
the same cash flows that would have been generated had the loan not prepaid.
None of the loans underlying Farmer Mac II Securities have yield maintenance
provisions. Loans without yield maintenance provisions represented 39% of the
total principal amount of all loans underlying Farmer Mac I and II Securities at
December 31, 1998.
There is less interest-rate risk related to Farmer Mac's portfolio of
non-program assets (cash and cash equivalents and investments) because it
consists entirely of non-prepayable fixed-rate investments or prepayable
investments that reprice within one year. However, Farmer Mac does invest in
certain adjustable-rate investments that limit or "cap" the amount the
investment coupon rate can increase. Such capped investments totaled $333.5
million at December 31, 1998.
Farmer Mac's primary strategy to manage interest-rate risk related to
Farmer Mac I and II Securities and other assets held for investment is to fund
them with liabilities that have similar durations or average cash flow patterns
over time. To achieve the desired liability duration, Farmer Mac uses a mix of
short-term Discount Notes and callable and non-callable Medium-Term Notes (see
Note 5 to the Financial Statements). By using a mix of liabilities that includes
callable debt, the duration of the liabilities will tend to increase or decrease
as interest rates change in a manner similar to changes in the duration of the
assets. Farmer Mac manages the interest-rate risk related to capped
adjustable-rate investments by purchasing interest rate contracts that
effectively "uncap" the investments (see Note 10 to the Financial Statements).
Farmer Mac is also subject to interest-rate risk on loans held for
securitization, including loans committed to be, but not yet, purchased. When
Farmer Mac commits to purchase a Qualified Loan, it is exposed to interest-rate
risk between the time it commits to purchase the loan and the time it either (a)
sells AMBS backed by the loan or (b) issues debt to retain the loan in its
portfolio, although issuing debt to fund the loans as an investment does not
fully mitigate interest rate risk due to the possible timing differences in the
cash flows of the assets and related liabilities, as discussed above. As of
December 31, 1998, the balance of loans committed or purchased and not yet sold
or funded as retained investments totaled $191.0 million. Farmer Mac manages the
interest-rate risk related to such loans through the use of off-balance sheet
derivative financial instruments, including interest-rate swap contracts and
Treasury futures contracts. Of the total balance of loans committed or purchased
and not yet sold forward or funded as retained investments, $139.4 million were
hedged with interest-rate swap contracts and $29.6 million were hedged with
Treasury futures contracts. The remaining portion consisted of adjustable-rate
loans that Farmer Mac does not hedge. Interest rate swap contracts reduce Farmer
Mac's interest rate exposure to changes in both Treasury rates and AMBS and debt
spreads by converting the loan rate to a quarterly adjustable rate. Unlike
interest rate swaps, Treasury futures only mitigate Farmer Mac's exposure to
changes in Treasury rates; Farmer Mac manages its exposure to changes in AMBS
spreads and debt spreads by monitoring those spreads and by forward selling or
funding loans as often as possible. For further information regarding
off-balance sheet derivative financial instruments, see Note 10 to the Financial
Statements.
Farmer Mac has established policies and implemented interest-rate risk
management procedures to monitor its exposure to interest rate risk. Management
performs sensitivity analyses of Farmer Mac's fair value of equity (FVE) and
calculates the duration gap, as measured by the duration of equity, on an
ongoing basis. These risk measures are reviewed regularly by management's Asset
Liability Committee and the Finance Committee of the Board of Directors to
ensure compliance with Farmer Mac's interest-rate risk policy limits.
The simulation of FVE is the process of generating multiple paths for
future interest rates starting from a "base" yield curve and then discounting
the estimated cash flows under those rate paths to arrive at the estimated fair
value of Farmer Mac's assets, liabilities and off-balance sheet items. Farmer
Mac uses a commercially developed model to perform the FVE analysis. The
analysis, which is based on Farmer Mac's existing assets, liabilities and
off-balance sheet financial instruments, and does not assume any new business,
measures the change in FVE under seven interest rate scenarios. The interest
rate scenarios include a "base case" in which the "base" yield curve is equal to
the current yield curve, and six parallel and instantaneous shocks to the "base"
yield curve (plus and minus 100, 200 and 300 basis points). Inherent in the FVE
sensitivity analysis presented is the assumption that interest rate changes
occur as instantaneous parallel shifts in the yield curve. In reality, such
shifts are rarely instantaneous or parallel. In addition, actual future market
conditions may differ materially from those assumed in the analysis. For
example, actual loan prepayments and Farmer Mac AMBS and debt spreads may differ
significantly from those assumed in the analysis. Accordingly, the results of
the FVE sensitivity analysis should not be viewed as a projection of future
results.
The following schedule summarizes the results of Farmer Mac's FVE
sensitivity analysis at December 31, 1998.
<TABLE>
<CAPTION>
Interest Rate Scenario Percentage Change in FVE from Base Case
-------------------------- ---------------------------------------
<S> <C> <C>
+ 300 bp -11.0%
+ 200 bp - 6.9%
+ 100 bp - 1.2%
Base case 0.0%
- 100 bp 0.0%
- 200 bp -0.6%
- 300 bp -1.2%
</TABLE>
Farmer Mac's duration of equity at December 31, 1998 was approximately 0.6
years, or 7 months. At December 31, 1998, Farmer Mac was in compliance with the
established policy limits for FVE and duration gap interest-rate risk.
Credit risk management. Farmer Mac' primary exposure to credit risk is the
risk of loss resulting from the inability of borrowers to repay their mortgages.
Farmer Mac is exposed to credit risk on loans it holds, as well as on loans
backing securities issued to third parties because of Farmer Mac's guarantee of
the timely payment of principal, including any balloon payments, and interest on
the securities. Loans held or guaranteed by Farmer Mac can be divided into three
groups: (a) pre-1996 Act Farmer Mac I loans; (b) post-1996 Act Farmer Mac I
loans; and (c) Farmer Mac II loans.
For pre-1996 Act loans, Farmer Mac's credit risk exposure is mitigated by
subordinated interests. Before Farmer Mac incurs a credit loss, full recourse
must first be taken against the subordinated interest. At December 31, 1998, the
subordinated interest of each outstanding security backed by pre-1996 Act Farmer
Mac I loans was equal to or greater than 10% of the total outstanding balance.
The 1996 Act eliminated the subordinated interest requirement. As a result,
Farmer Mac assumes 100% of the credit risk on post-1996 Act Farmer Mac I loans.
Farmer Mac mitigates the credit risk related to these loans through the
application of its Underwriting and Appraisal Standards and by requiring
collateral in the form of the real estate (see "Business - Farmer Mac I -
Underwriting and Appraisal Standards"). Farmer Mac's credit exposure on Farmer
Mac II loans 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. Farmer Mac believes it has little or no credit risk exposure to
pre-1996 Act Farmer Mac I loans because of the subordinated interests, or to
Farmer Mac II loans because of the USDA guarantee.
As of December 31, 1998 and 1997, the outstanding principal balance of
loans held or guaranteed by Farmer Mac is summarized in the table below.
Included in the table is the pro forma effect of the $407.7 million long-term
standby purchase commitment agreed to in December 1998 and closed in January
1999 (see " - Results of Operations - Business Volume"). Farmer Mac's credit
exposure on a long-term standby purchase commitment is the same as that of a
post-1996 Act Farmer Mac I loan.
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997
-------------------------- ---------
Actual Pro forma(1) Actual
---------- ------------- ---------
(in thousands)
<S> <C> <C> <C>
Farmer Mac I loans
Post-1996 Act $ 788,905 $ 1,196,607 $ 341,213
Pre-1996 Act 174,783 174,783 228,904
Farmer Mac II loans 336,914 336,914 272,777
---------- ---------- ----------
$ 1,300,602 $ 1,708,304 $ 842,894
---------- ---------- ----------
(1) Includes the January 1999 long-term standby purchase commitment.
</TABLE>
Farmer Mac continually assesses its credit risk exposure related to
post-1996 Act Farmer Mac I loans by monitoring agricultural economic conditions
and evaluating the credit quality of those loans. Despite adverse trends in
agricultural economic conditions in 1998 and continuing into 1999, particularly
low commodity prices, reduced export demand and weather-related problems in
certain areas of the country, Farmer Mac believes that the credit quality of the
post-1996 Act Farmer Mac I loans remains strong, based on Farmer Mac's credit
underwriting, appraisal and diversification standards. The following tables set
forth the loan-to-value, geographic and commodity distributions of the post-1996
Act Farmer Mac I loans, including the long-term standby purchase commitment, as
of December 31, 1998 and 1997. For information regarding loan-to-value,
commodity and geographic distributions of all Farmer Mac I loans, see Note 10 to
the Financial Statements.
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
---------------------- ----------
Actual Pro forma(1) Actual
-------- ---------- --------
<S> <C> <C> <C>
By original loan-to-value ratio:
0.00% to 40.00% 10% 26% 17%
40.01% to 50.00% 17% 26% 22%
50.01% to 60.00% 29% 24% 33%
60.01% to 70.00% 35% 23% 28%
70.01% to 80.00% 9% 1% 0%
80.01% to 90.00% 0% 0% 0%
--------- -------- --------
Total 100% 100% 100%
--------- -------- --------
By geographic regions: (2)
Mid-North 16% 11% 14%
Mid-South 6% 3% 7%
Northeast 3% 2% 4%
Northwest 33% 59% 33%
Southeast 4% 1% 8%
Southwest 38% 24% 34%
---------- ---------- ----------
Total 100% 100% 100%
---------- ---------- ----------
By commodity:
Crops 54% 56% 55%
Livestock 17% 22% 20%
Permanent plantings 27% 20% 25%
Part-time farms 2% 2% 0%
---------- ---------- ----------
Total 100% 100% 100%
---------- ---------- ----------
(1) Includes the January 1999 long-term standby purchase commitment.
(2) Regions are defined in Note 10 to the Financial Statements.
</TABLE>
Farmer Mac's policy is to limit its credit exposure in a particular
geographic region or commodity to a percentage of the total principal amount of
all loans outstanding, considering the credit quality of the loans in that
particular geographic region or commodity group based on the borrower's
loan-to-value, debt service coverage, equity-to-asset and working
capital-to-current asset ratios. For example, the higher concentration in the
northwest region as a result of the long-term standby purchase commitment is
mitigated by the lower loan-to-value ratios associated with the loans in that
transaction, which had a 31% weighted average loan-to-value ratio when the
transaction closed.
The effectiveness of Farmer Mac's underwriting, appraisal and
diversification standards is reflected primarily through the level of defaulted
loans and related credit losses. At December 31, 1998, post-1996 Act Farmer Mac
I loans that were 90 days or more past due (referred to as non-performing or
"impaired" loans) totaled $5.5 million, or 0.70% of the total principal amount
of all post-1996 Act loans. There were no such delinquent loans as of December
31, 1997. The increase in the delinquency rate of the post-1996 Act Farmer Mac I
loans was due to the growing number of loans that are approaching their
anticipated peak default years and adverse conditions affecting the agricultural
economy. Farmer Mac anticipates fluctuations in the delinquency rate from
quarter to quarter, with higher numbers likely to be reported during the first
and third quarters of each year due to the semiannual payment characteristics of
most Farmer Mac loans, and with the average delinquency level increasing during
1999 due to the foregoing factors.
Farmer Mac maintains a reserve to cover credit losses incurred on
post-1996 Act loans. At December 31, 1998, Farmer Mac's reserve for loan losses
totaled $3.3 million, compared to $1.6 million at December 31, 1997. The reserve
as a percentage of outstanding post-1996 Act Farmer Mac I loans was 0.40% and
0.42% at December 31, 1998 and 1997, respectively. 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 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. Although some credit losses are
expected to be incurred during 1999 on the existing post-1996 Act Farmer Mac I
delinquencies, Farmer Mac expects the losses to be well within current reserve
levels.
To a lesser extent, Farmer Mac is also exposed to institutional credit risk
related to: issuers of AgVantage bonds and other investments held by Farmer Mac;
Seller and servicers; and interest-rate contract counterparties. AgVantage bonds
are general obligations of the AgVantage Issuers and are secured by collateral
in an amount ranging from 120% to 150% of the bond amount. In addition to
requiring collateral, Farmer Mac mitigates credit risk related to AgVantage
bonds by evaluating and monitoring the financial condition of the AgVantage
Issuers. The credit risk inherent in the investment portfolio is mitigated by
Farmer Mac's policy of investing in highly rated instruments and by establishing
concentration limits, which reduce exposure to any one counterparty. Farmer
Mac's policy limits the dollar amount of investments with one counterparty,
excluding the other government-sponsored enterprises (GSEs), to the lesser of
20% of Farmer Mac's stockholders' equity or $25 million, and requires the
counterparty to be rated in one of the three highest rating categories by at
least one nationally recognized statistical rating organization. As of December
31, 1998, Farmer Mac had investments outstanding with 41 non-GSE counterparties,
each of which exceeded 10% of Farmer Mac's stockholders' equity, but no one of
which exceeded 19% of its stockholders' equity. The short-term nature of Farmer
Mac's investment portfolio also limits its credit risk. At December 31, 1998,
53% of Farmer Mac's investment portfolio consisted primarily of short-term
highly liquid investments, with the remainder primarily consisting of longer
term, variable rate GSE and agency mortgage-backed securities. Farmer Mac
manages institutional credit risk related to Sellers and servicers by requiring
such institutions to meet certain standards and by monitoring their financial
condition and servicing performance. 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 the 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, 1998 and 1997, Farmer Mac's cash and cash equivalents totaled
$540.6 million and $177.6 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 were phased in over a transition period, which ended on
January 1, 1999, when the highest level of minimum capital became 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
Farmer Mac -- Regulation -- Capital Standards -- Enforcement levels." As of
December 31, 1998 and 1997, 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, 1998 based on the then-current
requirements and assuming the fully phased-in requirements were in effect:
<TABLE>
<CAPTION>
Current Requirement Fully Phased-In Requirement
-----------------------------------------------------------------
Capital Capital
Amount Ration Required Amount Ratio Required
--------- -------- ----------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Designated assets:
Farmer Mac I and II Securities $ 552,205 1.95% $ 10,768 $ 552,205 2.75% $ 15,186
Loans held for securitization 168,064 1.95% 3,277 168,064 2.75% 4,622
Other on-balance sheet assets 1,215,031 2.65% 32,198 1,215,031 2.75% 33,413
Outstanding balance of Guaranteed - -
Mortgage Securities held by others 597,576 0.65% 3,885 597,576 0.75% 4,482
Other off-balance sheet obligations 3,601 0.65% 24 3,601 0.75% 27
------- -------
Minimum capital level 50,152 57,730
Actual core capital 80,665 80,665
-------- --------
Capital surplus $ 30,513 $ 22,935
-------- --------
</TABLE>
In the opinion of management, Farmer Mac has sufficient liquidity and
capital for the next twelve months.
Other Matters
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. The year 2000
date change potentially could affect Farmer Mac's internal information
technology (IT) and non-IT systems, as well as systems utilized by its external
vendors. Farmer Mac's internal IT systems, which are "PC software-based," are
used to perform critical business processes including purchases of Qualified
Loans; sales of AMBS; issuances of debt securities; payments to debt security
and AMBS investors; and financial reporting to investors and stockholders.
Certain vendors also perform critical business processes by servicing the loans
held or securitized by Farmer Mac and administering the guaranteed securities
issued by Farmer Mac. Failure of IT and/or vendor systems to handle the year
2000 date change could result in Farmer Mac being unable to perform critical
business processes and expose Farmer Mac to significant business risk. Less
critical to Farmer Mac's operations are non-IT systems, which include
telephones, facsimile machines and systems used to maintain building operations.
To manage the risks related to the year 2000 date change, Farmer Mac has
adopted a Year 2000 Compliance Plan. This Plan consists of four phases: system
inventory, system remediation, critical vendor testing and contingency planning.
Farmer Mac has completed the system inventory and system remediation phases of
its Plan. As part of inventorying and assessing the compliance status of
internal IT systems during the system inventory phase, Farmer Mac identified one
non-compliant system. This system was replaced in January 1999. Testing of other
critical internal IT systems during the system remediation phase identified no
additional non-compliant systems. Farmer Mac defines a compliant system as one
that will function and process dates in the 21st century without causing
significant disruption to Farmer Mac's business operation.
Farmer Mac's Compliance Plan places significant emphasis on vendors that
perform critical business processes because of the higher risk associated with
ensuring compliance by external vendors. Farmer Mac has been engaged in
discussions with these critical vendors regarding their year 2000 readiness
efforts and has not identified any significant year 2000 compliance issues.
Farmer Mac will continue to monitor the vendors' year 2000 readiness efforts and
expects to complete its assessment of critical vendors by June 30, 1999. To
prepare for the possibility that a critical vendor will not be year 2000
compliant, Farmer Mac is developing contingency plans that involve Farmer Mac
assuming the duties internally or transferring them to a compliant vendor.
Farmer Mac is also developing contingency plans in the event critical internal
systems fail. These plans are expected to be completed by June 30, 1999.
Notwithstanding the potential impact the year 2000 date change may have on
the agricultural economy, which Farmer Mac is unable to predict, management
believes that the year 2000 date change does not expose Farmer Mac to
significant business risk or material loss of revenue, if any, based on its
assessment to date of Farmer Mac's internal systems and critical vendors. In
addition, Farmer Mac expects total direct costs to complete its year 2000
readiness efforts not to exceed $150 thousand. This amount primarily includes
the use of outside consultants to help Farmer Mac evaluate the readiness of
internal IT systems and critical vendors. Costs incurred through December 31,
1998 have totaled approximately $75 thousand.
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Farmer Mac is exposed to market risk from changes in interest rates.
Farmer Mac manages this market risk by entering into various financial
instrument transactions, including off-balance sheet derivative financial
instruments, and by monitoring its exposure to changes in interest rates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Management - Interest rate risk management" for further
information regarding the Farmer Mac's exposure to interest rate risk and
strategies to manage such risk. For information regarding Farmer Mac's use of
off-balance sheet derivative financial instruments, including Farmer Mac's
accounting policies for such instruments, see Notes 2(k) and 10 to the Financial
Statements.
<PAGE>
Item 8. Financial Statements
Independent Auditors' Reports
The Board of Directors and Stockholders
Federal Agricultural Mortgage Corporation:
We have audited the accompanying consolidated balance sheet of the Federal
Agricultural Mortgage Corporation and subsidiaries ("Farmer Mac") as of December
31, 1998, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the year ended December 31, 1998. 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 audit 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 audit provides 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, 1998, and the results of their operations and their cash flows for
the year ended December 31, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Washington, D.C.
January 20, 1999
<PAGE>
The Board of Directors and Stockholders
Federal Agricultural Mortgage Corporation:
We have audited the accompanying consolidated balance sheet of the Federal
Agricultural Mortgage Corporation and subsidiaries ("Farmer Mac") as of December
31, 1997, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the two-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. The
consolidated balance sheet of Farmer Mac as of December 31, 1998 and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year ended December 31, 1998, were audited by other independent
auditors whose report dated January 20, 1999, expressed an unqualified opinion
on those statements.
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 the results of their operations and their cash flows for
each of the years in the two-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,
---------------------
1998 1997
---------- ---------
(in thousands)
<S> <C> <C>
Assets:
Cash and cash equivalents $ 540,626 $ 177,617
Investment securities 643,562 656,737
Farmer Mac guaranteed securities 552,205 442,311
Loans held for securitization 168,064 47,177
Interest receivable 24,526 19,968
Guarantee fees receivable 2,135 1,474
Prepaid expenses and other assets 4,182 2,851
---------- ----------
Total Assets $ 1,935,300 $ 1,348,135
---------- ----------
Liabilities and Stockholders' Equity:
Liabilities:
Notes and bonds payable
Due within one year $ 1,473,688 $ 856,028
Due after one year 365,451 402,803
Accrued interest payable 7,132 9,783
Accounts payable and accrued expenses 4,856 2,815
Reserve for losses on guaranteed securities 3,259 1,645
---------- ----------
Total Liabilities 1,854,386 1,273,074
Stockholders' Equity:
Common stock:
Class A Voting, $1 par value, no maximum authorization,
1,024,680 and 1,000,100 shares issued and outstanding at
December 31, 1998 and 1997, respectively 1,025 1,000
Class B Voting, $1 par value, no maximum authorization,
500,301 and 500,301 shares issued and outstanding at
December 31, 1998 and 1997, respectively 500 500
Class C Non-Voting, $1 par value, no maximum authorization,
3,092,117 and 3,078,214 shares issued and outstanding
at December 31, 1998 and 1997, respectively 3,092 3,078
Additional paid-in capital 76,168 75,148
Accumulated other comprehensive income/(deficit) 249 1,198
Retained deficit (120) (5,863)
---------- ----------
Total Stockholders' Equity 80,914 75,061
Total Liabilities and Stockholders' Equity $ 1,935,300 $ 1,348,135
---------- ----------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For Year Ended December 31,
---------------------------
1998 1997 1996
-------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Interest income:
Investments and cash equivalents $ 63,221 $ 47,371 $ 6,964
Farmer Mac guaranteed securities 32,922 30,541 29,672
Loans held for securitization 7,418 2,241 717
-------- -------- --------
Total interest income 103,561 80,153 37,353
Interest expense 92,992 72,992 34,623
-------- -------- --------
Net interest income 10,569 7,161 2,730
Other income:
Guarantee fees 3,727 2,575 1,623
Gain on sale of AMBS 1,400 2,362 1,070
Miscellaneous 142 253 63
-------- -------- --------
Total other income 5,269 5,190 2,756
Other expenses:
Compensation and employee benefits 3,872 3,422 2,361
Professional fees 1,532 1,500 828
Board of Directors fees and expenses 330 331 320
Regulatory fees 602 212 250
General and administrative 1,373 1,385 1,059
Provision for losses 1,614 990 263
-------- -------- --------
Total other expenses 9,323 7,840 5,081
-------- -------- --------
Income before income taxes and extraordinary item 6,515 4,511 405
Income tax expense/(benefit) 772 (115) 12
-------- -------- --------
Income before extraordinary item 5,743 4,626 393
Extraordinary gain from early extinguishment of debt - - 384
-------- -------- --------
Net income $ 5,743 $ 4,626 $ 777
-------- -------- --------
Earnings per share of Class A and B Voting Common Stock:
Basic earnings before extraordinary item $ 0.53 $ 0.48 $ 0.07
Basic net earnings $ 0.53 $ 0.48 $ 0.15
Diluted earnings before extraordinary item $ 0.52 $ 0.46 $ 0.07
Diluted net earnings $ 0.52 $ 0.46 $ 0.14
Earnings per share of Class C Non-Voting Common Stock:
Basic earnings before extraordinary item $ 1.60 $ 1.44 $ 0.22
Basic net earnings $ 1.60 $ 1.44 $ 0.44
Diluted earnings before extraordinary item $ 1.55 $ 1.39 $ 0.22
Diluted net earnings $ 1.55 $ 1.39 $ 0.43
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Loan Accumulated
Additional Receivable Other
Common Paid-in for Stock Comprehensive Retained
Stock Capital Purchase Income Deficit Total
--------- ----------- ------------ -------------- --------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 2,340 19,331 - 140 (10,099) 11,712
Issuance of Common Stock
Class A 320 2,240 2,560
Class B 93 136 (229) -
Class C 1,489 30,806 (328) 31,967
Change in unrealized gain
on securities available
for sale 189 189
Net income 777 777
------
Comprehensive Income 966
---------- ---------- ------------ -------------- -------- ------
Balance, December 31, 1996 4,242 52,513 (557) 329 (9,322) 47,205
Issuance of Common Stock
Class A 10 166 176
Class C 419 22,605 23,024
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
------
Comprehensive Income 5,495
----------- --------- --------- -------------- -------- -------
Balance, December 31, 1997 4,578 75,148 - 1,198 (5,863) 75,061
Issuance of Common Stock
Class A 25 444 469
Class C 14 576 590
Change in unrealized gain
on securities available for sale,
net of taxes of $279 thousand (949) (949)
Net income 5,743 5,743
------
Comprehensive Income 4,794
------------ -------- ---------- -------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 4,617 $ 76,168 $ - $ 249 $ (120) $ 80,914
------------ -------- ---------- -------------- -------- -------
See accompanying notes to consoldiated financial statements.
</TABLE>
<PAGE>
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1998 1997 1996
---------- ---------- ---------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Income from Operations $ 5,743 $ 4,626 $ 777
Adjustments to reconcile net income to cash provided by
operating activities:
Amortization of investment premiums and discounts 3,701 3,082 3,072
(Increase) decrease in interest receivable (4,558) (5,147) 751
Increase in guarantee fees receivable (661) (729) (172)
Increase in prepaid expenses and other assets (1,331) (2,145) (251)
Amortization of debt premiums, discounts and issuance costs 68,140 46,602 11,131
(Decrease) increase in accrued interest payable (2,651) 2,552 (1,163)
Increase in accounts payable and accrued expenses 2,041 1,094 981
Provision for losses 1,614 990 263
Gain on early extinguishment of debt - - (384)
---------- ---------- ----------
Net cash provided by operating activities 72,038 50,925 15,005
Cash flows from investing activities:
Purchases of available-for-sale investments (377,586) (427,269) (30,548)
Purchases of investment securities (12,315) (211,228) (21,081)
Purchases of Farmer Mac guaranteed securities (169,710) (80,641) (84,452)
Purchases of loans held for securitization (340,820) (229,628) (41,637)
Proceeds from repayment of available-for-sale investments 329,282 47,407 7,677
Proceeds from repayment of investment securities 72,502 21,001 23,969
Proceeds from repayment of Farmer Mac guaranteed securities 132,972 54,508 84,508
Proceeds from repayment of loans held for securitization 2,612 - -
Proceeds from sale of loans held for securitization 140,807 195,450 28,638
---------- ---------- ----------
Net cash used by investing activities (222,256) (630,400) (32,926)
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of discount notes 42,476,008 21,290,333 1,993,048
Proceeds from issuance of medium-term notes 179,560 154,913 39,897
Payments to redeem discount notes (41,928,370) (20,749,007) (1,908,215)
Payments to redeem medium-term notes (215,030) (30,420) (80,760)
Proceeds from common stock issuance 1,059 23,757 34,527
Purchase and retirement of stock - (1,396) -
------------ ----------- ----------
Net cash provided by financing activities 513,227 688,180 78,497
------------ ----------- ----------
Net increase in cash and cash equivalents 363,009 108,705 60,576
Cash and cash equivalents at beginning of period 177,617 68,912 8,336
------------ ----------- ----------
Cash and cash equivalents at end of period $ 540,626 $ 177,617 $ 68,912
------------ ----------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 29,674 $ 20,083 $ 24,581
Income Taxes $ 1,471 $ 34 $ 20
Non-cash activity:
Loans securitized and retained as Farmer Mac
guaranteed securities $ 75,567 $ - $ -
Loans acquired in exchange for AMBS $ 84,322 $ 1,050 $ -
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION
The Federal Agricultural Mortgage Corporation ("Farmer Mac" or the
"Corporation") is a federally chartered instrumentality of the United States
that was created to establish a secondary market for agricultural real estate
and rural housing mortgage loans ("Qualified Loans"). Farmer Mac was created
with the enactment of 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 provide for the existence of an agricultural secondary
mortgage market. 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 securities
issued and guaranteed by Farmer Mac for Qualified Loans that back those
securities (the "swap" program); (iii) issuing long-term standby commitments to
purchase newly originated and existing (seasoned) Qualified Loans; (iv)
purchasing portfolios of existing loans on a negotiated basis; and (v)
purchasing mortgage-backed bonds secured by Qualified Loans through its
"AgVantage" program.
Farmer Mac conducts its business through two programs, "Farmer Mac I" and
"Farmer Mac II." Under the Farmer Mac I Program, Farmer Mac purchases Qualified
Loans, which are not guaranteed by any instrumentality or agency of the United
States, or obligations backed by Qualified Loans or by Guaranteed Portions (as
defined below). Under the Farmer Mac II Program, Farmer Mac purchases the
guaranteed portion (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").
Pursuant to its statutory authority, Farmer Mac guarantees timely payments of
principal and interest on securities backed by Qualified Loans or Guaranteed
Portions ("Farmer Mac Guaranteed Securities") and sells those securities in the
capital markets or retains them in its portfolio.
Farmer Mac's principal sources of revenue are: (i) fees it receives in
connection with the issuance of its guarantee and commitments to purchase
Qualified Loans; (ii) gains on the sales of Farmer Mac Guaranteed Securities
backed by Qualified Loans it purchases; and (iii) net interest income earned on
its retained portfolio of Farmer Mac Guaranteed Securities, its investments,
Qualified Loans purchased pending securitization and mortgage-backed bonds
purchased under AgVantage.
By the end of 1998, there were 286 lenders approved as Sellers in the Farmer Mac
I Program, operating throughout the contiguous 48 states. During the year, the
top 10 Sellers generated 59% of the $226 million of Farmer Mac I cash window
loan volume (excluding the "proprietary" loan products discussed below), with no
one Seller having accounted for more than 8% of that total. In addition,
affiliates of Zions First National Bank ("Zions"), Farmer Mac's largest Class A
and Class C stockholder, sold Farmer Mac a total of $95 million of proprietary
loan products, with Zions assuming certain interest rate risks associated with
the proprietary characteristics of those loans. Had the purchases of proprietary
products from Zions and others been included in the foregoing cash window loan
total, Zions' sales of proprietary products would have represented 28% of Farmer
Mac's total cash window volume for the year and the top 10 Sellers would have
generated 68% of the total $340 million of Farmer Mac I cash window loan volume.
<PAGE>
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 certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures 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 represents the significant accounting policies that
Farmer Mac follows in preparing and presenting its financial statements:
(a) Principles of Consolidation
Farmer Mac has two wholly owned subsidiaries. The principal purpose of the
subsidiaries is to facilitate the purchase and issuance of Farmer Mac Guaranteed
Securities and to act as a registrant under registration statements filed with
the Securities and Exchange Commission. 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 and 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) Investments and Farmer Mac Guaranteed Securities
Investments and Farmer Mac Guaranteed 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. Other 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. Premiums,
discounts and other deferred costs are amortized to interest income over the
estimated life of the security using the effective interest method.
Farmer Mac receives yield maintenance payments when Qualified Loans underlying
certain Farmer Mac Guaranteed Securities issued in the Farmer Mac I Program
("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 Qualified Loans not
prepaid. Income from yield maintenance payments is recognized when the Qualified
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 either retaining or 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 forward sale
commitments or current market prices.
(e) Issuance of Farmer Mac Guaranteed Securities
Farmer Mac issues guaranteed securities backed by loans acquired through the
Farmer Mac I and II Programs. The issuance of Farmer Mac Guaranteed Securities
generates guarantee fees for the Corporation as compensation for assuming the
credit risk on the underlying loans. 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 Guaranteed Securities held in its
portfolio as guarantee fee income rather than interest income in its statements
of operations. Approximately $1.1 million, $1.1 million and $1.0 million of
guarantee fees in 1998, 1997 and 1996, respectively, relate to Farmer Mac
Guaranteed Securities held in portfolio. Periodically, Farmer Mac I Securities
are sold to capital market investors. When sold, a gain is recognized to the
extent sale proceeds, net of issuance costs and hedging gains and losses, exceed
the cost basis in the underlying loans.
(f) Non-Performing Loans
Non-performing (or "impaired") loans are loans for which it is probable that
Farmer Mac will not receive all amounts contractually due and includes all loans
90 days or more past due unless the loan is in the process of collection. When a
loan held by Farmer Mac is determined to be impaired, interest due on the loan
is not recognized as interest income until the payment is received from the
borrower. When a loan collateralizing a guaranteed security is placed on
non-accrual, the interest income due to the security holder is accrued as part
of the provision for losses. Interest previously accrued on loans held by Farmer
Mac or interest advanced to security holders is reversed/expensed if deemed
uncollectible.
(g) Notes and Bonds Payable
Notes and bonds payable are classified as due within one year or due after one
year based on their contractual maturities. Debt issuance costs are deferred and
amortized to interest expense using the effective interest method over the
estimated life of the related debt.
(h) Reserve for Losses on Guaranteed Securities
Management maintains the reserve at levels it deems adequate to absorb losses
incurred on outstanding Farmer Mac I Securities issued after the passage in 1996
of changes to Farmer Mac's statutory authorities (the "1996 Act"). No reserve
has been made for Farmer Mac I Securities issued prior to the 1996 Act or
securities issued under the Farmer Mac II Program ("Farmer Mac II Securities").
Farmer Mac I Securities issued prior to the 1996 Act are supported by
unguaranteed subordinated interests, the balances of which were equal to or
greater than 10% of the total outstanding balance of each security at December
31, 1998 and is expected to exceed the estimated credit losses on those
securities. Loans collateralizing Farmer Mac II Securities are guaranteed by the
Secretary of Agriculture. The reserve covers principal losses, as well as
interest due to AMBS investors related to loans that are 90 days or more
delinquent (unless the loan is well collateralized and in the process of
collection). The reserve is increased through periodic provisions charged to
expense and reduced by charge-offs, net of recoveries. In estimating losses
incurred on outstanding Farmer Mac I Securities, management considers economic
conditions, geographic and agricultural commodity concentrations, the credit
profile of the guaranteed securities and loans, delinquency trends, and
historical charge-off and recovery activity.
(i) Earnings/(Loss) Per Share
The following schedule reconciles basic and diluted earnings/(loss) per share
for the years ended December 31, 1998, 1997 and 1996. 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 potentially dilutive common stock.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ -------------------------- --------------------------
Dilutive Dilutive Dilutive
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 before
extraordinary item $ 5,743 $ - $ 5,743 $ 4,626 $ - $ 4,626 $ 393 $ - $ 393
Weighted average
shares:
Classes A and B 1,516 - 1,516 1,501 - 1,501 1,490 - 1,490
Class C 3,086 130 3,216 2,716 118 2,834 1,263 50 1,313
<S> <C> <C> <C> <C> <C> <C>
Earnings per
share:
Classes A and B $ 0.53 $ 0.52 $ 0.48 $ 0.46 $ 0.07 $ 0.07
Class C $ 1.60 $ 1.55 $ 1.44 $ 1.39 $ 0.22 $ 0.22
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.
</TABLE>
(j) 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/(benefit) is equal to the income taxes payable in the current
year plus the net change in the deferred tax asset or liability balance.
(k) 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 loans and loans held for securitization. Farmer Mac monitors the
correlation of the change in value of the hedge instrument and the change in
value of the hedged loan to determine the effectiveness of the hedge instrument.
Gains and losses on hedges that have been terminated or have matured are
deferred as an adjustment to the loans' cost basis if the hedges were effective.
Gains and losses on ineffective hedges, whether or not they have been terminated
or have matured, are recognized directly to income.
(l) Comprehensive Income
In 1998, Farmer Mac adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income." Comprehensive income, which is
presented in the Statement of Changes in Stockholders' Equity, represents all
changes in stockholders' equity except those resulting from investments by or
distributions to stockholders, and is comprised of net income and unrealized
gain/(loss) on securities available-for-sale.
(m) New Accounting Standards
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130 and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." These standards, which were effective beginning in 1998, provide
for additional disclosures only and had no effect on Farmer Mac's financial
position or results of operations. Farmer Mac had no reportable segments as
defined in SFAS No. 131.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. SFAS
No. 133 cannot be applied retroactively. SFAS No.133 must be applied to (a)
free-standing derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).
Farmer Mac has not yet quantified the impact of adopting SFAS No. 133 on its
financial statements. However, the Statement could increase volatility in
earnings and other comprehensive income.
(n) Reclassifications
Certain reclassifications of prior year information were made to conform with
the 1998 presentation.
3. INVESTMENTS
The amortized cost and estimated fair values of investments at December 31, 1998
and 1997 were as follows. Fair value was estimated based on quoted market
prices.
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------- -------------------------------------------------
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:
Mortgage-backed
securities $ 130,874 $ 1,631 $ - $ 132,505 $ 194,625 $ 3,598 $ - $ 198,223
------------ ------------ ------------ ------------ ----------- ---------- ----------- -----------
Total held-to-maturity 130,874 1,631 - 132,505 194,625 3,598 - 198,223
Available-for-sale:
Asset-backed
securities 82,487 82 - 82,569 - - - -
Commercial paper 9,879 - - 9,879 - - - -
Corporate debt
securities 148,897 45 - 148,942 166,009 22 89 165,942
Certificates of deposit 22,996 - (194) 22,802 10,000 - 18 9,982
Mortgage-backed
securities 244,017 444 - 244,461 284,432 1,283 - 285,715
------------ ------------ ------------ ----------- ------------ ---------- ----------- ----------
Total available for sale 508,276 571 (194) 508,653 460,441 1,305 107 461,639
Cash investment in
guaranteed investment
contract 4,035 8 - 4,043 473 - 1 472
------------ ------------ ------------ ----------- ------------ ---------- ----------- ----------
Total $ 643,185 $ 2,210 $ (194) $ 645,201 $ 655,539 $ 4,903 $ 108 $ 660,334
------------ ------------ ------------ ----------- ------------ ---------- ----------- ----------
</TABLE>
The amortized cost, estimated fair value and yield of investments by remaining
contractual maturity at December 31, 1998 are set forth below. Asset- and
mortgage-backed securities are included based on their final maturities,
although the actual maturities will differ because of prepayments of the
underlying assets or mortgages.
<TABLE>
<CAPTION>
Held-to Maturity Available-for-Sale Total
---------------------------------- --------------------------------- ----------------------------------
Amortized Amortized Amortized
Cost Fair Value Yield Cost Fair Value Yield Cost Fair Value Yield
---------- -------------- ---------- ----------- ------------- -------- ----------- ------------ ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due within one year $ - $ - - $ 42,876 $ 42,686 5.22% $ 42,876 $ 42,686 5.22%
Due after one year
through five years - - - 169,842 169,957 5.56% 69,842 169,957 5.56%
Due after five years
through ten years - - - 55,286 55,293 5.63% 55,286 55,293 5.63%
Due after ten years 130,874 132,505 6.67% 240,272 240,717 5.92% 371,146 373,222 6.19%
---------- ------------ --------- ------------- ------------- -------- ------------ ------------ ---------
Total (1) $130,874 $132,505 6.67% $508,276 $508,653 5.71% $639,150 $641,158 5.91%
---------- ------------ --------- ------------- ------------- -------- ------------ ------------ ---------
(1) Total excludes cash investment in guaranteed investment contract which matures within 1 year.
</TABLE>
4. FARMER MAC GUARANTEED SECURITIES
As of December 31, 1998 and 1997, Farmer Mac Guaranteed Securities included the
following:
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------------------
1998 1997
------------------------------------ ---------------------------------------
Premiums, Premuims,
Discounts Discounts
and Other and Other
Principal Deferred Amortized Principal Deferred Amortized
Balance Costs Cost Balance Costs Cost
------------- ----------- ----------- ------------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Farmer Mac I
AMBS $ 75,554 $ 948 $ 76,502 $ - $ - $ -
Other 163,735 5,167 168,902 184,356 8,504 192,860
Farmer Mac II 306,801 - 306,801 249,451 - 249,451
--------- -------- -------- -------- ---------- --------
Total $546,090 $ 6,115 $552,205 $433,807 $ 8,504 $442,311
--------- -------- -------- -------- ---------- --------
</TABLE>
The following table sets forth the amortized costs, unrealized gains and losses
and estimated fair values of the Farmer Mac Guaranteed Securities at December
31, 1998 and 1997. The method used to estimate fair value is described in Note
11.
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------
Held-to Available- Held-to Available-
Maturity for-Sale Total Maturity for Sale Total
---------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Amortized cost $ 475,703 $ 76,502 $ 552,205 $ 442,311 $ - $ 442,311
Unrealized gain 9,810 - 9,810 5,658 - 5,658
Unrealized loss (344) - (344) (1,837) - (1,837)
---------- --------- ---------- ---------- ------- ----------
Fair value $ 485,169 $ 76,502 $ 561,671 $ 446,132 $ - $ 446,132
---------- --------- ---------- ---------- ------- ----------
</TABLE>
The amortized cost, estimated fair value and yield of investments by remaining
contractual maturity at December 31, 1998 are set forth below. The expected
maturities of Farmer Mac Guaranteed Securities will differ from contractual
maturities because borrowers have the right to prepay the underlying mortgages,
although borrowers are required to pay a prepayment penalty in some cases.
<TABLE>
<CAPTION>
Amortized
Cost Fair Value Yield
---------- ------------- -------
(dollars in thousands)
<S> <C> <C> <C>
Due within one year $ 13,635 $ 13,470 7.42%
Due after one year through five years 54,730 55,001 7.01%
Due after five years through ten years 73,652 75,107 7.29%
Due after ten years 410,188 418,093 7.42%
--------- ----------- -------
Total $ 552,205 $ 561,671 7.36%
--------- ----------- -------
</TABLE>
Of the total Farmer Mac Guaranteed Securities held by Farmer Mac at December 31,
1998, $344.4 million and $207.8 million were fixed- and variable-rate
securities, respectively. There were no sales of Farmer Mac Guaranteed
Securities from its portfolio during the years ended December 31, 1998 and 1997.
5. NOTES AND BONDS PAYABLE
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
generally have maturities of one to 10 years. The following table sets forth
information related to Farmer Mac's borrowings for 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------- ------------------------------------------------------
Maximum Maximum
Outstanding at Average Outstanding Outstanding at Outstanding at Average Outstanding Outstanding at
December 31, During Year Any December 31, During Year Any
----------------- -------------------- ---------------- ---------------------
Amount Cost Amount Cost Month End Amount Cost Amount Cost Month End
--------- ------ --------- ---------- --------------- -------- ------- --------- ---------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due within one
year:
Discount notes $1,432,456 4.95% $1,163,078 5.32% $1,433,197 $ 816,680 5.63% $ 820,747 5.44% $ 994,548
Current portion
of Medium-
term notes 41,232 7.23% 46,264 7.17% 51,627 39,348 7.03% 31,053 6.94% 39,348
---------- ----- --------- -----
1,473,688 5.01% 856,028 5.69%
Due after one
year:
Medium-term
notes due in:
1999 n/a n/a 91,206 6.63%
2000 46,164 7.45% 76,123 7.07%
2001 108,996 6.08% 59,045 7.35%
2002 5,831 7.31% 50,826 6.88%
2003 73,397 5.66% 14,271 7.56%
2004 6,847 7.46% 6,845 7.45%
Thereafter 124,216 6.45% 104,487 7.52%
------- ------- -------- -----
365,451 6.34% 402,803 7.13%
------- ------- -------- -----
Total $1,839,139 5.27% $1,258,831 6.15%
---------- ------- ----------- -----
</TABLE>
Medium-term notes due after one year includes $65.3 million of medium-term notes
that are callable by Farmer Mac without penalty. The following schedule
summarizes the earliest repricing date of borrowings outstanding at December 31,
1998, 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:
1999 $1,473,688 5.01% $1,508,651 5.04%
2000 46,164 7.45% 46,164 7.45%
2001 108,996 6.08% 97,287 6.04%
2002 5,831 7.31% 17,885 7.33%
2003 73,397 5.66% 60,119 5.65%
2004 6,847 7.46% 6,847 7.46%
Thereafter 124,216 6.45% 102,186 6.25%
---------- ------- ----------- -------
Total $1,839,139 5.27% $1,839,139 5.27%
---------- ------- ----------- -------
</TABLE>
During 1998, Farmer Mac called $175.7 million of callable debt. No debt was
called during 1997. During 1996, Farmer Mac repurchased $8.0 million of
non-callable debt, resulting in an extraordinary gain of $384 thousand.
Authority to Borrow from the Treasury of the United States
Farmer Mac's statutory charter 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, 1998 and 1997, Farmer Mac had no such debt
outstanding.
6. RESERVE FOR LOSSES ON GUARANTEED SECURITIES
Farmer Mac maintains a reserve to cover losses incurred on Farmer Mac I
Securities issued since enactment of the 1996 Act ("AMBS"). No loss reserve has
been made for Farmer Mac I Securities issued prior to the 1996 Act or for Farmer
Mac II Securities (see Note 2(h) and Note 10 for further information regarding
Farmer Mac Guaranteed Securities). The reserve covers principal losses, as well
as interest due to AMBS investors related to loans that are 90 days or more
delinquent (unless the loan is adequately collateralized and in the process of
collection). At December 31, 1998, the amount of the reserve related to interest
due to AMBS investors totaled $136 thousand. No portion of the reserve related
to interest due to AMBS investors prior to 1998.
The following is a summary of the changes in the reserve for loan losses for the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 1,645 $ 655 $ 392
Provision for losses 1,614 990 263
Charge-offs - - -
-------- -------- ---------
Balance, end of year $ 3,259 $ 1,645 $ 655
-------- -------- ---------
</TABLE>
A portion of the reserve is specifically allocated to impaired loans when the
fair value of the collateral, less the estimated selling cost, is less then the
cost basis in the loan. At December 31, 1998, no portion of the reserve was
allocated to impaired loans, which totaled $5.5 million. There were no impaired
loans as of December 31, 1997 and 1996.
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 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. By
statute, 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 would be three-to-one. Farmer Mac does not expect
to pay dividends in the near future. Farmer Mac's ability to declare and pay a
dividend could be restricted if it failed to comply with regulatory capital
requirements.
The following is a summary of significant common stock transactions that
occurred during the years ended December 31, 1998 and 1997:
In January 1997, Farmer Mac repurchased the Class B Voting Common Stock
acquired by Western Farm Credit Bank (WFCB) as part of a "Strategic
Alliance Agreement" in conjunction with the settlement of litigation that
Farmer Mac commenced against WFCB alleging certain breaches of the
agreement. WFCB repaid all principal and interest due on a related loan
receivable. In connection with the settlement, WFCB exercised warrants and
acquired 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.
During 1997 and 1998, Farmer Mac issued 10,100 and 24,580 shares,
respectively, of Class A stock through its direct offering program,
primarily to institutions required to purchase the stock to meet Farmer
Mac's seller/servicer requirements.
<PAGE>
Stock Option Plan
In 1992 and 1996, Farmer Mac adopted stock option plans for officers to acquire
shares of Class C Non-Voting Common Stock. 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, which were granted in 1992 and 1993, is $6.56 per share. The maximum
number of options that could be issued under the 1992 plan was 115,000, all of
which were issued. Under the 1996 plan, stock options awarded under the plan
vested in thirds over a three-year period with the last installment having
vested in June 1998; if not exercised, any options granted under the 1996 plan
will expire ten years from the date of grant. The exercise price of options
granted under the 1996 plan, which were issued in 1996, is $7.875. The maximum
number of options that could be issued under the 1996 plan was 112,830, all of
which were issued. In 1997, Farmer Mac adopted a new stock option plan for all
employees and directors, the terms of which are generally the same as for the
1996 plan. Of the 250,000 shares authorized to be issued under the 1997 plan,
142,419 have been issued with exercise prices ranging from $38.00 to $60.00 per
share for options granted in 1998 and $35.50 to $54.75 per share for options
granted in 1997. For all stock options granted under all three of the
Corporation's plans, the exercise price was equal to the fair market value of
the Class C Stock on, or immediately preceding, the grant date.
The following table summarizes stock option activity for 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------------- ---------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
-------- --------------- -------- ------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 277,608 $ 13.56 217,830 $ 7.24
Granted 82,541 58.37 59,878 36.63
Excercised 6,333 12.65 - -
Canceled 967 41.47 100 54.75
-------- -------- --------- --------
Outstanding, end of year 352,849 $ 23.98 277,608 $ 13.56
-------- -------- --------- --------
Options excercisable at year end 279,280 199,979
-------- ---------
</TABLE>
The following table summarizes information regarding options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
----------------------- -------------
Weighted
Average
Remaining
Exercise Number of Contractual Number of
price Shares Life Shares
---------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
$ 6.56 100,000 4.0 years 100,000
7.88 112,830 7.4 years 112,830
35.50 52,828 8.4 years 35,219
38.75 1,850 8.6 years 1,850
54.75 2,800 8.8 years 1,867
52.75 500 9.1 years 167
59.00 500 9.2 years 167
53.00 400 9.3 years 133
60.00 75,341 9.4 years 25,114
38.00 5,800 9.7 years 1,933
---------- ----------- ----------
352,849 7.1 years 279,280
---------- ----------
</TABLE>
Farmer Mac uses the intrinsic value method of accounting for employee stock
options pursuant to Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and has adopted the disclosure only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no
compensation expense was recognized in 1998 and 1997 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, 1998 and 1997 would have been reduced to the pro forma amounts
indicated in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- --------------------- -------------------
As As As
Reported Proforma Reported Proforma Reported Proforma
------------------- --------------------- --------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 5,743 $ 3,263 $ 4,626 $ 4,103 $ 777 $ 637
Earning per share of Class A and B Voting
Common Stock:
Basic net earnings $ 0.52 $ 0.30 $ 0.48 $ 0.43 $ 0.15 $ 0.12
Diluted net earnings $ 0.52 $ 0.29 $ 0.46 $ 0.41 $ 0.14 $ 0.12
Earnings per share of Class C Non-Voting
Common Stock:
Basic net earnings $ 1.60 $ 0.91 $ 1.44 $ 1.28 $ 0.44 $ 0.36
Diluted net earnings $ 1.55 $ 0.88 $ 1.39 $ 1.23 $ 0.43 $ 0.35
</TABLE>
The weighted-average fair values of options granted in 1998 and 1997 were $45.53
and $19.19, respectively. The fair values were estimated using the Black Scholes
option pricing model based on the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Risk-free interest rate 5.5% 6.3% 6.7%
Expected years until exercise 5 years 5 years 5 years
Expected stock volatility 66.2% 51.4% 42.8%
Dividend yield 0.0% 0.0% 0.0%
</TABLE>
Restricted Stock
In 1998, 6,715 shares of restricted stock were granted to officers. The stock
may not be disposed of until May 31, 1999. Compensation expense recognized in
1998 related to the stock grant totaled $403 thousand.
8. INCOME TAXES
The components of the provision for federal income taxes for the years ended
December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Current $ 1,716 $ 136 $ 12
Deferred 547 1,463 300
-------- ------- -------
2,263 1,599 312
Change in net deferred tax
asset valuation allowance (1,491) (1,714) (300)
-------- ------- --------
Net federal income tax
expense (benefit) $ 772 $ (115) $ 12
-------- ------- --------
</TABLE>
A reconciliation of tax at the statutory federal tax rate to the income tax
provision for the years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- --------
(in thousands)
<S> <C> <C> <C>
Tax expense at
statutory rate $ 2,215 $ 1,534 $ 268
Change in net deferred tax
asset valuation all (1,491) (1,714) (300)
Other 48 65 44
-------- --------- -------
$ 772 $ (115) $ 12
-------- --------- -------
Statutory tax rate 34.0% 34.0% 34.0%
Effective tax rate 11.8% (2.5%) 1.5%
</TABLE>
Components of the deferred tax assets and liabilities as of December 31, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for uncollectible yield
maintenance fee receivable $ 2 $ 94
Reserve for loan losses 1,108 559
Net operating loss carryforwards - 867
Alternative minimum tax credit - 147
Other 196 118
------- -------
Total deferred tax asset 1,306 1,785
Deferred tax liability 112 44
------- -------
Net deferred tax asset, before
valuation allowance 1,194 1,741
Valuation allowance - (1,491)
------- -------
Net deferred tax asset $ 1,194 $ 250
------- -------
</TABLE>
A valuation allowance is required to reduce the net deferred tax asset to an
amount that is more likely than not to be realized. At December 31, 1997, a
valuation allowance had been established for a significant portion of the net
deferred tax asset because of uncertainty regarding future profitability. No
valuation allowance was considered necessary at December 31, 1998.
9. EMPLOYEE BENEFITS
On December 28, 1989, Farmer Mac adopted a defined contribution 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), plus 5.7% of the difference
between (i) the lesser of the gross salary and $160,000 ($150,000 in 1996) and
(ii) the Social Security Taxable Wage Base. Employees are fully vested in
contributions made to the plan after two years. Pension expense for the years
ended December 31, 1998, 1997 and 1996 was $338 thousand, $251 thousand and $216
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 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. As of December 31, 1998 and 1997, the
outstanding principal balance of Farmer Mac Guaranteed Securities not held in
Farmer Mac's portfolio was as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
Farmer Mac I
AMBS $ 545,614 $ 341,213
Other 21,848 44,548
Farmer Mac II Securities 30,114 23,326
--------- ---------
$ 597,576 $ 409,087
--------- ---------
</TABLE>
AMBS represent guaranteed securities issued after the 1996 Act and for which
Farmer Mac assumes 100% of the credit risk. Other Farmer Mac I Securities
includes those securities issued prior to the 1996 Act. These securities are
supported by an unguaranteed subordinated interest that was equal to 10% of the
initial balance of the loans underlying the securities at issuance. Farmer Mac's
guarantee on Farmer Mac II Securities is covered by the "full faith and credit"
of the United States by virtue of the USDA guarantee of the principal and
interest on all Guaranteed Portions. For further information regarding Farmer
Mac's credit risk related to off-balance sheet guaranteed securities, see Notes
2(h) and 6.
In December 1998, Farmer Mac committed to enter into a long-term guarantee
arrangement covering $407.7 million of seasoned loans, which was consummated in
January 1999. The structure of this off-balance sheet transaction, referred to
as a long-term standby purchase commitment, was similar to a swap transaction.
The recipient of the standby commitment segregates a pool of loans in its
portfolio and pays Farmer Mac an annual fee approximating its usual guarantee
fee on the outstanding balance of the loans, in return for Farmer Mac's
assumption of the credit risk on those loans. The credit risk related to
long-term standby commitments is the same as that of AMBS.
Commitments. Farmer Mac enters into mandatory delivery commitments to purchase
loans. If the seller is unable to deliver the loans required under a mandatory
delivery commitment within the specified time period, Farmer Mac requires the
seller to pay a fee to extend or cancel the commitment. At December 31, 1998 and
1997, commitments to purchase loans totaled $23.8 million and $10.8 million,
respectively.
Farmer Mac is exposed to interest-rate risk from the time it commits to purchase
the loans to the time it either (a) forward sells AMBS backed by the loans or
(b) issues debt to retain the loans in its portfolio (issuing debt to fund the
loans as an investment does not fully mitigate interest rate risk exposure
because of possible timing differences in the cash flows of the assets and
related liabilities). There were no outstanding forward sale commitments at
December 31, 1998. Forward sale commitments totaled $23.8 million at December
31, 1997. Farmer Mac manages the interest rate risk related to loans not yet
forward sold or funded as a retained investment through the use of off-balance
sheet financial instruments, such as interest-rate swap contracts and futures
contracts.
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 loans and investments or the 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" 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, 1998 and 1997.
<TABLE>
<CAPTION>
As of December 31, 1998
------------------------------------------------------------------------------
2004-
1999 2000 2001 2002 2003 2008 Thereafter Total
------- ------ ------ ------ ------ ------ ------------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Asset-linked:
Amortizing basis swaps $ - $ - $ - $ - $ - $ 130,874 $ 116,584 $ 247,458
Pay fixed swaps - - - - 10,000 - - 10,000
Weighted-average
pay rate - - - - 6.25% - - 6.25%
Purchased caps - - - 100,000 135,000 - - 235,000
Weighted-average
strike rate - - - 8.50% 8.50% - - 8.50%
-------
Total notional amount $ 492,458
----------
As of December 31, 1997
-----------------------------------------------------------------------------
2003-
1998 1999 2000 2001 2002 2007 Thereafter Total
------- ------ ------ ------ ------ ------ ------------ -------
(dollars in thousands)
<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%
Purchased 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 arises from the
possibility that a counterparty will be unable to perform according to the terms
of the contract and is mitigated by dealing with counterparties with high credit
ratings (no less than BBB+ at December 31, 1998), establishing and maintaining
collateral requirements and 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, 1998 and
1997, the net replacement value of interest rate contracts was $1.8 million and
$1.5 million, respectively, none of which was required to be 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 loans and loans held for securitization. The total notional balance of
open futures contracts at December 31, 1998 and 1997 was $20.1 million and $1.2
million, respectively.
Concentrations of Credit Risk
The following table sets forth the geographic and commodity diversification, as
well as the range of loan-to-value ratios, of Farmer Mac I Securities and loans
held for securitization as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------------------- -----------------------------------
AMBS and AMBS and
LHFS (1) Other Total LHFS (1) Other Total
---------- -------- --------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
By geographic regions: (2)
Mid-North $ 128,025 $ 24,137 $ 152,162 $ 56,679 $ 32,321 $ 89,000
Mid-South 41,778 20,762 62,540 19,646 24,572 44,218
Northeast 25,611 4,604 30,215 19,433 5,305 24,738
Northwest 289,759 23,757 313,516 170,557 30,215 200,772
Southeast 12,159 28,358 40,517 9,722 35,623 45,345
Southwest 291,573 73,165 364,738 112,353 100,868 213,221
--------- -------- --------- --------- --------- ---------
Total $ 788,905 $ 174,783 $ 963,688 $ 388,390 $ 228,904 $ 617,294
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
By commodity:
Crops $ 416,517 $ 102,280 $ 518,797 $ 204,193 $ 133,830 $ 338,023
Livestock 136,120 28,636 164,756 83,643 37,624 121,267
Permanent plantings 217,175 43,867 261,042 100,554 57,450 158,004
Part-time farms 19,093 - 19,093 - - -
--------- -------- --------- --------- ---------- --------
Total $ 788,905 $ 174,783 $ 963,688 $ 388,390 $ 228,904 $ 617,294
--------- -------- --------- --------- ---------- --------
By loan -to-value:
0.00% to 40.00% $ 77,336 $ 23,620 $ 100,956 $ 30,697 $ 74,154 $ 104,851
40.01% to 50.00% 127,005 34,629 161,634 74,357 61,057 135,414
50.01% to 60.00% 227,770 52,303 280,073 139,288 65,480 204,768
60.01% to 70.00% 283,485 56,964 340,449 143,146 28,213 171,359
70.01% to 80.00% 70,347 7,267 77,614 902 - 902
80.00% to 90,00% 2,962 - 2,962 - - -
--------- -------- --------- --------- ----------- --------
Total $ 788,905 $ 174,783 $ 963,688 $ 388,390 $ 228,904 $ 617,294
--------- -------- --------- --------- ----------- --------
(1) Loans held for securitization (LHFS).
(2) Georgraphic 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).
</TABLE>
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.
11. FAIR VALUE DISCLOSURES
The following table sets forth the estimated fair values and carrying values of
financial assets and liabilities at December 31, 1998 and 1997. 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>
1998 1997
---------------------------- ---------------------------
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
---------------------------- ---------------------------
(in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 540,626 $ 540,626 $ 177,617 $ 177,617
Investment securities 645,201 643,562 660,334 656,737
Farmer Mac guaranteed securities 561,671 552,205 446,132 442,311
Loans held for securitization 169,652 168,064 49,802 47,177
Off-balance sheet items in a gain position:
Purchase commitments - - 54 -
Interest-rate contracts 1,793 - 2,247 -
Futures contracts 74 - - -
Financial liabilities:
Notes and bonds payable:
Due within one year 1,475,102 1,473,688 856,479 856,028
Due after one year 390,556 365,146 413,737 402,803
Off-balance sheet items in a loss position:
Sale commitments - - 220 -
Purchase commitments 12 - - -
Interest-rate contracts 4,302 - 3,393 -
Futures contracts - - 3 -
</TABLE>
Except as discussed below, the estimated fair value for Farmer Mac's financial
instruments were calculated by generating multiple paths for future interest
rates starting from the current yield curve and then discounting the projected
cash flows for each instrument under those interest rate paths.
Cash and cash equivalents. For these short-term financial instruments, the
carrying value approximates fair value.
Investments. The fair values of investment securities were based on quoted
market prices.
Commitments. The fair values of commitments were based on the estimated fair
value of the loans less the commitment price. The fair values of the loans 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.
Futures contracts. The unrealized gain or loss on futures contracts was based on
quoted futures prices less the original prices.
<PAGE>
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1998 Quarter Ended 1997 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 $27,854 $26,796 $25,437 $23,475 $22,631 $22,738 $21,302 $13,482
Interest expense 24,859 24,130 22,964 21,040 20,625 20,768 19,474 12,125
-------- --------- -------- -------- -------- -------- -------- --------
Net interest income 2,995 2,666 2,473 2,435 2,006 1,970 1,828 1,357
Guarantee fee income 1,093 1,037 841 756 718 725 607 525
Gain on issuance of mortgage-
backed securities - 420 552 428 251 592 1,053 466
Miscellaneous 26 54 14 48 20 16 21 196
--------- --------- --------- -------- -------- ------- -------- --------
Total revenues 4,114 4,177 3,880 3,667 2,995 3,303 3,509 2,544
Other expenses 2,450 2,388 2,411 2,074 1,936 2,079 2,167 1,658
--------- --------- --------- -------- -------- ------- -------- ---------
Income before income taxes 1,664 1,789 1,469 1,593 1,059 1,224 1,342 886
Income tax expense/(benefit) 566 665 (306) (152) (219) 40 36 28
--------- --------- --------- -------- -------- ------- -------- ---------
Net income $ 1,098 $ 1,124 $ 1,775 $ 1,745 $ 1,278 $ 1,184 $ 1,306 $ 858
--------- --------- --------- -------- -------- ------- -------- ---------
Earnings Per Share:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A and B Voting Common Stock:
Basic net earnings $ 0.11 $ 0.10 $ 0.16 $ 0.16 $ 0.13 $ 0.12 $ 0.14 $ 0.09
Diluted net earnings $ 0.10 $ 0.10 $ 0.16 $ 0.16 $ 0.12 $ 0.12 $ 0.13 $ 0.09
Class C Non-Voting Common Stock:
Basic net earnings $ 0.31 $ 0.31 $ 0.49 $ 0.49 $ 0.38 $ 0.37 $ 0.41 $ 0.27
Diluted net earnings $ 0.30 $ 0.30 $ 0.48 $ 0.47 $ 0.37 $ 0.36 $ 0.40 $ 0.26
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning Farmer Mac's executive officers and persons who
have been nominated for election or reelection to the board of directors at
Farmer Mac's annual meeting of stockholders to be held on June 3, 1999 is hereby
incorporated by reference from Farmer Mac's definitive proxy statement, which
will be filed with the SEC within 120 days after the close of the fiscal year.
Item 11. Executive Compensation
Information concerning executive compensation is hereby incorporated by
reference from Farmer Mac's definitive proxy statement, which will be filed with
the SEC 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 Farmer Mac's definitive
proxy statement, which will be filed with the SEC 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 Farmer Mac's definitive proxy statement,
which will be filed with the SEC 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 8, above.
(2) Financial Statement Schedules.
All schedules are omitted since they are not applicable, not
required, or the information required to be set forth therein is included in
the financial statements, or in notes thereto.
(3) Exhibits and Reports on Form 8-K.
(a) Exhibits.
* 3.1 - Title VIII of the Farm Credit Act of 1971, as most recently
amended by the Farm Credit System Reform Act of 1996, P.L.
104-105 (Form 10-K filed March 29, 1996).
* 3.2 - Amended and restated 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 November 10, 1992).
+* 10.1.1 - Amendment No. 1 to Stock Option Plan (Previously filed
as Exhibit 10.2 to Form 10-Q filed August 16, 1993).
+* 10.1.2 - 1996 Stock Option Plan (Form 10-Q filed November 10,
1996).
+* 10.1.3 - 1997 Stock Option Plan (Form 10-Q filed May 15, 1997).
+* 10.1.4 -Amended and Restated 1997 Incentive Plan (Form10-Q filed
November 10, 1996).
+* 10.1.5 -Amended and Restated 1997 Incentive Plan (Form 10-Q filed
November 14, 1997).
+* 10.1.6 - Amended and Restated 1997 Incentive Plan (Form 10-Q
filed August 14, 1998).
+* 10.2 - Employment Agreement dated May 5, 1989 between Henry D.
Edelman and the Registrant (Previously filed as Exhibit 10.4
to Form 10-K filed February 14, 1990).
+* 10.2.1 - Amendment No. 1 dated as of January 10, 1991 to
Employment Contract between Henry D. Edelman and the Registrant
(Previously filed as Exhibit 10.4 to Form 10-K filed April 1,
1991).
+* 10.2.2 - Amendment to Employment Contract dated as of September
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 September 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 September 13, 1996 to
Employment Contract between Henry D. Edelman and the
Registrant (Form 10-Q filed November 10, 1996).
+* 10.2.6 - Amendment No. 6 dated as of August 7, 1997 to Employment
Contract between Henry D. Edelman and the Registrant (Form
10-Q filed November 14, 1997).
+* 10.2.7 - Amendment No. 7 dated as of June 4, 1998 to Employment
Contract between Henry D. Edelman and the Registrant (Form
10-Q filed August 14, 1998).
+* 10.3 - 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 September
1, 1993 between Nancy E. Corsiglia and the Registrant
(Previously filed as Exhibit 10.9 to Form 10-Q filed November
15, 1993).
_____________________
* Incorporated by reference to the indicated prior filing.
+ Management contract or compensatory plan.
+* 10.3.4 - Amendment No. 4 dated September 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).
+*____10.3.5 - Amendment No. 5 dated as of September 1, 1994 to
Employment Contract between Nancy E. Corsiglia and the
Registrant (Previously filed as Exhibit 10.12 to Form 10-Q
filed August 15, 1994).
+*____10.3.6 - Amendment No. 6 dated as of September 1, 1995 to
Employment Contract between Nancy E. Corsiglia and the
Registrant (Form 10-Q filed November 10, 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 September 13, 1996 to
Employment Contract between Nancy E. Corsiglia and the
Registrant (Form 10-Q filed November 10, 1996).
+* 10.3.9 -Amendment No. 9 dated as of August 7, 1997 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form
10-Q filed November 14, 1997).
+* 10.3.10- Amendment No. 10 dated as of June 4, 1998 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form
10-Q filed August 14, 1998).
+* 10.4 - Employment Agreement dated September 13, 1989 between Thomas
R. Clark and the Registrant (Previously filed as Exhibit
10.6 to Form 10-K filed April 1, 1990).
+* 10.4.1 - Amendment No. 1 dated February 14, 1991 to Employment
Agreement between Thomas R. Clark and the Registrant
(Previously filed as Exhibit 10.9 to Form 10-K filed April 1,
1991).
+* 10.4.2 - Amendment to Employment Contract dated as of September
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 September 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).
______________________
* Incorporated by reference to the indicated prior filing.
+ Management contract or compensatory plan.
<PAGE>
+* 10.4.4 -Amendment No. 4 dated as of September 1, 1994 to
Employment Contract between Thomas R. Clark and the Registrant
(Previously filed as Exhibit 10.17 to Form 10-Q filed August
15, 1994).
+* 10.4.5 -Amendment No. 5 dated as of September 1, 1995 to Employment
Contract between Thomas R. Clark and the Registrant (Form
10-Q filed November 10, 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 September 13, 1996 to
Employment Contract between Thomas R. Clark and the
Registrant (Form 10-Q filed November 10, 1996).
+* 10.4.8 -Amendment No. 8 dated as of August 7, 1997 to Employment
Contract between Thomas R. Clark and the Registrant (Form
10-Q filed November 14, 1997).
+* 10.4.9 -Amendment No. 9 dated as of June 4, 1998 to Employment
Contract between Thomas R. Clark and the Registrant (Form
10-Q filed August 14, 1998).
+* 10.5 -Employment Agreement dated April 29, 1994 between Charles M.
Lewis and the Registrant (Previously filed as Exhibit 10.18
to Form 10-Q filed August 15, 1994).
+* 10.5.1 -Amendment No. 1 dated as of September 1, 1995 to
Employment Contract between Charles M. Lewis and the
Registrant (Form 10-Q filed November 10, 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 September 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).
* Incorporated by reference to the indicated prior filing.
+ Management contract or compensatory plan.
+* 10.6.1 -Amendment to Employment Contract dated as of September
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 September 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 September 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 September 1, 1995 to
Employment Contract between Michael T. Bennett and the
Registrant (Form 10-Q filed November 10, 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 September 13, 1996 to
Employment Contract between Michael T. Bennett and the
Registrant (Form 10-Q filed November 10, 1996).
+* 10.6.7 -Amendment No. 7 dated as of August 7, 1997 to Employment
Contract between Michael T. Bennett and the Registrant (Form
10-Q filed November 14, 1997).
+* 10.6.8 -Amendment No. 8 dated as of June 4, 1998 to Employment
Contract between Michael T. Bennett and the Registrant (Form
10-Q filed August 14, 1998).
+* 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 September
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 September 1, 1993 to Employment
Contract between Christopher A. Dunn and the Registrant
(Previously filed as Exhibit 10.25 to Form 10-K filed March 30,
1994).
* Incorporated by reference to the indicated prior filing.
+ Management contract or compensatory plan.
+* 10.7.3 -Amendment No. 3 dated as of September 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 September 1, 1995 to
Employment Contract between Christopher A. Dunn and the
Registrant (Form 10-Q filed November 10, 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 September 13, 1996 to
Employment Contract between Christopher A. Dunn and the
Registrant (Form 10-Q filed November 10, 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 November 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).
+* 10.8.1 -Amendment No. 1 dated as of June 4, 1998 to Employment
Contract between Tom D. Stenson and the Registrant (Form
10-Q filed August 14, 1998).
* 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.
21.1 -Farmer Mac Mortgage Securities Corporation, a Delaware
Corporation.
21.2 -Farmer Mac Acceptance Corporation, a Delaware Corporation.
* 99.1 -Map of U.S. Department of Agriculture (Secretary of
Agriculture's) Regions (Previously filed as Exhibit 1.1 to
Form 10-K filed April 1, 1991).
(b) Reports on Form 8-K.
The Registrant did not file any reports on Form 8-K during the quarter
ended December 31, 1998.
* Incorporated by reference to the indicated prior filing.
+ Management contract or compensatory plan.
<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, 1999
- - ---------------------------------------- -------------------------------------
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 and March 24, 1999
Director
- - --------------------------------
Charles Eugene Branstool
/s/ Henry D. Edelman President and Chief Executive March 24, 1999
- - -------------------------------- Officer (Principal Executive
Henry D. Edelman Officer)
/s/ Nancy E. Corsiglia Vice President - Business March 24, 1999
- - -------------------------------- Development and Treasurer
Nancy E. Corsiglia (Principal Financial and
Accounting Officer)
<PAGE>
Name Title Date
/s/ Kenneth E. Graff Director March 24, 1999
- - ---------------------------------------
Kenneth E. Graff
/s/ W. David Hemingway Director March 24, 1999
- - ---------------------------------------
W. David Hemingway
/s/ Mitchell A. Johnson Director March 24, 1999
- - ---------------------------------------
Mitchell A. Johnson
/s/ Lowell Junkins Director March 24, 1999
- - ---------------------------------------
Lowell Junkins
/s/ James A. McCarthy Director March 24, 1999
- - ---------------------------------------
James A. McCarthy
/s/ Robert J. Mulder Director March 24, 1999
- - ---------------------------------------
Robert J. Mulder
/s/ John G. Nelson Director March 24, 1999
- - ---------------------------------------
John G. Nelson
/s/ David J. Nolan Director March 24, 1999
- - ---------------------------------------
David J. Nolan
/s/ Peter T. Paul Director March 24, 1999
- - ---------------------------------------
Peter T. Paul
/s/ Marilyn Peters Director March 24, 1999
- - ---------------------------------------
Marilyn Peters
/s/ John Dan Raines, Jr. Director March 24, 1999
- - ---------------------------------------
John Dan Raines, Jr.
/s/ Darryl W. Rhodes Director March 24, 1999
- - ---------------------------------------
Darryl W. Rhodes
/s/ Gordon Clyde Southern Vice Chairman March 24, 1999
- - ---------------------------------------
Gordon Clyde Southern
/s/ Clyde A. Wheeler Director March 24, 1999
- - ---------------------------------------
Clyde A. Wheeler
<PAGE>
<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 $0.53. Diluted earnings per share are $0.52 for for
Classes A & B stock.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 540,626
<SECURITIES> 1,195,767
<RECEIVABLES> 26,661
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 571,333
<PP&E> 136
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,935,300
<CURRENT-LIABILITIES> 1,488,935
<BONDS> 365,451
0
0
<COMMON> 4,617
<OTHER-SE> 76,297
<TOTAL-LIABILITY-AND-EQUITY> 1,935,300
<SALES> 108,830
<TOTAL-REVENUES> 108,830
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,323
<LOSS-PROVISION> 1,614
<INTEREST-EXPENSE> 92,992
<INCOME-PRETAX> 6,515
<INCOME-TAX> 772
<INCOME-CONTINUING> 5,743
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,743
<EPS-PRIMARY> 1.60
<EPS-DILUTED> 1.55
</TABLE>
