Back to GetFilings.com
As filed with the Securities and Exchange Commission on
March 29, 1996
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number 0-17440
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
Federally chartered instrumentality
of the United States
___________________________________
(State or other jurisdiction of
incorporation or organization)
52-1578738
_______________________________________
(I.R.S. employer identification Number)
919 18th Street, N.W., Suite 200,
Washington, D.C. 20006
___________________________________________ ________________________
(Address of principal exeuctive offices) (Zip code)
(202) 872-7700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Voting Common Stock
Class B Voting Common Stock
Class C Non-Voting Common Stock
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve
months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (17 C.F.R. 229.405) is
not contained herein, and will not be contained, to the best of
the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. [ ]
The aggregate market values of the Class A Voting Common
Stock and Class C Non-Voting Common Stock held by non-affiliates
of the Registrant were $3,601,250 and $8,956,665, respectively,
based upon the average bid and asked prices for the respective
classes on March 25, 1996 as quoted by the National Association
of Securities Dealers Automated Quotation System ("NASDAQ"). The
aggregate market value of the Class B Voting Common Stock is not
ascertainable due to the absence of publicly available quotations
or prices with respect to the Class B Voting Common Stock as a
result of the limited market for, and infrequency of trades in,
Class B Voting Common Stock and the fact that any such trades are
privately negotiated transactions.
There were 670,000 shares of Class A Voting Common Stock,
593,401 shares of Class B Voting Common Stock, and 1,214,463
shares of Class C Non-Voting Common Stock outstanding as of March
25, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement to be filed on or about April 29, 1996 in
connection with the Annual Meeting of Stockholders to be held on
June 13, 1996 (portions of which are incorporated by reference
into Part III of this Annual Report on Form 10-K).
_______________________
PART I
ITEM 1. BUSINESS
GENERAL
The Federal Agricultural Mortgage Corporation ("Farmer Mac"
or the "Registrant") is a federally chartered instrumentality of
the United States established by Title VIII of the Farm Credit
Act of 1971(12 U.S.C. 2279aa et seq.), as amended most
recently by the Farm Credit System Reform Act of 1996, P.L. 104-
105 (the "1996 Act") (collectively, the "Act"). Farmer Mac was
established primarily to attract new capital for the financing of
agricultural real estate and rural housing loans and to provide
liquidity to agricultural real estate and rural housing lenders.
Farmer Mac is intended to aid the development of a secondary
market for agricultural real estate and rural housing loans
(each, a "Qualified Loan") made by participating originators
(each, an "Originator"), pooled by eligible agricultural mortgage
marketing facilities, including Farmer Mac (each, a "Pooler"),
and secured by first liens on agricultural real estate, including
rural housing, by guaranteeing the timely payment of principal
and interest on obligations ("Farmer Mac I Securities") backed
by, and securities representing interests in, such loans (the
"Farmer Mac I Program"). See "Farmer Mac Guarantee Program _
Farmer Mac I." Farmer Mac also purchases portions ("Guaranteed
Portions") of farm ownership, operating, business and industry
and certain other loans guaranteed by the United States acting
through the Secretary of Agriculture pursuant to the Consolidated
Farm and Rural Development Act and may issue certificates
("Farmer Mac II Securities") representing interests in pools of
Guaranteed Portions (the "Farmer Mac II Program"). See "Farmer
Mac Guarantee Program _ Farmer Mac II." Farmer Mac I Securities
and Farmer Mac II Securities are collectively referred to herein
as "Farmer Mac Guaranteed Securities." Farmer Mac is authorized
to borrow up to $1.5 billion from the Secretary of the Treasury,
subject to certain conditions, to enable it to fulfill its
guarantee obligations. See "Farmer Mac's Borrowing Authority
from the U.S. Treasury."
The 1996 Act significantly changed Farmer Mac's statutory
charter by, among other things, authorizing Farmer Mac to act as
a Pooler, purchase Qualified Loans directly from Originators and
issue securities backed by those loans without the prior
statute's requirement to create a minimum 10% subordinated
interest or reserve; and delaying for three years the prior
statute's imposition of higher regulatory capital requirements.
For a detailed discussion of the changes to Farmer Mac's charter
as a result of the 1996 Act, see "Recent Legislative Revisions to
Farmer Mac's Statutory Charter." For an overview of 1995, as
well as a discussion of Farmer Mac's plans regarding the
implementation of the new authorities in the 1996 Act, see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations _ 1995 Overview."
Farmer Mac obtained its initial operating capital through
the sale of 670,000 Class A Units and 500,301 Class B Units in
its initial public offering in December 1988. A Class A Unit
consisted of one share of Class A Voting Common Stock and one
share of Class C Non-Voting Common Stock. A Class B Unit
consisted of one share of Class B Voting Common Stock and one
share of Class C Non-Voting Common Stock. In accordance with the
terms of the initial public offering, each Unit separated into
its component shares in November 1993. Additional shares of
Class B Voting Common Stock and Class C Non-Voting Common Stock
were recently issued to Western Farm Credit Bank ("WFCB")
pursuant to a Strategic Alliance Agreement between WFCB and
Farmer Mac. See "Farmer Mac Guarantee Program _ Farmer Mac I _
Transactions Under Farmer Mac I Program." As a result of these
issuances, there are currently outstanding 670,000 shares of
Class A Voting Common Stock, 593,401 shares of Class B Voting
Common Stock and 1,214,463 shares of Class C Non-Voting Common
Stock. On March 14, 1996, Farmer Mac announced that it had
reached an agreement in principle to sell 320,000 newly issued
shares of Class A Voting Common Stock to Zions First National
Bank, Salt Lake City, Utah ("Zions") at a price of $8.00 per
share. If that transaction is consummated on April 10, 1996, as
currently anticipated, there would be outstanding 990,000 shares
of Class A Voting Common Stock, of which Zions would own
approximately 33%. See "Farmer Mac Guarantee Program _ Financing
_ Future Stock Issuances." The Class A Voting Common Stock and
the Class B Voting Common Stock are herein called the "Voting
Common Stock." The Voting Common Stock and the Class C Non-
Voting Common Stock are herein called the "Common Stock."
Funding for Farmer Mac's operations has been derived from
income from operations and expenditures of capital. Farmer Mac
intends to fund its operations out of income therefrom, primarily
from the fees it charges for issuing its guarantee on Farmer Mac
Guaranteed Securities; interest income on investments; and
revenues it may derive from its authority to function as a
Pooler. Farmer Mac's Board of Directors (the "Board") has
authorized the issuance of up to $1.5 billion in outstanding
aggregate principal amount of notes having maturities of not more
than nine months ("Discount Notes") and notes having maturities
of nine months or more ("Medium-Term Notes" and, together with
the Discount Notes, the "Notes"). See "Farmer Mac Guarantee
Program _ Financing." As of December 31, 1995, Farmer Mac had
outstanding $132.8 million of Discount Notes and $358.7 million
of Medium-Term Notes, net of unamortized debt issuance costs,
discounts and premiums. Farmer Mac may also obtain capital from
future issuances of common stock (both voting and non-voting) or
preferred stock. Farmer Mac expects to consummate the Class A
stock sale to Zions, which will generate $2.56 million in new
capital, and anticipates one or more additional issuances of
common or preferred stock, or both, within the next two years to
further increase its capital as required under the 1996 Act. Any
such issuances may be significantly dilutive of the interests of
one or more classes of stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Financial Review" and "Recent Legislative Revisions to Farmer
Mac's Statutory Charter."
The Farm Credit Administration ("FCA"), acting through the
Office of Secondary Market Oversight, has general regulatory and
enforcement authority over Farmer Mac, including the authority to
promulgate rules and regulations governing the activities of
Farmer Mac and to apply its general enforcement powers to Farmer
Mac and its activities. Farmer Mac is required to meet certain
minimum and critical capital requirements established in the Act,
some of which had been scheduled to increase significantly in
December 1996. The 1996 Act revised and delayed these changes by
establishing a transition period in which Farmer Mac has the
opportunity to implement its new legislative authorities before
higher minimum and critical capital requirements are fully
effective. For a discussion of the capital requirements and
Farmer Mac's capital, see "Recent Legislative Revisions to Farmer
Mac's Statutory Charter;" "Government Regulation of Farmer Mac"
and Note 3 to the Financial Statements.
Although Farmer Mac is an institution of the Farm Credit
System, it is not liable for any debt or obligation of any other
institution of the Farm Credit System (a "System Institution").
Neither the Farm Credit System nor any other individual System
Institution is liable for any debt or obligation of Farmer Mac.
Farmer Mac employs 16 persons, all located at its principal
executive offices at 919 18th Street, N.W., Suite 200,
Washington, D.C. 20006. Its telephone number is (202) 872-7700.
FARMER MAC GUARANTEE PROGRAM
FARMER MAC I
Prior to the enactment of the 1996 Act on February 10, 1996,
Farmer Mac was not authorized to purchase or pool Qualified Loans
(with the exception of Guaranteed Portions discussed under
"_Farmer Mac II"). Rather, it functioned purely as a guarantor
of securities backed by a pool of Qualified Loans and supported
by a statutorily mandated 10% Subordinated Interest or Reserve
(as discussed below). Without the authority to purchase or pool,
Farmer Mac's involvement with the pooling process, particularly
the Pooler's mix of loan products and rates, marketing activities
and loan securitization decisions, was statutorily restricted.
Under the new authorities of the 1996 Act and consistent
with the intent of Congress in passing that legislation, Farmer
Mac anticipates functioning in a manner similar to Fannie Mae and
Freddie Mac, government-sponsored enterprises that maintain
secondary markets for residential and multifamily loans. In that
regard, Farmer Mac expects to purchase Qualified Loans for cash
on either a servicing released or servicing retained basis and,
when economically justifiable, to issue Farmer Mac I Securities
backed thereby; to offer Originators the option of "swapping"
Qualified Loans for Farmer Mac I Securities; and to make
available to interested parties a facility through which Pools of
Qualified Loans (or Farmer Mac I Securities) could be securitized
for sale into the capital markets. The actual structure of each
of these programs is currently under development; the timing of
the availability of these programs is discussed in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations _ 1995 Overview."
Guarantee
General. Under its statutory charter, Farmer Mac is
authorized to guarantee the timely payment of interest and
principal on Farmer Mac I Securities and, under the 1996 Act, to
issue Farmer Mac I Securities. It does not guarantee the
repayment of any Qualified Loan. Prior to the 1996 Act, Farmer
Mac's authority to place its guarantee on securities was
conditioned on the creation by the Pooler or the Originators, or
both, of a reserve ("Reserve") for losses in, or a subordinated
"first loss" interest ("Subordinated Interest") in, each pool of
Qualified Loans (a "Pool") equal to at least 10% of the
outstanding initial principal amount of the Qualified Loans in
the Pool. The exact amount of the Reserve or Subordinated
Interest was determined by Farmer Mac on a Pool-by-Pool basis.
Farmer Mac could not be called upon to make a guarantee payment
unless the amounts then available to be drawn pursuant to the
Reserve or Subordinated Interest for distribution on the Farmer
Mac I Securities had been so drawn. Under the new authorities in
the 1996 Act, there are no statutorily required Reserves or
Subordinated Interests; thus, Farmer Mac is now authorized (and
expects) to guarantee 100% of the payment of interest and
principal on Farmer Mac I Securities without a Reserve or
Subordinated Interest. On a Pool-by-Pool basis, Farmer Mac may
require some form of credit support for its guarantee of
securities backed by certain Pools.
In anticipation of issuing "first loss guarantees," Farmer
Mac is in the process of developing a guarantee fee model to
determine the appropriate guarantee fees for various risk
profiles, including those of newly originated and existing
Qualified Loans, the latter of which may, depending upon
seasoning, performance data and Farmer Mac's assessment of the
existence of other positive characteristics, result in a
negotiated guarantee fee below the level for new originations.
Management expects that the fee charged for issuing a first loss
guarantee will exceed the fee for the issuance of a guarantee
supported by a Subordinated Interest.
In connection with the issuance of the Farmer Mac Securities
Guide, the detailed policies and procedures manual developed to
inform potential participants in the Farmer Mac I Program (prior
to the 1996 Act) how to originate, pool and issue Farmer Mac I
Securities, Farmer Mac prescribed the Underwriting, Appraisal
and Diversification Standards for Qualified Loans, as well as
eligibility criteria for Poolers and Originators. See
"Underwriting and Appraisal Standards," "Pool Standards,"
"Poolers" and " Originators." Those standards are currently under
review to determine what changes, if any, should be made in light
of the new authorities in the 1996 Act. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations _ 1995 Overview."
Linked Portfolio Transactions. In certain transactions in
the Farmer Mac I Program prior to the enactment of the 1996 Act,
a Farmer Mac subsidiary purchased Farmer Mac I Securities from
Poolers. Farmer Mac issued Notes approximately equal to the
principal amount of a corresponding series of Farmer Mac I
Securities and provided the proceeds of the issuance of such
Notes to its subsidiary in the amount necessary to fund the
purchase of the Farmer Mac I Securities. Payments on the Farmer
Mac I Securities were distributed to Farmer Mac by its subsidiary
and used by Farmer Mac to make payments on the Notes. See
"Financing." This program was known as the "Linked Portfolio
Strategy" or "LPS."
The Linked Portfolio Strategy has been offered to Poolers
that have agreed to provide to Farmer Mac pool level or loan
level "yield maintenance" compensation for the reinvestment risk
associated with prepayments on the mortgage loans underlying the
Farmer Mac I Securities purchased in LPS transactions ("Linked
Portfolio Assets"), unless and except to the extent the Linked Portfolio
Assets were purchased with the proceeds of callable debt. "Yield
maintenance" payments represent amounts in addition to the
principal prepaid on the mortgage loans underlying the Linked
Portfolio Assets. These amounts, when reinvested together with
the prepaid principal, could be expected to generate
substantially the same cash flows that would have been generated
by the Linked Portfolio Assets had the underlying mortgage loans
not prepaid. While yield maintenance payments are recognized as
income when the mortgage loans underlying the Linked Portfolio
Assets prepay, in accordance with generally accepted accounting
principles, such payments must be reinvested at or near U.S.
Treasury rates for securities of corresponding maturity to
generate the incremental future cash flows needed to satisfy
future maturities of Notes issued in connection with the purchase
of the Linked Portfolio Assets.
Three LPS transactions have been consummated under the
Farmer Mac I Program using the Linked Portfolio Strategy. See
"Transactions Under Farmer Mac I Program." Management intends to
reduce Farmer Mac's use of LPS transactions in the future because
of the regulatory capital costs associated with those
transactions, which are "on balance sheet" for accounting and
regulatory purposes, and because of competitive price levels in
the relevant markets and the broader authorities granted to
Farmer Mac in the 1996 Act.
Funding. Farmer Mac intends that the primary sources of
funding for the payment of claims, if any, made under guarantees
will be the fees Farmer Mac receives for providing its
guarantees, together with the proceeds of Farmer Mac's initial
public offering of its stock and any other equity offerings by
Farmer Mac. A portion of the guarantee fees received is set
aside by Farmer Mac as an allowance for losses arising from its
guarantee activities. Among other things, this allowance must be
exhausted before Farmer Mac may issue obligations to the
Secretary of the Treasury against the $1.5 billion Farmer Mac is
authorized to borrow from the Secretary of the Treasury pursuant
to the Act. The Secretary of the Treasury must purchase
obligations issued by Farmer Mac not later than 10 business days
after receipt and acceptance by the Secretary of the Treasury of
a certification by Farmer Mac in the form prescribed by the Act.
See "Farmer Mac's Borrowing Authority from the U.S. Treasury" for
a description of the material terms of such certification and
obligations.
Originators
Farmer Mac has established minimum eligibility standards
relating to the characteristics and underwriting and appraisal
practices of Originators. See " Underwriting and Appraisal
Standards." An Originator may be a System Institution, bank,
insurance company, business and industrial development company,
savings and loan association, association of agricultural
producers, agricultural cooperative, commercial finance company,
trust company, credit union, or other entity that originates and
services agricultural or rural residential mortgage loans, and
owns directly or indirectly the required minimum number of shares
of Voting Common Stock. See " Ownership Requirements."
Originators are also generally required to maintain a fidelity
bond and either an errors and omissions, mortgage impairment or
mortgagee interest policy providing coverage in the amount set
forth in the Farmer Mac Securities Guide.
Poolers
Farmer Mac has developed standards of eligibility for
certification of Poolers that are set forth in detail in the
Securities Guide. In general, a Pooler other than Farmer Mac
must:
(i) Have capital of at least $2,000,000 or 0.20% of pooled
loans, whichever is greater, in a form acceptable to Farmer Mac.
Assets acceptable to Farmer Mac in determining capital are those
having real economic value and liquidity which are reported on
the applicant's audited financial statements in accordance with
generally accepted accounting principles. A Pooler must also
meet or exceed the capital standards established by its
regulatory agency or agencies (if any).
(ii) Adopt, as appropriate, agricultural or rural
housing mortgage loan underwriting, appraisal and servicing
standards that meet or exceed the standards set by Farmer Mac.
(iii) Adopt appropriate minimum standards and
procedures for agricultural or rural housing mortgage loan
administration and disclosure to borrowers in conformity with
uniform standards established by Farmer Mac concerning the terms
and rights applicable to Qualified Loans. The minimum standards
for loan administration are set forth in the Securities Guide and
include standards for collecting principal and interest payments
from the borrowers, collecting tax and insurance escrow payments
if required by the terms of the mortgage, maintaining proper
financial records, making proper and timely reports and
remittances and resolving delinquencies through workouts,
foreclosures or other measures. The Securities Guide requires
annual loan statements to be sent to borrowers, including a
summary of tax and insurance escrows, interest paid, remaining
principal balances and other credits and charges to the
borrowers' accounts.
(iv) Adopt appropriate minimum requirements for Pools
and related Farmer Mac I Securities and securities administration
that meet or exceed the requirements adopted by Farmer Mac.
(v) Maintain insurance coverage in the amount set
forth in the Securities Guide.
(vi) Own the requisite number of shares of Voting
Common Stock. See " Ownership Requirements."
(vii) Securitize a minimum volume of Qualified
Loans annually in the Farmer Mac I Program in order to retain
its Pooler certification.
In addition, the Act sets forth the following minimum
eligibility requirements for Poolers: a Pooler must: (i) be a
System Institution or a corporation, association or trust
organized under the laws of the United States or of any state;
(ii) have, as one of its purposes, the sale or resale of Farmer
Mac I Securities; (iii) demonstrate, by providing evidence of
relevant experience to Farmer Mac that, directly or through
approved contractors, it has managerial ability in underwriting,
servicing and marketing agricultural or rural residential
mortgage loans; and (iv) agree to allow officers or employees of
Farmer Mac to have access to its records and facilities for the
purpose of examining its operations.
The certification of a Pooler is effective for a period set
by Farmer Mac, not to exceed five years, and may be revoked after
notice and an opportunity for a hearing by Farmer Mac if the
Pooler no longer meets the requirements established by Farmer
Mac. As of December 31, 1995, there were three Poolers certified
by Farmer Mac. Two Poolers provided commitments to meet the 1995
minimum volume securitization threshold requirement established
by Farmer Mac's Board for continued certification as a Pooler,
but the third did not, and its Pooler status was accordingly
revoked.
As a result of the 1996 Act, all Originators will be
eligible to sell Qualified Loans directly to Farmer Mac, but only
Poolers will be eligible to act as or designate central servicers
for the Pools they form. Over time, Farmer Mac pricing for the
purchase of Qualified Loans may become more favorable than that
offered by Poolers, and it is unlikely that Poolers will be able
to offer pricing more favorable than that offered by Farmer Mac.
Moreover, Farmer Mac intends to certify new Poolers only on the
basis of its independent determination of a need for additional
Poolers and its evaluation of the commitment of each new Pooler
to the Farmer Mac program. Factors will include, without
limitation, the business plans of the Pooler applicants and the
size and nature of their initial transactions with Farmer Mac.
Ownership Requirements
General. There are minimum Voting Common Stock ownership
requirements ("Ownership Requirements") for both Originators and
Poolers, subject to certain exceptions. Class B Voting Common
Stock is held by System Institutions; Class A Voting Common Stock
is held by entities other than System Institutions. Class B
holders must own at least 100 shares of Voting Common Stock to be
considered as Originators. There are Ownership Requirements for
each of four categories of Class A holders to be considered as
Originators. "Small Institutions" must own at least 100 shares
of Voting Common Stock. "Intermediate Institutions" must own at
least 200 shares of Voting Common Stock. "Large Institutions"
must own at least 500 shares of Voting Common Stock. "Major
Institutions" must own at least 2,000 shares of Voting Common
Stock. Small Institutions have not more than $50,000,000 in
assets. Intermediate Institutions have more than $50,000,000,
but not more than $100,000,000 in assets. Large Institutions
have more than $100,000,000 and not more than $500,000,000 in
assets. Major Institutions have more than $500,000,000 in
assets. In determining the size of an institution for
eligibility as an Originator and compliance with the Ownership
Requirements, "related corporations" within the meaning of
Section 318 of the Internal Revenue Code of 1986, as amended,
will be treated as a single entity. Only a holder owning at
least 5,000 shares of Voting Common Stock will be eligible to be
a Pooler. Once a holder has purchased the requisite amount of
Voting Common Stock, all "related corporations" (as so defined),
will be deemed to have met the Ownership Requirements.
The determination of an institution's size for eligibility
as an Originator and compliance with the Ownership Requirements
will be made at the time of its sale of any loan to a Pooler.
The Act provides that no stockholder may own, directly or
indirectly, more than thirty-three percent (33%) of the Class A
Voting Common Stock. There are no restrictions on the maximum
purchase or holding of Class B Voting Common Stock. In
connection with the Board's agreement in principle to sell Class
A Voting Common Stock to Zions, the Board eliminated a corporate
policy, adopted in 1988 to facilitate a broad distribution of
stock in Farmer Mac's initial public offering, that limited the
amount of Class A Voting Common Stock that could be purchased or
held by a stockholder to no more than 10 percent.
Exceptions. The Ownership Requirements do not apply to
those Originators or Poolers that cannot purchase shares of
Voting Common Stock because of legal restrictions on their
ownership of such shares, provided that such participants
undertake to make the minimum purchases, if and when such
restrictions are withdrawn. These Ownership Requirements also do
not apply to eligible participants that Farmer Mac may determine
by resolution need not comply with the requirements. Farmer Mac
would consider waiving Ownership Requirements for an eligible
participant whose purchase of Voting Common Stock is not barred
by legal restrictions but is, as a practical matter, virtually
impossible. For example, a state or local government
agricultural or rural housing finance agency that is not legally
barred from owning Voting Common Stock but which is unable to
obtain funds to purchase such stock might be permitted to become
a participant if it met all other eligibility standards and its
participation were deemed to be in the best interests of Farmer
Mac. No such waiver resolution has been requested by a potential
participant.
Farmer Mac reserves the right, in its sole discretion, to
change the Ownership Requirements for Poolers, Originators that
are Class B holders, or any of the four categories of Originators
that are Class A holders in order to permit maximum participation
in Farmer Mac's programs. No such changes to the Ownership
Requirements have been made.
Qualified Loans
General. A Qualified Loan must be secured by a fee simple
mortgage or a minimum 50-year leasehold mortgage, with status as
a first lien on Agricultural Real Estate or Rural Housing (as
defined below) that is located within the United States. A
Qualified Loan must also be an obligation of: (i) a citizen or
national of the United States or an alien lawfully admitted for
permanent residence in the United States; or (ii) a private
corporation or partnership whose members, stockholders or
partners holding a majority interest in the corporation or
partnership are individuals described in clause (i). A Qualified
Loan must also be an obligation of a person, corporation or
partnership having farming experience or other indicia of
creditworthiness sufficient to indicate a reasonable likelihood
of repayment of the loan according to its terms. A Qualified
Loan may be an existing or newly originated mortgage loan that
conforms to the requirements set forth in the Securities Guide.
Agricultural Real Estate and Rural Housing. Qualified Loans
are secured either by Agricultural Real Estate or by Rural
Housing. Agricultural Real Estate is defined in the Securities
Guide as a parcel or parcels of land, which may be improved by
buildings or other structures permanently affixed to the parcel
or parcels, that (a) are used for the production of one or more
agricultural commodities; and (b) consist of a minimum of five
acres or are used in producing minimum annual receipts of at
least $5,000. In accordance with the Act, the principal amount
of a Qualified Loan secured by Agricultural Real Estate may not
exceed $3.3 million, which has been adjusted for inflation as of
December 31, 1995, unless the Agricultural Real Estate consists
of an aggregate of 1,000 acres or less. In light of its new
status as a first loss guarantor, Farmer Mac has limited the
maximum loan amount to $3.3 million, regardless of acreage.
Rural Housing is defined in the Securities Guide as a one-
to four-family, owner-occupied principal residence that is a
moderately priced dwelling located in a community having a
population of 2,500 or fewer inhabitants; the dwelling (excluding
the land to which the dwelling is affixed) cannot have a purchase
price or current appraised value of more than $133 thousand,
which has been adjusted for inflation as of December 31, 1995,
and must be located on land with reasonable legal access to a
public road. In addition to the dwelling itself, a Rural Housing
loan can be secured by land associated with the dwelling having
an appraised value of no more than 50% of the total appraised
value of the combined property.
Underwriting and Appraisal Standards
In connection with the promulgation of the original Farmer
Mac Securities Guide, Farmer Mac established Underwriting and
Appraisal Standards for Qualified Loans in an effort to reduce
the risk of loss from defaults by borrowers and to provide
guidance concerning management, administration and conduct of
appraisals to all participants in the Farmer Mac I Program. As
previously noted, those standards are currently under review to
determine what changes, if any, should be made in light of the
new authorities in the 1996 Act. The original Underwriting and
Appraisal Standards were developed on the basis of industry
norms for mortgage loans qualified to be sold in the secondary
market, and were designed to assess the creditworthiness of the
borrower as well as the value of the mortgaged properties
relative to the amount of the Qualified Loan. In any
transaction, Farmer Mac requires representations and warranties
to ensure that the Qualified Loans conform to its standards and
any other requirements it may impose from time to time.
The current Underwriting Standards require, among other
things, that the loan-to-value ratio for any Qualified Loan not
exceed 70% (which Farmer Mac recently reduced from 75% in light
of its new status as a first loss guarantor). In the case of
Qualified Loans secured by Rural Housing, up to 85% of the
appraised value of the property may be financed if the amount
above 75% is covered by private mortgage insurance. In the case
of newly originated Qualified Loans secured by Agricultural Real
Estate, borrowers must also meet certain credit ratios,
including: (i) a pro forma (after closing the new loan)
debt-to-asset ratio of 50% or less; (ii) a pro forma cash flow
debt service coverage ratio of not less than 1:1 on the subject
property; (iii) a total debt service coverage ratio, computed on
a pro forma basis, of not less than 1.25:1, including farm and
non-farm income; and (iv) a ratio of current assets to current
liabilities, computed on a pro forma basis, of not less than 1:1.
In the case of existing loans, sustained loan performance is
considered by Farmer Mac to be a reliable alternative indicator
of a borrower's ability to pay the loan according to its terms.
An existing loan generally will be eligible for purchase or
inclusion in a Pool if it is at least five years old, has a
loan-to-value ratio (based on an updated appraisal) of 60% or
less, and there have been no payments more than 60 days past due
during the three years prior to pooling and no material
restructurings or modifications for credit reasons during the
five years prior to pooling.
The Underwriting Standards provide that Farmer Mac may, on a
loan-by-loan basis, accept loans that do not conform to one or
more of the Underwriting Standards when: (a) those loans exceed
one or more of the Underwriting Standards to which they do
conform to a degree that compensates for noncompliance with one
or more other Standards; and (b) those loans are made to
producers of particular agricultural commodities in a segment of
agriculture in which such non-conformance and compensating
strengths are typical of the financial condition of sound
borrowers. The acceptance by Farmer Mac of loans that do not
conform to one or more of the Underwriting Standards is not
intended to provide a basis for waiving or lessening in any way
the requirement that loans be of high quality in order to qualify
for purchase or inclusion in a Pool. The entity that requests
the acceptance by Farmer Mac of such loans bears the burden of
convincing Farmer Mac that the loans meet both tests as set forth
in clauses (a) and (b) above, and that the inclusion of such
loans in a Pool will strengthen, not weaken, the overall
performance of the Pool. For those reasons, Farmer Mac does not
believe that inclusion of such loans in a particular Pool creates
any additional risk to Farmer Mac as the guarantor of the related
securities.
The current Appraisal Standards for newly originated loans
require, among other things, that the appraisal function be
performed independently of the credit decision making process.
The Appraisal Standards require the appraisal function to be
conducted or administered by an individual meeting certain
qualification criteria who (a) is not associated, except by the
engagement for the appraisal, with the credit underwriters who
make the loan decision, though both the appraiser and the credit
underwriter may be directly or indirectly employed by a common
employer; (b) receives no financial or professional benefit of
any kind relative to the report content, valuation or credit
decision made or based on the appraisal product; and (c) has no
present or contemplated future direct or indirect interest in the
appraised property. The Appraisal Standards also require uniform
reporting of reliable and accurate estimates of the market value,
market rent and net property income characteristics of the
mortgaged property and the market forces relative thereto.
Pool Standards
General. In addition to reviewing the standards that each
Qualified Loan must meet under its new authorities, Farmer Mac
also is in the process of revising certain Pool standards. See
"Management Discussion and Analysis of Financial Condition and
Results of Operations _ 1995 Overview."
Applicability of Borrower Rights
Borrower rights which arise under state laws will continue
to apply to those Qualified Loans originated in such states. A
Pooler, including Farmer Mac, may not refuse to purchase and pool
Qualified Loans originated in states that have established
borrower rights laws merely due to the existence of such laws,
though discounts or fees reasonably related to costs and expenses
arising from such laws may be charged when purchasing such
Qualified Loans for a Pool.
Borrower rights applicable to System Institution borrowers
under certain provisions of the Farm Credit Act of 1971 do not
apply to Qualified Loans included in a Pool or purchased by
Farmer Mac.
Transactions Under Farmer Mac I Program
To date, Farmer Mac has consummated seven guarantee
transactions under the Farmer Mac I Program resulting in the
guarantee by Farmer Mac of payments of principal and interest on
approximately $748.1 million of Farmer Mac I Securities. Three
of the transactions (representing approximately $461.0 million or
62% of the Farmer Mac I Securities issued) involved the Linked
Portfolio Strategy; another was the first public offering of
Farmer Mac Guaranteed Securities, and the other three
transactions were private placements where both the guaranteed
and unguaranteed securities were retained by the respective
Poolers. As of December 31, 1995, approximately $359.1 million
of Farmer Mac I Securities remained outstanding, including those
from two transactions that closed in 1995.
The final transaction under the "open window" pooling
program initially developed and operated by Prudential Securities
Incorporated ("Pru Securities") and Equitable Agri-Business, Inc.
closed on May 12, 1995 and involved the issuance of approximately
$37 million of Farmer Mac I Securities.
Farmer Mac entered into a strategic alliance agreement with
WFCB in November 1994, which was amended in January and December
1995 (collectively, the "Strategic Alliance Agreement"). Prior to
announcing the opening of a program for new loan purchases, WFCB
entered into a swap transaction with Farmer Mac in the first
quarter of 1995 involving the exchange of $71.3 million aggregate
principal amount of Agricultural Real Estate loans for Farmer Mac
I Securities and unguaranteed subordinated securities. In
accordance with the terms of the Strategic Alliance Agreement,
WFCB received warrants to purchase 18,784 shares of Farmer Mac
Class C Non-Voting Common Stock based on the amount by which the
original aggregate principal balance of the loans in the swap
transaction exceeded $50 million. The warrants are exercisable
from time to time until February 28, 2005 at a purchase price per
share equal to $7.67; the number of shares purchasable upon
exercise of the warrants and the exercise price thereof are
subject to adjustment pursuant to the anti-dilution provisions in
the Strategic Alliance Agreement. No such warrants have yet been
exercised.
As part of the alliance, Farmer Mac and WFCB have jointly
developed a pooling program. That program, operating as "The
National AgriMortgage Funding" program and commonly referred to
as "AgFunding," was publicly announced and commenced purchasing
loans in the summer of 1995. Although no guarantee transactions
were completed in 1995, an increasing network of participating
lenders has been (and continues to be) assembled and WFCB has
issued a commitment to deliver to Farmer Mac a minimum of
$60 million of pooled loans for guarantee during the second
quarter of 1996. The Strategic Alliance Agreement permits WFCB
to sell obligations to Farmer Mac in an amount equal to the
expenses of operating the AgFunding pooling program, but not to
exceed $1.5 million in the aggregate. Those obligations are not
recourse obligations of WFCB, but are repayable only from
AgFunding's (and not WFCB's) profits. In connection with the
sale of any such obligations, WFCB is required to invest in newly
issued Farmer Mac Common Stock (up to $500,000 in Class B and the
balance in Class C) in an amount equal to the principal amount of
the obligations then being sold to Farmer Mac. Pursuant to the
agreement, on January 23, 1996, WFCB: (i) purchased 93,100 shares
of Farmer Mac Class B Voting Common Stock for a purchase price of
$229,957 and 44,162 shares of Farmer Mac Class C Non-Voting
Common Stock for a purchase price of $327,239; and (ii) sold to
Farmer Mac its promissory note in the principal amount of
$557,196. As a result of those purchases, WFCB currently owns
approximately 25% of the outstanding Farmer Mac Class B Voting
Common Stock and 8% of the outstanding Class C Non-Voting Common
Stock.
On June 20, 1995, Fannie Mae, AgFirst Farm Credit Bank
("AgFirst," created by a merger of the Farm Credit Bank of
Columbia and the Farm Credit Bank of Baltimore) and Farmer Mac
announced the opening of a joint pooling arrangement for Rural
Housing loans pursuant to which AgFirst would pool eligible loans
through the Farmer Mac I Program and the securities issued in
connection therewith would be purchased by Fannie Mae under the
terms of the arrangement. This announcement followed the
completion of extensive development work in support of this
program, the origin of which dates back to 1994, and, in
management's opinion, represents a major achievement for Farmer
Mac by associating its rural housing initiative with the well-
established and more familiar Fannie Mae operation. No Rural
Housing mortgage pool was formed by AgFirst during 1995, although
marketing initiatives and lender approval efforts in support of
the development of a pool have been (and continue to be)
extensively pursued. In early 1996, AgFirst committed to Farmer
Mac in writing its intention to securitize at least $100 million
in Rural Housing loans during 1996 and agreed to pay Farmer Mac a
monthly guarantee fee equivalent to the amount due on a $100
million pool for at least 12 months.
FARMER MAC II
General
The Farmer Mac II Program is authorized under Sections
8.0(3) (12 U.S.C. 2279aa(3)) and 8.0(9) (12 U.S.C. 2279aa(9))
of the Act. Under those Sections: (i) the portion of a loan
guaranteed (each such portion being referred to herein as a
"Guaranteed Portion") by the Secretary of Agriculture pursuant to
the Consolidated Farm and Rural Development Act (7 U.S.C. 1921
et seq.) (the "ConAct") is statutorily included in the definition
of loans eligible as "Qualified Loans" for Farmer Mac secondary
market programs; (ii) Guaranteed Portions are exempted from the
underwriting, appraisal and repayment standards that all other
Qualified Loans must meet and Pools of Guaranteed Portions are
exempted from all diversification and internal credit enhancement
(including Reserves and Subordinated Interests) required of Pools
of Qualified Loans that are not Guaranteed Portions; and (iii)
Farmer Mac is authorized to pool Guaranteed Portions and issue
Farmer Mac II Securities backed by such Guaranteed Portions.
United States Department of Agriculture Guaranteed Loan Programs
The United States Department of Agriculture ("USDA"), acting
through various agencies within USDA, currently administers the
federal rural credit programs first developed in the mid-1930s.
USDA makes direct loans and also issues guarantees for the
Secretary of Agriculture on loans made by USDA-qualified loan
originators (each, a "Lender") for various purposes.
Under the Farmer Mac II Program, Farmer Mac purchases from
Lenders and from others (collectively, "Sellers") the Guaranteed
Portions of farm ownership loans, farm operating loans, business
and industry loans and other loans that are guaranteed by the
Secretary of Agriculture pursuant to the ConAct (collectively,
the "Guaranteed Loans"). Guaranteed Portions, which represent up
to 90% of the principal amount of Guaranteed Loans, are fully
guaranteed as to principal and interest by USDA.
USDA Guarantees. The maximum loss covered by a USDA
guarantee can never exceed the lesser of: (i) 90% of principal
and interest indebtedness on the Guaranteed Loan, any loan
subsidy due, and 90% of principal and interest indebtedness on
secured protective advances for protection and preservation of
the related mortgaged property made with USDA authorization; and
(ii) 90% of the principal advanced to or assumed by the borrower
under the Guaranteed Loan and any interest due (including a loan
subsidy).
Each USDA guarantee is a full faith and credit obligation of
the United States and is activated if a Lender fails to
repurchase the Guaranteed Portion from the owner thereof (the
"Owner") within thirty (30) days after written demand from the
Owner when (a) the borrower under the Guaranteed Loan (the
"Borrower") is in default not less than sixty (60) days in the
payment of any principal or interest due on the Guaranteed
Portion, or (b) the Lender has failed to remit to the Owner the
payment made by the Borrower on the Guaranteed Portion or any
related loan subsidy within thirty (30) days after the Lender's
receipt thereof.
If the Lender does not repurchase the Guaranteed Portion as
provided above, USDA, as appropriate, is required to purchase the
unpaid principal balance of the Guaranteed Portion together with
accrued interest (including any loan subsidy) to the date of
purchase, less the servicing fee, within thirty (30) days after
written demand to USDA from the Owner. While the USDA guarantee
will not cover the note interest to the Owner on Guaranteed
Portions accruing after ninety (90) days from the date of the
original demand letter of the Owner to the Lender requesting
repurchase, procedures have been established to require prompt
tendering of Guaranteed Portions.
If in the opinion of the Lender (with the concurrence of
USDA) or in the opinion of USDA, repurchase of the Guaranteed
Portion is necessary to service adequately the related Guaranteed
Loan, the Owner will sell the Guaranteed Portion to the Lender or
USDA for an amount equal to the unpaid principal balance and
accrued interest (including any loan subsidy) on such Guaranteed
Portion less the Lender's servicing fee. Federal regulations
prohibit the Lender from repurchasing Guaranteed Portions for
arbitrage purposes.
Lenders. All Guaranteed Loans must be originated and
serviced by eligible Lenders. Under applicable regulations, all
eligible Lenders must be subject to credit examination and
supervision by either an agency of the United States or a state,
must be in good standing with their licensing authorities and
have met any licensing, loan making, loan servicing and other
applicable requirements of the state in which the collateral for
a Guaranteed Loan will be located. Each Lender must inform USDA,
as applicable, that it qualifies as an eligible Lender and which
agency or authority supervises it.
Loan Servicing. The Lender on each Guaranteed Loan is
required by regulation to retain the unguaranteed portion of the
Guaranteed Loan (the "Unguaranteed Portion"), to service the
entire underlying Guaranteed Loan, including the Guaranteed
Portion, and to remain mortgagee and/or secured party of record.
The Guaranteed Portion and the Unguaranteed Portion of the
underlying Guaranteed Loan are to be secured by the same security
with equal lien priority. The Guaranteed Portion cannot be paid
later than or in any way be subordinated to the related
Unguaranteed Portion.
Farmer Mac II Guarantee
In March 1995, Farmer Mac revised the Farmer Mac II Program
such that it began purchasing Guaranteed Portions for retention
in its portfolio under a master Farmer Mac II Guaranteed
Security. Prior to that time, Farmer Mac purchased and pooled
the Guaranteed Portions and arranged for the issuance of a series
of Farmer Mac II Securities through a related trust. Farmer Mac
guarantees only the timely payment of interest on and principal
of the Farmer Mac II Securities. It does not guarantee the
repayment of Guaranteed Portions. As discussed above, the
Lenders are required under several regulations to retain the
Unguaranteed Portions and service the loans. The Guaranteed
Portions must meet the requirements of the appropriate USDA
guaranteed loan program.
Transactions Under Farmer Mac II Program
As of December 31, 1995, Farmer Mac had issued and
guaranteed approximately $184.8 million of Farmer Mac II
Securities, of which approximately $143.3 million were
outstanding as of December 31, 1995. Of the $143.3 million of
Farmer Mac II Securities outstanding as of December 31, 1995,
approximately $138.5 million are held by Farmer Mac. The
remaining outstanding Farmer Mac II Securities are held by other
investors. See Note 5 to the Financial Statements.
FINANCING
Guarantee Fees
Farmer Mac intends to finance its operations primarily
through guarantee fees it receives. The Comptroller General of
the United States is required by the Act to review annually the
actuarial soundness and reasonableness of such fees and to submit
a report regarding the fees to Congress.
Debt Issuances
The Board has authorized the issuance of up to $1.5 billion
of Notes, subject to periodic review of the adequacy of that
level relative to Farmer Mac's borrowing requirements. Farmer
Mac may issue Notes to obtain funds for the Farmer Mac I and
Farmer Mac II Programs to cover transaction costs, guarantee
payments and the costs of purchasing Guaranteed Portions,
Qualified Loans and securities (including Farmer Mac Guaranteed
Securities backed by Guaranteed Portions and/or Qualified Loans.)
Farmer Mac also may issue Notes to fund business operations,
including liquidity. The Notes may have maturities, bear
interest and be redeemable prior to maturity, all as determined
by Farmer Mac. Pending use of the proceeds of Notes issued for
the above-described purposes, such proceeds will be invested in
accordance with the policies established by the Board in the
following investments: (1) securities and obligations issued or
guaranteed by the United States Treasury ("Treasury Securities")
or by agencies and instrumentalities of the United States
government ("Agency Securities"), including those on which
interest is payable at maturity ("zero coupon" or "strip"
securities); (2) repurchase agreements for Treasury and Agency
Securities; (3) commercial paper rated Al by Standard & Poor's
Corporation and Pl by Moody's Investors Service, Inc.; (4)
guaranteed investment contracts issued by banks or insurance
companies that are rated AAA by Standard & Poor's Corporation and
Moody's Investors Service, Inc.; (5) short-term borrowings
between banks, known as "federal funds," provided that such banks
have a rating of C or better from Thomson's BankWatch; (6)
negotiable certificates of deposit and bankers acceptances issued
by commercial banks and thrift institutions rated at least "B/C"
by Thomson's BankWatch; and (7) corporate money market funds,
such as the Merrill Lynch Institutional Fund and comparable
funds, that invest in short-term diversified, high quality money
market securities; and (8) asset-backed securities that are rated
AAA.
Any Notes issued will be repaid from the above-described
investments, reimbursements of transaction costs, guarantee fees,
payments on Farmer Mac Guaranteed Securities held in Farmer Mac's
or its subsidiary's portfolio and from the proceeds of the sale
of securities backed by Farmer Mac Guaranteed Securities or the
issuance of additional Notes. See Note 9 to the Financial
Statements for information on Farmer Mac's outstanding
indebtedness.
Profitability
The profitability of Farmer Mac's operations will be
determined largely by the volume of guarantee transactions in
which it engages, the difference between income from guarantee
fees and the amounts paid under its guarantees, the reinvestment
of its guarantee fees, its net interest income, and its
administrative expenses. Losses, if any, on guarantees will be
affected by many general circumstances, including agricultural
growing conditions, agricultural market conditions and the
agricultural economy, and particular circumstances, including the
quality of Farmer Mac credit underwriting, appraisals and loan
servicing. Current volume has not generated income in excess of
operating expenses and funding for Farmer Mac's operations has
been derived from income from operations and expenditures of
capital. Stockholders' equity has decreased as a result of the
partial use of capital to fund operations. Farmer Mac intends to
fund its future operations out of its income therefrom, primarily
from the fees it charges for issuing its guarantee on Farmer Mac
Guaranteed Securities; interest income on investments; and
revenues it may derive from its authority to function as a
Pooler. There can be no assurance, however, that the volume of
future guarantee transactions will generate sufficient income to
eliminate Farmer Mac's dependence on capital to fund operations.
Under the 1996 Act, Farmer Mac is required to increase its
capital to at least $25 million by February 1998 (or sooner if
business volume increases substantially). The failure to raise
capital to the required level would result in the suspension of
Farmer Mac's ability to purchase new Qualified Loans or issue or
guarantee new securities and could result in the appointment of a
conservator or receiver or have other adverse effects on Farmer
Mac's ability to continue to do business. There can be no
assurance that business conditions will improve adequately to
place Farmer Mac in a position to increase its capital within the
required timeframe. For a discussion of Farmer Mac's capital
requirements, see "Recent Legislative Revisions to Farmer Mac's
Statutory Charter," "Government Regulation of Farmer Mac" and
Note 3 to the Financial Statements. Significantly increased
utilization of Farmer Mac's programs by its Class A and Class B
stockholders will be necessary for Farmer Mac to become
profitable and ultimately comply with the capital raising
requirement and the higher capital requirements in the 1996 Act.
See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations _ Results of Operations."
Future Stock Issuances
Farmer Mac may issue its Voting Common Stock only to banks,
other financial entities, insurance companies and System
Institutions ("Holders") who are eligible to be Originators or
Poolers. In addition to the outstanding Voting Common Stock and
Class C Non-Voting Common Stock, Farmer Mac may issue non-voting
common stock (which may include additional shares of Class C
Non-Voting Common Stock) or preferred stock. The non-voting
common stock may have, and the preferred stock would have,
priority over the Voting Common Stock in payments of dividends
and liquidation proceeds. Farmer Mac expects to consummate the
Class A stock sale to Zions, which will generate $2.56 million in
new capital, and anticipates one or more additional issuances of
common or preferred stock, or both, within the next two years to
increase capital as required by the new legislation. Any such
issuances may be significantly dilutive of the interests of one
or more classes of stock. See "Business _ General;" "Recent
Legislative Revisions to Farmer Mac's Statutory Charter" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations _ 1995 Overview." Non-voting common stock,
including any Class C Non-Voting Common Stock, and preferred
stock, if and when issued, will be, and the Class C Non-Voting
Common Stock currently outstanding is, freely transferable. The
holders of any preferred stock would be paid in full at par
value, plus all accrued dividends, before the holders of shares
of Common Stock receive any payment upon liquidation,
dissolution, or winding up of the business of Farmer Mac.
Authority to Borrow from Treasury
The Act authorizes Farmer Mac to borrow up to $1.5 billion
from the Secretary of the Treasury, subject to certain
conditions, to enable Farmer Mac to fulfill the obligations under
its guarantee. Such debt would bear interest at a rate
determined by the Secretary of the Treasury taking into
consideration the average rate on outstanding marketable
obligations of the United States as of the last day of the
calendar month ending before the date of the purchase of such
obligations and would be required to be repaid to the Treasury
within a reasonable time. See "Farmer Mac's Borrowing Authority
from the U.S. Treasury."
Administrative Expenses
Farmer Mac may impose charges or fees in reasonable amounts
to recover the costs of administering its activities. Under the
Act, Farmer Mac is authorized to require each Originator and
Pooler to make nonrefundable capital contributions to meet the
administrative expenses of Farmer Mac. Farmer Mac would issue
shares of Voting Common Stock in exchange for such capital
contributions. No such capital contributions have been required,
and Farmer Mac has no present intention to exercise its statutory
authority to require such contributions.
FARMER MAC'S BORROWING AUTHORITY FROM THE U.S. TREASURY
Farmer Mac may issue obligations to the Secretary of the
Treasury in a cumulative amount not to exceed $1.5 billion.
The proceeds of such obligations may be used solely for the
purpose of fulfilling Farmer Mac's guarantee obligations under
the Farmer Mac I and Farmer Mac II Programs. The Secretary of
the Treasury is required to purchase such obligations of Farmer
Mac if Farmer Mac certifies to the Secretary that: (i) a
portion of the guarantee fees assessed by Farmer Mac (in an
amount determined by Farmer Mac's Board to be necessary) has
been set aside as a reserve against losses arising out of
Farmer Mac's guarantee activities and such reserve has been
exhausted; and (ii) the proceeds of the sale of such
obligations are needed to fulfill Farmer Mac's obligations
under its guarantee.
The Secretary of the Treasury is required to purchase
obligations issued by Farmer Mac in an amount determined by
Farmer Mac to be sufficient to meet the guarantee liabilities
of Farmer Mac not later than ten (10) business days after
receipt and acceptance by the Secretary of the Farmer Mac
certification described above. Such obligations would bear
interest at a rate determined by the Secretary of the Treasury
taking into consideration the average rate on outstanding
marketable obligations of the United States as of the last day
of the last calendar month ending before the date of the
purchase of such obligation, and would be required to be repaid
to the Treasury within a reasonable time. While the Act
requires that any Farmer Mac obligations purchased by the
Secretary must be repaid within a "reasonable time," the Act
does not define or provide guidance as to the meaning of that
phrase. Consequently, the terms of repayment would likely be
determined through negotiations between Farmer Mac and the
Treasury, and are unknown at this time. In the event that
Farmer Mac were in default on the repayment of any such
obligations, the Secretary of the Treasury would still be
required to purchase additional obligations of Farmer Mac so
long as the aggregate amount of all such obligations did not
exceed $1.5 billion.
The United States government does not guarantee payments
due on Farmer Mac Guaranteed Securities, funds invested in the
stock or Notes of Farmer Mac, the dividend payments on shares
of such stock or the profitability of Farmer Mac.
RECENT LEGISLATIVE REVISIONS TO FARMER MAC'S STATUTORY CHARTER
GENERAL
On February 10, 1996, President Clinton signed into law
the Farm Credit System Reform Act of 1996, Pub. L. 104-105 (110
Stat. 162). Article I of the 1996 Act substantially amends the
Farm Credit Act of 1971, in large part, by enacting into law
certain changes to the Act recommended by Farmer Mac as part of
the legislative initiative commenced in 1995. The Farmer Mac
Board and management sought the changes on the belief that the
development of the secondary market for agricultural and rural
housing loans had been constrained by certain statutory
restrictions on Farmer Mac's operations. Accordingly, the
Board directed management to seek legislative amendments to
Farmer Mac's statutory charter that would, among other things:
(i) authorize Farmer Mac to act as a pooler of qualified loans;
(ii) eliminate the mandatory subordinated interest or reserve
that must be created in connection with Farmer Mac guarantee
transactions; (iii) delay the implementation of higher minimum
and critical capital requirements that were scheduled to take
effect in December 1996; and (iv) delay the promulgation by FCA
of any final risk-based capital regulation until no earlier
than three years from the date of enactment of the 1996 Act.
The 1996 Act enacted each of these changes, together with a
number of other revisions, which are summarized below under "-
Summary of Statutory Revisions."
While the 1996 Act enacted the changes sought by Farmer
Mac, there can be no assurance that the volume of any business
generated under the revised charter will result in
profitability for Farmer Mac or that Farmer Mac will be able to
raise sufficient capital, either from retained earnings or from
external financing sources, such as an offering of common or
preferred stock, to comply with the new capital requirements of
the 1996 Act as they become effective.
SUMMARY OF STATUTORY REVISIONS
Set forth below is a summary of the key provisions of the
1996 Act.
Pooling Authority. The 1996 Act authorizes Farmer Mac to
act as a Pooler of Qualified Loans under the Farmer Mac I
Program, specifically providing Farmer Mac, or an affiliate,
the authority and power to purchase Qualified Loans, borrow
money to fund the purchase of Qualified Loans and issue Farmer
Mac Guaranteed Securities representing interests in or
obligations backed by such Qualified Loans.
Elimination of Required Subordinated Interest or Reserve.
Previous law required a minimum 10% cash reserve or
subordinated interest to be maintained (or sold to investors)
by the Originators or Poolers, or both, originating and
assembling the loans in each Pool as a condition of
Farmer Mac's guarantee of securities backed by those loans.
The 1996 Act authorizes Farmer Mac to issue and guarantee
securities backed by pools of Qualified Loans in the Farmer
Mac I Program up to 100% of the principal amount of the
Qualified Loans in each Pool.
Capital.
Extension of Capital Transition Period. The 1996 Act
directs FCA, acting through the Director of the Office of
Secondary Market Oversight (the "Director"), to promulgate risk-
based capital regulations for Farmer Mac. The 1996 Act further
provides that the public notice of proposed rulemaking to be
issued by the Director in connection with establishing such
risk-based capital regulations shall not be published for
public comment until after the expiration of the three-year
period commencing with the enactment of the 1996 Act (February
10, 1999). Prior to the enactment of the 1996 Act, the Act had
provided that risk-based capital regulations for Farmer Mac
were to have already been effective, although the Director had
not promulgated any such regulations as of the date of
enactment of the 1996 Act.
Minimum Capitalization Level. Prior to the enactment of
the 1996 Act, the minimum level of core capital required to be
maintained by Farmer Mac was to increase in December 1996 from
0.45 percent to 2.50 percent of all assets owned ("on balance
sheet") by Farmer Mac, while the amount required to be
maintained against Guaranteed Securities not owned by Farmer
Mac (or an Affiliate) and other "off-balance sheet obligations"
of Farmer Mac was to remain at 0.45 percent.
The 1996 Act imposes higher levels of core capital than
the 2.50 percent in the Act, but provides a three-year
transition period following the enactment of the 1996 Act
before Farmer Mac is required to maintain the highest level of
core capital.
Under the 1996 Act, the highest minimum capital level for
Farmer Mac will be an amount of core capital equal to the sum
of 2.75 percent of Farmer Mac's aggregate on-balance sheet
assets, as determined by generally accepted accounting
principles, plus 0.75 percent of the aggregate off-balance
sheet obligations of Farmer Mac, specifically including: (A)
the unpaid principal balance of outstanding Guaranteed
Securities; (B) instruments issued or guaranteed by Farmer Mac
that are substantially equivalent to the securities described
in category (A); and (C) other off-balance sheet obligations of
Farmer Mac (the "highest minimum capital level").
During the transition period, Farmer Mac's minimum level
of core capital will be:
(A) prior to January 1, 1997, the sum of 0.45
percent of the aggregate off-balance sheet obligations
of Farmer Mac, plus 0.45 percent of the sum of: (i)
the aggregate on-balance sheet assets acquired under
the Linked Portfolio Strategy; and (ii) the aggregate
amount of Qualified Loans purchased and held by Farmer
Mac (together, "designated assets"), plus 2.50 percent
of on-balance sheet assets other than designated assets;
(B) during the 1-year period ending December 31,
1997, the sum of 0.55 percent of the aggregate
off-balance sheet obligations, plus 1.20 percent of
designated assets, plus 2.55 percent of on-balance
sheet assets other than designated assets;
(C) during the 1-year period ending December 31,
1998, the sum of 0.65 percent of the aggregate off-
balance sheet obligations, plus 1.95 percent of
designated on-balance sheet assets, plus 2.65
percent of on-balance sheet assets other than
designated assets; except that, if Farmer Mac's
core capital is less than $25 million on
January 1, 1998, the minimum capital level
shall be the highest minimum capital level; and
(D) on and after January 1, 1999, the
highest minimum capital level.
Critical Capital Level. The 1996 Act clarifies that
Farmer Mac's critical capital level at any time shall be an
amount of core capital equal to 50 percent of the total minimum
capital requirement at that time.
Recapitalization of Farmer Mac. The 1996 Act requires
Farmer Mac to increase its total core capital to at least
$25 million by February 10, 1998 or within 180 days after the
end of the first calendar quarter that its aggregate on-balance
sheet assets, plus outstanding off-balance sheet obligations,
equal or exceed $2 billion, whichever occurs sooner. In
raising capital, Farmer Mac is permitted to use its existing
authorities to issue stock or any other recognized and
legitimate means of raising core capital within its powers. If
Farmer Mac fails to raise its core capital level within the
applicable time frame provided for in the 1996 Act, it may not
purchase new Qualified Loans or issue or guarantee new
securities until its core capital level is increased to
$25 million or more.
The 1996 Act further provides that, during the three-year
period following its enactment, Farmer Mac's on-balance sheet
assets plus off-balance sheet obligations may not exceed $3
billion, unless and until its total core capital is at least
$25 million.
For a discussion of Farmer Mac's current capital
condition, see "Government Regulation of Farmer Mac -
Regulation - Capital Standards" and Note 3 to the Financial
Statements.
Liquidation of Farmer Mac.
Voluntary Liquidation. The 1996 Act provides that Farmer
Mac may voluntarily liquidate only with the consent of the FCA
Board and in accordance with a plan of liquidation approved by
the FCA Board.
Involuntary Liquidation. Under the 1996 Act, the FCA
Board may appoint a conservator or receiver for Farmer Mac
under the circumstances specified in the general enforcement
sections of the Farm Credit Act of 1971. With respect to the
appointment of a conservator or receiver for Farmer Mac:
(1) Farmer Mac shall be considered insolvent if it is
unable to pay its debts as they fall due in the ordinary course
of business;
(2) a conservator may be appointed if Farmer Mac's
authority to purchase Qualified Loans or to issue or guarantee
securities is suspended by law (including, for example, if
Farmer Mac failed to raise its core capital to the levels
required under the 1996 Act within the applicable time frame
provided for therein); and
3) a receiver may be appointed if: (A) Farmer Mac's
authority to purchase Qualified Loans or to issue or guarantee
securities is suspended or Farmer Mac is classified under
certain enforcement levels, and the alternative actions
available under the Farm Credit Act of 1971 are not
satisfactory; and (B) the FCA determines that the appointment
of a conservator would not be appropriate.
Conservator or Receiver. The 1996 Act contains specific
provisions with respect to the eligibility, compensation and
functions of a conservator or receiver for Farmer Mac. A
conservator or receiver may be: (A) the FCA or any government
entity or employee, including the Farm Credit System Insurance
Corporation; or (B) any person who has no claim against or
financial interest in Farmer Mac, or any other basis for a
conflict of interest, and has the financial and management
expertise to direct the affairs of and to liquidate Farmer Mac
if necessary. The conservator or receiver and employees
thereof are entitled to compensation in amounts no greater than
the compensation provided to federal employees for similar
services, except that the FCA may pay higher rates, not in
excess of the prevailing rates in the private sector, if it
determines that is necessary to retain competent personnel.
The conservator or receiver:
(A) is authorized to contract with any government entity
for the use of personnel, services and facilities on terms
mutually agreed to between the parties and each such government
entity is authorized to provide such;
(B) may borrow such funds, from such sources, at such
rates as the conservator or receiver determines to be necessary
to meet the expenses or the liquidity needs of the
conservatorship or receivership, if the conservator or receiver
determines that it is likely there will be insufficient funds
to pay the administrative expenses of the conservatorship or
receivership or to fund maturing obligations thereof;
(C) shall pay valid claims for the expenses of the
conservatorship or receivership, including compensation and any
loan made by the conservator or receiver, before paying any
other claim against Farmer Mac, and may secure such claims as a
first priority lien against such property of Farmer Mac as the
receiver determines;
(D) if not a federal entity or federal employee, shall
not be personally liable for damages in tort or otherwise for
acts or omissions in connection with carrying out the
receivership except for gross negligence or intentional
tortuous or criminal conduct; and
(E) may be indemnified on such terms as the FCA considers
appropriate.
Within 30 days after the appointment of a conservator or
receiver, Farmer Mac may seek an order in the U.S. District
Court for the District of Columbia to require that the FCA
remove the conservator or receiver, and, based on the merits of
the case, the court shall either dismiss the action or direct
the FCA to remove the conservator or receiver. On the
commencement of such action, all other judicial proceedings to
which Farmer Mac is a party shall be stayed pending the outcome
of such action.
The powers of the conservator or receiver shall be
provided for in regulations to be issued by the FCA and those
powers shall be comparable to the powers available to a
conservator or receiver appointed for any other System
Institution under the Farm Credit Act of 1971.
No agreement which tends to diminish or defeat the right,
title, or interest of the conservator or receiver in any assets
acquired from Farmer Mac shall be valid against the conservator
or receiver unless the agreement: (1) is in writing; (2) is
executed by Farmer Mac and any person claiming an adverse
interest under the agreement, contemporaneously with the
acquisition of the asset by Farmer Mac; (3) is approved by the
Farmer Mac Board, or an appropriate Board committee, and is
recorded in the minutes of such; and (4) has been,
continuously, from the time of its execution, an official
record of Farmer Mac.
Upon a determination by the receiver that the assets of
Farmer Mac in receivership are inadequate to pay all valid
claims against Farmer Mac, the receiver shall submit to the
Secretary of the Treasury and to the House and Senate
Agriculture Committees a report of the financial condition of
the receivership.
Farmer Mac's charter may be canceled and its authority to
do business under the Act will terminate on such date as
determined by the FCA Board, following the placement of Farmer
Mac in receivership, but not later than the termination of the
receivership and discharge of the receiver. The Office of
Secondary Market Oversight within the FCA will be abolished and
its authorities canceled 30 days after Farmer Mac's charter has
been canceled by the FCA, but not later than the termination of
the receivership and discharge of the receiver.
Miscellaneous Amendments. The 1996 Act contains other
provisions intended to improve the efficiency of Farmer Mac's
operations or clarify other sections of the Act to conform them
to the major amendments included in the 1996 Act. The more important
provisions are summarized below.
Rural Housing. The 1996 Act clarifies that the word
"dwelling," as it is used in reference to the definition of
"rural housing," refers only to the residential structure and
not to the land on which it is affixed.
Federal Reserve Banks. Federal Reserve Banks are now
required to act as depositories and fiscal agents for Farmer
Mac, whereas under previous law the Federal Reserve Banks were
only authorized to do so. In addition, Farmer Mac is granted
access to the Federal Reserve's book-entry system for purposes
of issuing, settling and trading its securities. Previous law
authorized, but did not require, the Department of the Treasury
to permit book-entry access to Farmer Mac's securities.
Recourse Loans. Previous law prohibited the inclusion of
any loan with recourse to the originator in a Pool with respect
to which Farmer Mac had issued a guarantee. The 1996 Act
repealed this prohibition.
Diversified Pools. The 1996 Act removed the requirement
that each Pool of Qualified Loans be diverse both
geographically and with respect to commodities produced. This
change authorizes Farmer Mac to purchase individual Qualified
Loans or small groups of Qualified Loans, either in its new
capacity as a Pooler or as part of a transaction involving the
swap of Guaranteed Securities for a portfolio of Qualified
Loans, even if such purchases or transactions would not meet
the pool diversification requirements contained in previous
law.
Preemption of State Usury Laws. The 1996 Act clarifies
that State law limitations on prepayment penalties (either
fixed or declining), yield maintenance premiums, or make-whole
payment provisions charged, taken or received by an Originator
or Pooler in connection with the full or partial prepayment of
a loan are preempted by the Act. The 1996 Act also provides
that any State usury law preempted by the Act shall not apply
to an agricultural loan made in accordance with the Act for
sale to Farmer Mac or another Pooler for inclusion in a Pool
for which Farmer Mac has provided or has committed to provide a
guarantee, so long as the loan is actually sold to Farmer Mac
or included in such a Pool within 180 days after the date the
loan was made.
Borrower Stock. The 1996 Act provides that the
requirements applicable to Farm Credit System borrowers to
purchase voting stock or participation certificates in the
System Institution lender when a loan is made will not apply
if, at the time the loan is made, it is designated for sale
into the secondary market; and, in the case of a loan made
before the date of enactment of the 1996 Act that is sold into
the secondary market, all outstanding voting stock or
participation certificates held by the borrower on the loan
will be retired.
Borrowers Rights. The 1996 Act provides that borrowers'
rights otherwise applicable to loans made by System
Institutions shall not apply to a loan made by a System
Institution lender on or after the date of enactment of the
1996 Act that is designated at the time it is made for sale
into the secondary market. It further provides that, if a
designated System Institution loan is not sold into the
secondary market within 180 days after the date of the
designation, all borrowers' rights provided for in the Farm
Credit Act of 1971 shall become effective with respect to the
loan, except that if such loan is thereafter sold into the
secondary market the borrowers' rights shall not apply to the
loan beginning on the date of the sale.
GOVERNMENT REGULATION OF FARMER MAC
GENERAL
Public offerings of Farmer Mac Guaranteed Securities must
be registered with the Securities and Exchange Commission (the
"Commission") pursuant to the Securities Act of 1933, as
amended (the "1933 Act"). Farmer Mac is subject to the
periodic reporting requirements of the Securities Exchange Act
of 1934 (the "1934 Act") and, accordingly, files reports with
the Commission pursuant thereto.
REGULATION
Office of Secondary Market Oversight. As an institution
of the Farm Credit System, Farmer Mac is subject to the
regulatory authority of the FCA. Through the Office of
Secondary Market Oversight ("OSMO"), the FCA has general
regulatory and enforcement authority over Farmer Mac, including
the authority to promulgate rules and regulations governing the
activities of Farmer Mac, and to apply its general enforcement
powers to Farmer Mac and its activities. The Director of OSMO,
who was selected by and reports to the FCA Board, is
responsible for the examination of Farmer Mac and the general
supervision of the safe and sound performance by Farmer Mac of
the powers and duties vested in it by the Act. The Act
requires an annual examination of the financial transactions of
Farmer Mac and authorizes the FCA to assess Farmer Mac for the
cost of its regulatory activities, including the cost of any
examination. Farmer Mac is required to file quarterly reports
of condition with the FCA, as well as copies of all documents
filed with the Commission under the 1933 and 1934 Acts.
Department of the Treasury. In connection with the
passage of the 1996 Act, the Chairmen of the House and Senate
Agriculture Committees requested the FCA, in a cooperative
effort with the Department of the Treasury, to "monitor and
review the operations and financial condition of Farmer Mac and
to report in writing to the appropriate subcommittees of the
House Agriculture Committee, the House Banking and Financial
Services Committee and the Senate Agriculture, Nutrition and
Forestry Committee at six-month intervals during the capital
deferral period and beyond, if necessary."
Comptroller General. The Act requires the Comptroller
General of the United States to perform an annual review of the
actuarial soundness and reasonableness of the guarantee fees
established by Farmer Mac.
Capital Standards. The Act, as amended by the 1996 Act,
establishes three capital standards for Farmer Mac, as
described in "Recent Legislative Revisions to Farmer Mac's
Statutory Charter _ Summary of Statutory Revisions _ Capital."
Farmer Mac's current minimum and critical capital requirements
are based upon a percentage of on-balance sheet assets and a
lower percentage of outstanding Farmer Mac Guaranteed
Securities and assets acquired pursuant to the Linked Portfolio
Strategy; each of these percentages will increase as the
transition period is phased in. See Note 3 to the Financial
Statements for a more specific discussion of the capital
standards and Farmer Mac's current regulatory minimum capital
position. At December 31, 1995, Farmer Mac's minimum and
critical capital requirements were $4.7 million and
$2.5 million, respectively, and its actual capital level was
$11.7 million. If the fully-phased in (highest) minimum
capital level had been in effect at December 31, 1995, Farmer
Mac's actual capital would have been $3.1 million less than the
requirement.
The 1996 Act also provides that, prior to the promulgation
of a risk-based capital regulation for Farmer Mac (which, as
previously noted, cannot occur until after February 10, 1999),
Farmer Mac shall be classified as within "level I" (the highest
compliance level) of four enforcement levels so long as its
capital equals or exceeds the minimum capital level provided
for in the 1996 Act. See "Recent Legislative Revisions to
Farmer Mac's Statutory Charter - Summary of Statutory Revisions
- - Capital."
Failure to comply with the minimum capital level in
the 1996 Act would result in Farmer Mac being classified as
within level III (below the minimum but above the critical
capital level) or level IV (below the critical capital level).
(Level II is not applicable prior to the promulgation of the
risk-based capital regulation since it contemplates the failure
to comply with the risk-based capital standard.) In the event
that Farmer Mac is classifed as within level III or IV, the Act
requires the Director to take a number of mandatory supervisory
measures and provides the Director with discretionary authority
to take various optional supervisory measures depending on the
level in which Farmer Mac is classified. The mandatory
measures applicable to level III include: requiring
Farmer Mac to submit (and comply with) a capital restoration
plan; prohibiting the payment of dividends if such payment
would result in Farmer Mac being reclassified as within level
IV and requiring the pre-approval of any dividend payment even
if such payment would not result in reclassification as within
level IV; and reclassifying Farmer Mac as within a lower level
if it does not submit a capital restoration plan that is
approved by the Director or the Director determines that
Farmer Mac has failed to make, in good faith, reasonable
efforts to comply with such a plan and fulfill the schedule
for the plan approved by the Director. If Farmer Mac were
classified as within level III, then, in addition to the
foregoing mandatory supervisory measures, the Director
could take any of the following discretionary supervisory
measures: imposing limits on any increase in, or ordering
the reduction of, any obligations of Farmer Mac, including
off-balance sheet obligations; limiting or prohibiting asset
growth or requiring the reduction of assets; requiring the
acquisition of new capital in an amount sufficient to provide
for reclassification as within a higher level; terminating,
reducing or modifying any activity the Director determines
creates excessive risk to Farmer Mac; or appointing a
conservator or a receiver for Farmer Mac. The Act does not
specify any supervisory measures, either mandatory or
discretionary, to be taken by the Director in the event Farmer
Mac were classified as within level IV.
The Director has the discretionary authority to reclassify
Farmer Mac to a level that is one level below its then current
level (i.e., from level III to level IV) if the Director
determines that Farmer Mac is engaging in any action not
approved by the Director that could result in a rapid depletion
of core capital or if the value of property subject to
mortgages backing Farmer Mac-guaranteed securities has
decreased significantly.
ITEM 2. PROPERTIES
On September 30, 1991, Farmer Mac entered into a long-term
lease for its principal offices, which are located at 919 18th
Street, N.W., Suite 200, Washington, D.C. 20006. The lease,
which is for a term of ten years, covers approximately 7,500
square feet of office space. Farmer Mac has the option to
terminate the lease at the end of the fifth lease year (January
1997) upon the payment of a termination fee of $400,000 (an
amount representing approximately 20 months' rent). See Note
12 to the Financial Statements attached hereto. Farmer Mac's
offices are suitable and adequate for its present needs and the
rent paid by Farmer Mac under the lease is consistent with
current market rates for comparable office space in the
District of Columbia. Because full implementation of the new
authorities granted to Farmer Mac in the 1996 Act may result in
the expansion of Farmer Mac's staff and equipment and perhaps
the need for larger facilities, Farmer Mac is considering
alternatives to its current lease arrangement.
ITEM 3. LEGAL PROCEEDINGS
Farmer Mac is not a party to any pending legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Farmer Mac has three classes of common stock outstanding.
Class A Voting Common Stock may be held only by banks,
insurance companies and other financial institutions or similar
entities that are not institutions of the Farm Credit System.
Class B Voting Common Stock may be held only by institutions of
the Farm Credit System. There are no ownership restrictions on
the Class C Non-Voting Common Stock. The common stock was
issued in Units and, until November 1993, traded as such. A
Class A Unit consisted of one share of Class A Voting Common
Stock and one share of Class C Non-Voting Common Stock. A
Class B Unit consisted of one share of Class B Voting Common
Stock and one share of Class C Non-Voting Common Stock. In
accordance with the terms of the initial public offering, the
Class C Non-Voting Common Stock separated from the Class A and
Class B Units in November 1993.
The Class A Units were quoted on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ")
under the symbol "FAMCU" from their initial issuance and sale
in December 1988 until November 23, 1993. The Class B Units
were quoted on NASDAQ under the symbol "FAMCL" until September
1991; as a result of the limited market for Class B Voting
Common Stock and the infrequency of trades therein, the Class B
Units were delisted from NASDAQ in September 1991. Since then,
Farmer Mac has been unaware of any publicly available
quotations or prices with respect to the Class B Units or the
Class B Voting Common Stock.
The Class A and Class C Common Stock trade on the NASDAQ
Small Cap Markets tier of the NASDAQ Stock Markets under the
symbols "FAMCA" and "FAMCK," respectively. As of March 25,
1996, the high and low bid quotations as reported by NASDAQ
for Class A Common Stock were $5.00 and the high and low bid
quotations for Class C Common Stock were both $7.00. The
information set forth below with respect to the Class A and
Class C Common Stock represents the high and low bid
quotations as reported by NASDAQ for the periods indicated.
These prices are inter-dealer prices without adjustment
for retail mark-ups, mark-downs, or commissions and may not
represent actual transactions.
Class A Common Stock High Bid Low Bid
($ per share)
1994
First Quarter $4.75 $4.50
Second Quarter 5.00 4.75
Third Quarter 5.25 5.00
Fourth Quarter 5.25 4.50
1995
First Quarter $4.50 $4.50
Second Quarter 4.50 4.25
Third Quarter 4.25 3.75
Fourth Quarter 3.75 3.75
1996
First Quarter
(through March 25) $5.00 $3.75
Class C Common Stock High Bid Low Bid
($ per share)
1994
First Quarter $4.75 $4.50
Second Quarter 5.00 4.75
Third Quarter 5.00 5.00
Fourth Quarter 5.00 4.50
1995
First Quarter $4.50 $4.50
Second Quarter 4.50 4.25
Third Quarter 4.25 4.25
Fourth Quarter 4.25 4.25
1996
First Quarter (through
March 25) $7.00 $4.25
It is estimated that there were approximately 1,633
registered owners of the Class A Voting Common Stock
outstanding, approximately 102 registered owners of the Class B
Voting Common Stock outstanding and approximately 1,656
registered owners of the Class C Non-Voting Common Stock
outstanding as of March 25, 1996.
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for information on
Farmer Mac's dividend policy.
ITEM 6. SELECTED FINANCIAL DATA (dollars in thousands)
[CAPTION]
December 31,
Summary of Financial 1995 1994 1993 1992 1991
Condition: (consolidated) (consolidated) (consolidated) (consolidated (consolidated)
Investment Securities $ 63,281 $ 9,437 $ 5,503 $ 40,649 $12,486
Farmer Mac I and II
Securities 417,169 367,994 398,380 444,226 2,276
Total assets 512,464 477,238 525,254 514,257 66,169
Debentures, notes and
bonds, net:
Due within one year 207,422 168,307 172,350 87,454 49,924
Due after one year 284,084 288,209 330,190 403,086
Total liabilities 500,752 465,019 511,703 500,030 50,595
Stockholders'
equity 11,712 12,219 13,551 14,227 15,574
Selected Financial Ratios:
Return on average assets (0.13%) (0.27%) (0.14%) (0.44%) (5.04%)
Return on equity (5.41%) (10.34%) (4.99%) (9.46%) (16.44%)
Average equity to assets 2.42% 2.57% 2.71% 4.63% 30.64%
Summary of Operations
Operations: Year Ended December 31,
1995 1994 1993 1992 1991
(consolidated) (consolidated) (consolidated) (consolidated) (consolidated)
(dollars in thousands, except per share amounts)
Interest income $ 36,424 $ 31,712 $ 32,642 $ 20,154 $ 2,886
Interest expense 34,709 30,303 30,848 18,413 1,854
Net interest
income 1,715 1,409 1,794 1,741 1,032
Guarantee
fee income 1,166 1,050 1,203 932 28
Other expenses 3,699 3,968 3,976 4,151 3,828
Loss before
extraordinary item (647) (1,332) (803) (1,347) (2,750)
Extraordinary gain - - 127 - -
Net loss (647) (1,332) (676) (1,347) (2,750)
Loss per share
before extraordinary
item - - (0.34) - -
Net loss per share (0.28) (0.57) (0.28) (0.58) (1.18)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial information at and for the twelve months ended December
31, 1995 and 1994 is consolidated to include the accounts of Farmer
Mac and its two wholly owned subsidiaries, Farmer Mac Mortgage
Securities Corporation ("FMMSC") and Farmer Mac Acceptance Corporation
("FMAC"). All material intercompany transactions have been eliminated
in consolidation.
1995 OVERVIEW
1995 was an important year for Farmer Mac. Farmer Mac undertook
a major legislative initiative that culminated in the passage by
Congress in early 1996 of significant revisions to its statutory
charter. Consequently, 1995 was the last year that Farmer Mac would
be required to do business under, and that its financial performance
would be evaluated on the basis of, the provisions of a charter that
Farmer Mac's Board and management had concluded was seriously
constraining the development of the secondary market for agricultural
real estate and rural housing loans.
The new legislation authorizes Farmer Mac to perform the
functions of a Pooler in the secondary market, eliminates the
requirement to create a minimum 10% subordinated interest or reserve
requirement in connection with Farmer Mac guarantee transactions, and
extends from December 1996 to December 1999 the statutory deadline for
the full imposition of certain regulatory capital requirements
applicable to Farmer Mac. The legislation requires Farmer Mac to
increase its level of core capital to at least $25 million by February
1998 (or sooner if business volume increases substantially) or face
suspension of its authority to conduct any new business. The
legislation also made various statutory changes intended to further
streamline program operations and clarify other ambiguous statutory
provisions. For a detailed discussion of the changes to Farmer Mac's
charter as a result of the 1996 Act, see "Recent Legislative Revisions
to Farmer Mac's Statutory Charter."
In addition to the passage of the legislation, there were other
significant occurrences in 1995. In May, C. Eugene Branstool,
President Clinton's nominee to be chairman of the Farmer Mac Board,
was officially appointed to that position. He replaced John R. Dahl,
who served in that post from 1988 until mid-1994. Other developments
during the year included: the guarantee of two loan pools under the
Farmer Mac I Program; the development of two active Farmer Mac I
pooling programs for newly originated Qualified Loans, one for
Agricultural Real Estate loans under the Strategic Alliance Agreement
with WFCB and one for Rural Housing loans operated by AgFirst Farm
Credit Bank; and the significant expansion of business volume through
the Farmer Mac II Program. In addition, Farmer Mac consolidated its
existing operations by decertifying poolers that failed to comply with
minimum business volume guidelines established by the Board for the
1994 fiscal year, and focused its limited resources on supporting
pooling programs operated by the remaining poolers and the Farmer Mac
II Program. Financially, Farmer Mac reported a loss from operations
during 1995 of $647 thousand, down significantly from the $1.3 million
for 1994.
Farmer Mac is in a transition period as a result of the favorable
outcome of its legislative initiative. In particular, Farmer Mac is
no longer subject to former charter provisions that had precluded it
from dealing directly with Originators, and now has the authority,
similar to that possessed by Fannie Mae and Freddie Mac, to function
as an active Pooler. Farmer Mac is currently evaluating the manner in
which it intends to exercise its new authorities under the 1996 Act by
conducting analyses of the risks associated with such enhanced powers.
One principal focus is upon its new status as a "first loss
guarantor," since the legislation eliminated the former mandatory 10%
subordinated interest or reserve requirement that was intended to
absorb losses before the guarantee could be invoked. Another
principal focus is upon the development of appropriate operating
policies and procedures intended to assure the safe and sound
operation of the program under the new authorities. The Board
determined that implementation of those authorities should occur by
following a two-phased approach.
Phase I of the implementation process involves the development of
a guarantee fee model. The work on this project began in late
February and is scheduled to be completed by early April. The
guarantee fee model developed by Farmer Mac will be evaluated and
tested by an independent consultant before it is accepted for purposes
of establishing guarantee fee levels for the program. Upon completion
of Phase I, it is anticipated that Farmer Mac will proceed with the
securitization of Pools presented by either of its existing Poolers
and consider swap and securitization transactions involving seasoned
loan portfolios that meet existing program requirements for loan
performance and diversification. These efforts are also intended to
support the efforts of the existing Poolers, AgFunding for
Agricultural Real Estate loans and AgFirst for Rural Housing loans, to
build loan volume through their pooling programs.
Under Phase II of the implementation process, Farmer Mac plans to
evaluate all aspects of its current program and develop new policies
and procedures considered necessary for the full implementation of its
newly authorized direct pooling program. This work presently is
scheduled to be completed prior to the beginning of the fall mortgage
lending season for Agricultural Real Estate loans. The major elements
of this evaluation will include: review and refinement of credit
scoring and underwriting and appraisal standards; analysis of
diversification requirements and development of appropriate
guidelines; and evaluation of outsourcing versus internalizing the
performance of certain functions under the new structure, such as due
diligence reviews, pipeline management and warehousing of loans during
pool development, loan servicing, quality control, securitization, and
marketing.
Having achieved the legislative initiative undertaken in early
1995, Farmer Mac now faces the difficult challenge of implementing its
new legislative authorities in the very competitive market for
agricultural and rural home mortgages. Although those authorities
give Farmer Mac the statutory flexibility to devise programs that
operate under similar guidelines to those of Fannie Mae and Freddie
Mac, this flexibility by no means ensures success of Farmer Mac's
programs. A number of factors have constrained participation in
Farmer Mac's programs to date, and caused its core business activities
to be unprofitable. Those factors have included: the excess
liquidity of many agricultural lenders; the attractiveness of loans
(otherwise qualified under the Farmer Mac programs) as investments for
their originators; the disinclination of many lenders to offer
intermediate-term adjustable rate and long-term fixed rate
agricultural real estate loans, as a result of the higher
profitability associated with short-term lending; the lack of borrower
demand for intermediate and long-term loans due to the lower interest
rates generally associated with shorter term loans; various
restrictive provisions in Farmer Mac's charter; and the unfavorable
regulatory capital treatment afforded banks and System Institutions
holding subordinated securities created in Farmer Mac transactions.
Even though the 1996 Act has removed those charter provisions that
Farmer Mac had concluded were constraining the operation of the
secondary market, most of the other enumerated factors, over which
Farmer Mac has little, if any, control, may continue to exist as
Farmer Mac seeks to implement its new authorities. If those factors
persist, they will affect Farmer Mac's ability to implement programs
that generate the volume of loans necessary to achieve profitability
and ultimately comply with the requirement to raise capital to higher
levels by February 1998. Several positive developments have come from
the legislation, including lower interest rates on loans offered in
the pooling program operated by WFCB as a result of the elimination of
the subordination requirement and corresponding increases in that
program's loan volume, as well as an offer to purchase a substantial
portion of Farmer Mac's Voting Common Stock. Despite these positive
developments, and Farmer Mac's ongoing efforts as described above to
prepare for the implementation of its new authorities under the 1996
Act, Farmer Mac's ability to operate profitably in the future remains
uncertain.
Turning to financial results for 1995, Farmer Mac reported a net
loss of $647 thousand, which is a significant reduction from the net
loss reported for the same period in 1994. This reduction in loss was
primarily the result of increased net interest income and guarantee
fee income and reduced administrative expenses. Farmer Mac's
administrative expenses will increase as it begins to implement the
new authorities in the 1996 Act.
FINANCIAL REVIEW
Balance Sheet - General. During 1995, Farmer Mac's assets grew
by $35.3 million, from $477.2 million at December 31, 1994 to
$512.5 million at December 31, 1995. The growth in assets primarily
resulted from a growth in Farmer Mac I and II Securities and in
investment securities. During 1995, Farmer Mac issued $56.2 million
in securities under the Farmer Mac II Program, $55.9 million of which
were purchased by Farmer Mac for investment purposes. Under the
Farmer Mac I Program, Farmer Mac issued $101.0 million in Farmer Mac I
Securities, $36.8 million of which were acquired for investment
purposes.
Farmer Mac I and II Securities. At December 31, 1995, Farmer Mac
held $417.2 million of Farmer Mac I and II Securities, $278.6 million
of which were in Farmer Mac I Securities and $138.5 million in Farmer
Mac II Securities. At December 31, 1994, Farmer Mac held
$368.0 million of Farmer Mac I and II Securities, $282.5 million of
which were in Farmer Mac I Securities and $85.5 million of which were
in Farmer Mac II Securities.
The following table summarizes the amortized cost, fair value and
weighted average yield of Farmer Mac I and II Securities by remaining
contractual maturity as of December 31, 1995.
Maturity
After 1 After 5
year years
10 through After
Within through 10 10
1 year 5 years years years Total
(dollars in thousands)
Farmer Mac I Securities
- Amortized cost _ $239,927 _ $38,698 $278,62
- Fair value _ 246,054 _ 40,819 286,873
- Yield _ 7.00% _ 7.42% 7.06%
Farmer Mac II Securities
- Amortized cost $230 16,937 39,854 81,523 138,544
- Fair value 231 16,878 40,210 82,848 140,167
- Yield 7.27% 6.62% 6.94% 6.94% 6.90%
Total
- Amortized cost $230 256,864 39,854 120,221 417,169
- Fair value 231 262,932 40,210 123,667 427,040
- Yield 7.27% 6.97% 6.94% 7.10% 7.01%
Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Investment Securities. The $53.8 million growth in investment
securities from December 31, 1994 to December 31, 1995 resulted from
management's decision to hold a portfolio of available-for-sale
investment securities, comprised of agency mortgage-backed securities
with floating rates. This portfolio is primarily funded with debt of
comparable maturities. At December 31, 1995 and 1994, Farmer Mac's
investment securities totaled $63.3 million and $9.4 million,
respectively.
The following table sets forth the amortized cost of Farmer Mac's
investment securities by type and classification as of December 31,
1995 and 1994.
Amortized Cost
December 31, December 31,
1995 1994
(in thousands)
Held-to-maturity
U.S. agency debt securities $2,000 $4,000
Mortgage-backed securities 5,419 5,437
Total $7,419 $9,437
Available-for-sale
Mortgage-backed securities $55,722 _
The amortized cost, fair values, and weighted average interest rates
of investment securities at December 31, 1995, by contractual
maturity, were as set forth in the table below.
December 31, 1995
Amortized Fair Weighted
Cost Value Average Rate
(dollars in thousands)
Held-to-maturity securities
Due after 1 year through 5 years $ 2,000 $ 1,999 5.48%
Due after 10 years 5,419 5,428 7.00%
Total $ 7,419 $ 7,427 6.59%
Available-for-sale securities
Due after 10 years $55,722 $55,862 6.41%
Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Other investments. Other investments are primarily comprised of
cash invested in a Guaranteed Investment Contract and Guaranteed
Portions purchased under the Farmer Mac II Program. At December 31,
1995 and 1994, other investments totaled $2.3 million and
$10.7 million, respectively. The weighted average rate of the other
investments at December 31, 1995 was 6.15% and the weighted average
remaining maturity was 3.3 years.
Debentures, notes and bonds, net. At December 31, 1995, Farmer
Mac had $491.5 million of Discount Notes and Medium-Term Notes (net of
unamortized debt issuance costs, discounts and premiums) outstanding,
an increase of $35.0 million over 1994. The increase in outstanding
debt is primarily attributable to the purchase of Farmer Mac I and
Farmer Mac II Securities for investment purposes.
The following table presents, for the periods indicated, certain
information regarding Farmer Mac's short term borrowings by type of
borrowing. The Current Portion of Medium-Term Notes refers to those
Medium-Term Notes maturing within the next twelve months, and includes
$6.9 million of Medium-Term Notes with optional redemption provisions.
Maximum
Effective Amount Effective
Interest Rate Outstanding Interest Rate
Balance at at end of during the during
end of period period period period
(dollars in thousands)
December 31, 1995
Discount Notes $132,788 5.62% $297,341 5.80%
Current Portion
of Medium-Term Notes 74,634 6.65% 79,436 6.53%
Total $207,422
December 31, 1994
Discount Notes $124,337 5.81% $124,337 4.32%
Current Portion of
Medium-Term Notes 43,970 5.94% 63,938 5.63%
Total $168,307
Average Balances, Income and Expense, Yields and Rates. The following table
presents, for the periods indicated, information regarding interest income on
average interest earning assets and related yields, as well as interest expense
on average interest bearing liabilities and related rates paid. The average
balances were calculated by averaging month-end balances.
Year Ended December 31,
1995 1994 1993
__________________________ __________________________ ___________________________
Average Income/ Average Average Income/ Average Average Income/ Average
Balances Expense Rate Balances Expense Rate Balances Expense Rate
(dollars in thousands)
Assets
Earning assets:
Farmer Mac I & II
Securities $397,571 $29,097 7.32% $381,282 $26,627 6.98% $404,955 $29,120 7.19%
Investments and
cash equivalents 119,485 7,327 6.13% 100,864 5,085 5.04% 84,464 3,522 4.17%
Total earning assets 517,056 36,424 7.05% 482,146 31,712 6.58% 489,419 32,642 6.67%
Other assets 12,688 11,403 10,731
$529,744 $493,549 $500,150
Liabilities and
Stockholder's Equity
Interest-bearing
liabilities
Debentures, notes
and bonds, net $510,853 $34,709 6.79% $473,387 $30,303 6.40% $478,679 $30,848 6.44%
Other liabilities 7,124 7,286 7,915
Stockholders'equity 11,767 12,876 13,556
$529,744 $493,549 $500,150
Net interest
income/spread $1,715 0.26% $ 1,409 0.18% $ 1,794 0.23%
Net yield on interest
earing assets 0.33% 0.29% 0.37%
Rate/Volume Analysis. The table below sets forth certain
information regarding the changes in the components of Farmer Mac's
net interest income for the periods indicated. For each category,
information is provided on changes attributable to (a) changes in
volume (change in volume multiplied by old rate); (b) changes in
rate (change in rate multiplied by old volume); and (c) the total.
Combined rate/volume variances, a third element of the calculation,
are allocated based on their relative size.
1995 vs. 1994 1994 vs. 1993
_______________________________ _________________________________
Increase or (Decrease) Due to Increase or (Decrease) Due to
Rate Volume Total Rate Volume Total
Income from interest-
earning assets:
Farmer Mac I and II
Securities $ 1,307 $1,163 $2,470 $ (824) $(1,669) $(2,493)
Investments 1 ,210 1,032 2,242 811 752 1,563
Total income from
interest-earning assets: 2,517 2,195 4,712 (13) (917) (930)
Expense on interest-
bearing liabilities 1,925 2,481 4,406 (205) (340) (545)
Change in net interest
income $ 592 $ (286) $ 306 $ 192 $ (577) $ (385)
RESULTS OF OPERATIONS
General. Farmer Mac reported a net loss in 1995 of $647
thousand, a decrease of $685 thousand or 51% from the loss
reported in 1994. The decrease in loss is attributable to
increased net interest income, a result of the shift from lower
yielding to higher yielding interest earning assets, increased
guarantee fee income from an increase in the level of outstanding
Farmer Mac I and II Securities, and reduced expenses, a result of
less pooler activity.
The $1.3 million net loss reported in 1994 represents a
$656 thousand increase in loss from 1993. The increase in loss
from 1993 to 1994 primarily results from the reduction of yield
maintenance income relative to the increased level of premium
amortization, both of which occurred as a result of prepayments
on the mortgage loans underlying Farmer Mac I Securities held by
Farmer Mac and the higher interest rate environment in 1994 as
compared to 1993. Farmer Mac recognized $1.9 million of interest
income from yield maintenance payments in 1994, as compared to
$3.6 million in 1993, and increased the level of premium
amortization by $1.7 million in 1994, as compared to $2.2 million
in 1993.
Farmer Mac's future profitability will be affected not only
by guarantee volume but also by any payments Farmer Mac must make
on its guarantees; payments it must make on its Notes; the income
it earns on its investment securities, its mortgage portfolio and
other funds it is holding; and its administrative expenses.
Losses, if any, on guarantees will be affected by many general
circumstances, including agricultural growing conditions,
agricultural market conditions and the agricultural economy, and
particular circumstances, including the quality of Farmer Mac
credit underwriting, appraisals and loan servicing. The primary
sources of funding for the payment of claims made under
guarantees are the fees Farmer Mac charges for providing its
guarantees, together with Farmer Mac's loss allowance, invested
capital and the proceeds of any other debt issuance.
Even with the new legislative authorities, improvements in
Farmer Mac's operating results ultimately will depend upon the
volume of new guarantee transactions, which in turn, is dependent
upon continued and significantly increased utilization of its
programs by its Class A and Class B stockholders.
Net Interest Income. Net interest income increased $306
thousand from 1994 to 1995, and decreased $385 thousand from 1993
to 1994. The increase in 1995 is largely attributable to an 8
basis point (0.08%) increase in the net interest spread,
resulting from a shift in the composition of interest earning
assets from lower yielding Farmer Mac I Securities to higher
yielding Farmer Mac I and II Securities. The effective yield on
the Farmer Mac I Securities has also increased from 1994 to 1995
as certain loans underlying the Farmer Mac I Securities have
extended beyond their scheduled maturity date, thus providing
interest to Farmer Mac until the payoff date, and increasing the
effective yield.
The $385 thousand decrease from 1993 to 1994 is largely the
result of the $23.7 million or 6% decline in the average balances
of the Farmer Mac I and II Securities. Although the average
balance of investments and the average rate of investments
increased 16.4 million and 87 basis points, respectively, from
1993 to 1994, these increases were not enough to offset the
effects of the decline in the average balances of the Farmer
Mac I and II Securities.
In the absence of increased volume, Farmer Mac's interest
expense, over time, may exceed its interest income as the
composition of its debt portfolio shifts from shorter-term,
lower costing debt to longer-term, higher costing debt while the
earnings from its mortgage portfolio continue to be recognized on
a level yield basis. The purchase of the mortgage portfolio was
funded with a series of callable and non-callable debt issues, at
an initial weighted average interest rate below the level yield
of the interest earning assets. However, as the shorter-term,
lower costing debt matures, the longer-term, higher costing debt
will remain, thus increasing the weighted average interest rate
of Farmer Mac's debt portfolio and decreasing net interest
income.
Interest Income. Interest income totaled $36.4 million,
$31.7 million and $32.6 million for the years ended December 31,
1995, 1994 and 1993, respectively. The $4.7 million increase
from 1994 to 1995 in interest income is attributable to a
$34.9 million increase in the average amount of interest earning
assets outstanding during 1995 as compared to 1994, a result of
$43.6 million in net growth in the Farmer Mac II Program, and a
47 basis point (0.47%) increase in the average rate of interest
earning assets from 1994 to 1995. The increase in the average
rate of interest earning assets was due to an increase in market
interest rates, a shift from lower coupon, more seasoned Farmer
Mac I and II Securities to higher coupon, newly originated Farmer
Mac I and II Securities, and an increase in the effective yield
of Farmer Mac I Securities as a result of the extension of
certain loans with balloon maturities underlying the Farmer Mac I
Securities. In certain Pools, loans with balloon maturities are
permitted to remain in the Pool up to two years after the
scheduled maturity date. Farmer Mac and/or the holder of the
Farmer Mac I Securities receives interest during that two-year
period.
With respect to other interest earning investments, Farmer
Mac has changed the composition of the portfolio from lower
yielding investments such as commercial paper to higher yielding
investments such as floating rate mortgage-backed securities.
The $930 thousand decrease in interest income from 1993 to
1994 is attributable to the $23.7 million decrease in the average
balance of Farmer Mac I and II Securities, a result of principal
repayments on the securities, and the $1.2 million reduction in
interest income from the excess of the increased level of premium
amortization over yield maintenance.
Interest Expense. Interest expense for the years ended
December 31, 1995, 1994 and 1993 totaled $34.7 million,
$30.3 million, and $30.8 million, respectively. The $4.4 million
increase from 1994 to 1995 in interest expense resulted from
increases in the average amount and average cost of interest
bearing liabilities. During 1995, Farmer Mac issued $2.8 billion
(net of discount) of Discount Notes and $68.7 million of Medium-
Term Notes and redeemed $2.8 billion of Discount Notes and
$42.1 million of Medium-Term Notes.
The $545 thousand decrease in interest expense from 1993 to
1994 is attributable to the decline in the average balance of
interest bearing liabilities and the 4 basis point (0.04%)
decline in the average cost of interest bearing liabilities. The
greater concentration of shorter term, lower costing debt during
1994 lowered the overall cost of the total debt portfolio.
Other Income. Other income totaled $1.3 million,
$1.2 million, and $1.4 million for the years ended December 31,
1995, 1994 and 1993, respectively, an increase of $110 thousand
from 1994 to 1995 and a decrease of $152 thousand from 1993 to
1994. Guarantee fee income, the principal component of other
income, increased $116 thousand from 1994 to 1995 and decreased
$153 thousand from 1993 to 1994. The changes in guarantee fee
income for the comparable periods were attributable to the volume
of guarantee transactions outstanding in each of the comparable
periods.
Miscellaneous income, the other component of other income,
consisted primarily of transaction fees generated from the Farmer
Mac II Program. Miscellaneous income decreased $6 thousand from
1994 to 1995 and increased $1 thousand from 1993 to 1994. The
decrease in miscellaneous income from 1994 to 1995 resulted from
a newly implemented policy of reducing transaction fees in the
Farmer Mac II Program for large transactions. The increase from
1993 to 1994 was primarily the result of the level of issuances
of Farmer Mac II Securities and purchases of Guaranteed Portions
under the Farmer Mac II Program for the comparable periods. Total
volume under the Farmer Mac II Program totaled $56.2 million in
1995, as compared to $46.9 million in 1994 and $49.9 million in
1993.
Other Expenses. Other expenses totaled $3.7 million,
$4.0 million and $4.0 million for the years ended December 31,
1995, 1994 and 1993, respectively, a decrease of $269 thousand
from 1994 to 1995, and a decrease of $8 thousand from 1993 to
1994. The $269 thousand decrease from 1994 to 1995 is largely
attributable to reductions in compensation and employee benefits,
professional fees and administrative expenses, which was
partially offset by an increase in insurance expense.
Compensation and employee benefits totaled $1.9 million for
1995, a decrease of $106 thousand from the $2.0 million reported
for 1994. The decrease resulted from a reduction in the amount
of bonuses paid to management and the use of lower costing
temporary employees during 1995.
Professional fees, consisting primarily of legal, accounting
and consulting fees, totaled $412 thousand for 1995, a decline of
$155 thousand from the $567 thousand reported for 1994. The
decrease resulted from non-recurring consulting and professional
fees, including a marketing and an asset/liability management
study, the transfer of trustees for the Farmer Mac II Program and
the installation of a local area network, incurred in 1994.
Administrative expenses totaled $360 thousand for 1995, a
decrease of $88 thousand from the $448 thousand reported for
1994. The decrease in administrative expenses is attributable to
a reduction in travel-related expenses and advertising costs,
both of which resulted from less pooler activity.
Insurance expense totaled $216 thousand for 1995, an
increase of $75 thousand from the $141 thousand reported for
1994. The increase is attributable to an increase in Directors
and Officers liability insurance coverage.
Farmer Mac's other expenses will increase as it proceeds to
implement the new authorities under the 1996 Act. As previously
noted, the implementation process consists of a two-phased
approach, and will likely involve the use of outside service
providers and the hiring of additional employees.
From 1993 to 1994, other expenses declined $8 thousand,
primarily the result of a decrease in professional fees and an
increase in compensation and employee benefits. Professional
fees decreased $150 thousand from 1993 to 1994, primarily as a
result of the elimination of outside legal services related to
the Farmer Mac II Program. From 1993 through January 1994,
Farmer Mac utilized the services of outside counsel to assist
with the issuance of securities under the Farmer Mac II Program;
however, beginning February 1, 1994, all of these services were
performed by internal legal personnel.
Compensation and employee benefits increased $119 thousand
from 1993 to 1994, a result of increases in staffing,
attributable mainly to greater internal staffing of the Farmer
Mac II Program. During the latter half of 1993, Farmer Mac added
two employees and, in the first quarter of 1994, added one
employee.
Extraordinary Gain. In 1993, the Corporation recognized an
extraordinary gain of $127 thousand or $0.06 per share from the
early extinguishment of $14.9 million of debt.
Dividends. Farmer Mac has not paid and does not expect to
pay dividends on its common stock in the near future. Dividends
on the common stock are subject to determination and declaration
by the Board. In February 1992, the Board adopted a policy
stating that no dividends would be paid on Farmer Mac Voting or
Non-Voting Common Stock until such time as Farmer Mac's
stockholders' equity is at least equal to $22 million (the amount
of gross proceeds raised by Farmer Mac in its initial common
stock offering). Thereafter, up to 50% of accumulated net
earnings may be paid out as dividends, provided that
stockholders' equity remains at least equal to $22 million. No
preference between holders of the Voting Common Stock and Class C
Non-Voting Common Stock has been established relating to
dividends. The ratio of dividends paid on each share of Class C
Non-Voting Common Stock to each share of Voting Common Stock,
however, will be three-to-one. Dividends paid to holders of
Class A and Class B Voting Common Stock will be equal.
RISK MANAGEMENT
Interest rate risk management. Interest rate risk is the
risk that interest rate changes could materially affect equity
and earnings. Farmer Mac is subject to interest rate risk
primarily as a result of the ability of borrowers to prepay their
mortgages before the scheduled maturities. Mortgage prepayments
can cause fluctuations in net interest income to the extent that
they change the match of cashflows of Farmer Mac's assets and
liabilities, as well as the amortization of certain deferred
items. This risk is mitigated by yield maintenance provisions,
when present, which require borrower and/or pooler payments to be
made to Farmer Mac when the mortgage loans prepay. These
payments are calculated such that, when reinvested with the
prepaid principal, they should generate substantially the same
cash flows that would have been generated
by the mortgage-backed securities had the underlying mortgage
loans not prepaid. The existence of these provisions reduces
(but does not eliminate) Farmer Mac's exposure to reinvestment
risk.
Management has established policies and implemented interest
rate risk management procedures to monitor its exposure to
interest rate volatility from prepayments and reinvestment risk.
Management performs sensitivity analyses of Farmer Mac's market
value of equity and net interest income and calculates the
duration gap of its assets and liabilities on an ongoing basis.
These risk measures are reviewed regularly to determine the
optimal asset and liability mix to limit Farmer Mac's exposure to
interest rate risk.
Farmer Mac's primary strategy to manage prepayment and
reinvestment risk is to fund the Farmer Mac I and II Securities
with a mix of short-term Discount Notes and callable and non-
callable Medium-Term Notes. This funding mix is designed to
match the expected cash flows of the mortgages underlying the
Farmer Mac I and II Securities, while allowing Farmer Mac the
ability to adjust debt maturities in response to prepayments.
Credit risk management. Prior to enactment of the 1996 Act,
the Board established a loss reserve policy for Farmer Mac,
stipulating that ten percent (10%) of the guarantee fees earned
from transactions in which Farmer Mac's guarantee is provided in
the Farmer Mac I Program be set aside as a loss allowance. No
loss allowance has been made specifically for the Farmer Mac II
Program because the Guaranteed Portions are backed by the full
faith and credit of the United States and are not materially
exposed to credit losses. As of December 31, 1995, Farmer Mac's
total loss allowance was $392 thousand, an increase of $97
thousand from December 31, 1994. This increase in the allowance
for losses is attributable to the volume of guarantee fees
received in 1995, as compared to 1994. See Note 7 to the
Financial Statements. Future additions to this allowance will be
charged to earnings and the amounts in the allowance account will
be used to cover payments of any claims made under Farmer Mac
guarantees. Farmer Mac considers the amounts in the allowance
account to be adequate to cover its exposure to guarantee
payments on existing Farmer Mac I Securities. Before Farmer Mac
is required to make a guarantee payment on its existing Farmer
Mac I Securities, full recourse must be taken against a reserve
or subordinated interest initially established in an amount equal
to at least ten percent (10%) of the initial pool balance. The
main risk Farmer Mac bears is that this unguaranteed reserve or
subordinated interest will be insufficient ultimately to cover
timely payment of principal and interest to holders of Farmer Mac
I Securities. To mitigate this risk, Farmer Mac has required all
loans in a pool to meet standards with respect to loan-to-value
ratios, other financial ratios, and diversification among crops
and geographic locations represented. Farmer Mac subjects each
pool submitted for guarantee under the Farmer Mac I Program to a
"stress test" designed to analyze the pool's diversification and
the sufficiency of the reserve or subordinated interest under
simulated conditions of greatly increased foreclosures and
losses. Farmer Mac only provides its guarantee on securities
backed by pools that pass its stress test. As of December 31,
1995, the subordinated interests represented 10.0% of the
outstanding balance of all Farmer Mac I Securities and
subordinated interests; any losses incurred as a result of
foreclosures may reduce the outstanding balance of the
subordinated interests. As part of the overall review of its
policies in light of the changes from the 1996 Act, Farmer Mac is
currently evaluating the appropriateness of its loan loss reserve
policy, particularly as a result of its new status as a first
loss guarantor, and its underwriting standards.
At December 31, 1995, a total of two loans aggregating $299
thousand were 90 days or more past due, three loans totaling $683
thousand were in foreclosure and title to two loans with an
aggregate outstanding principal balance of $709 thousand had been
acquired by the trust in the Farmer Mac I Program. The seven
loans combined represent 0.5% of the aggregate principal amount
of outstanding Farmer Mac I Securities at December 31, 1995.
Management believes that no losses will be incurred by Farmer Mac
as a result of the loans in foreclosure or the real estate owned
by the trust.
LIQUIDITY
Farmer Mac's primary sources of liquidity are issuances of
debt obligations, and principal and interest payments on
mortgages underlying securities purchased by Farmer Mac under the
Farmer Mac I and Farmer Mac II Programs. Although Farmer Mac's
debt is not guaranteed by the U.S. government, the capital
markets have treated its obligations as "federal agency" debt,
allowing Farmer Mac to have ready access to funds at favorable
rates.
Funds from the issuance of Discount Notes and Medium-Term
Notes may be used in the Farmer Mac I and Farmer Mac II Programs
to cover transaction costs, guarantee payments and the costs of
purchasing Guaranteed Portions, Qualified Loans and securities
(including Farmer Mac Guaranteed Securities backed by Guaranteed
Portions and/or Qualified Loans). Farmer Mac may also issue
Notes to fund business operations, including liquidity.
Farmer Mac also maintains a portfolio of cash equivalents,
comprised of commercial paper, federal funds, and other short-
term investments, to draw upon as necessary. At December 31,
1995 and 1994, Farmer Mac's cash and cash equivalents totaled
$8.3 million and $73.1 million, respectively.
CAPITAL RESOURCES
The Act established capital requirements for Farmer Mac,
which were modified by the 1996 Act. Certain types of assets and
guarantees are required to be supported by specific amounts of
"core capital." The Act further defines capital levels as
"minimum" or "critical;" the 1996 Act phases in higher minimum
capital requirements over a three-year transition period.
Certain levels of enforcement are given to the FCA depending upon
Farmer Mac's compliance with these capital levels. See "Recent
Legislative Revisions to Farmer Mac's Statutory Charter - Summary
of Statutory Changes - Capital" and "Government Regulation of
Farmer Mac - Regulation - Capital Standards." As of December 31,
1995, Farmer Mac's minimum capital requirement was $4.7 million
and its actual capital level was $11.7 million. At December 31,
1994, Farmer Mac's minimum capital requirement was $4.8 million,
and its actual capital level was $12.2 million. See "Government
Regulation of Farmer Mac" and Note 3 to the Financial Statements.
In the opinion of management, Farmer Mac has sufficient
liquidity and capital for the next twelve months.
ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
which prescribes the accounting and reporting for all stock-based
compensation plans, including employee stock options, restricted
stock, and stock appreciation rights. This statement does not
require companies to change their existing accounting for
employee stock options under APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Instead, the new rules encourage
companies to recognize expense for stock-based awards based on
their estimated fair value on the date of grant. Companies
electing to continue following present accounting rules under APB
No. 25 will be required to provide pro forma disclosures of what
net income and earnings per share would have been had the new
fair value method been used.
This statement is effective as of January 1, 1996.
Management does not believe that this statement will have a
material impact on Farmer Mac's financial results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Federal Agricultural Mortgage Corporation
We have audited the accompanying consolidated balance sheets
of the Federal Agricultural Mortgage Corporation ("Farmer Mac")
and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations and cash flows for
each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the
responsibility of Farmer Mac's management. Our responsibility is
to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 3, Farmer Mac has been unable to
generate sufficient business volume to achieve profitability and
therefore has reduced its capital by $10 million since its
inception in 1988. On February 10, 1996, President Clinton
signed legislation that, among other things, broadens the scope
of Farmer Mac's permitted business activities, alters the timing
of implementation as well as the nature of increased capital
requirements, and expands the authorized enforcement powers of
Farmer Mac's regulator. As of December 31, 1995, Farmer Mac was
in compliance with all currently applicable regulatory capital
requirements. However, higher capital requirements will be
phased in between January 1, 1997 and January 1, 1999, with
significantly higher capital requirements in effect no later than
January 1, 1998. Farmer Mac's regulator has certain enforcement
powers if Farmer Mac is unable to meet its capital standards,
including the authority to require a capital restoration plan,
restrict or prohibit payment of dividends, limit growth, restrict
activities, and appoint a conservator or receiver.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Farmer Mac and subsidiaries as of
December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 1995 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
February 12, 1996, except as to Note 11, which is as of March 14, 1996
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31,
1995 1994
ASSETS:
Cash and cash equivalents $ 8,336 $ 73,129
Interest receivable 15,572 14,023
Guarantee fees receivable 573 454
Investment securities (Note 4):
Held-to-maturity, fair value of
$7,427 and $8,681 at December 31, 1995
and 1994, respectively 7,419 9,437
Available-for-sale 55,862 --
Farmer Mac I & II Securities, fair value
of $427,040 and $358,023 at December 31,
1995 and 1994, respectively (Note 5) 417,169 367,994
Other investments, fair value of $2,338
and $10,652 at December 31, 1995
and 1994, respectively (Note 6) 2,340 10,691
Farmer Mac I & II payments receivable 4,939 1,196
Office equipment, net (Note 8) 65 98
Prepaid expenses and other assets 189 216
TOTAL ASSETS $512,464 $477,238
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Allowance for sold Farmer Mac I & II
Securities (Note 7) $ 112 $ 81
Accounts payable and accrued expenses 740 972
Accrued interest payable 8,394 7,450
Debentures, notes and bonds,
net: (Note 9)
Due within one year 207,422 168,307
Due after one year 284,084 288,209
TOTAL LIABILITIES 500,752 465,019
STOCKHOLDERS' EQUITY (Note 10):
Common stock:
Class A Voting, $1 par value, no
maximum authorization, 670,000
shares issued and outstanding 670 670
Class B Voting, $1 par value, no
maximum authorization,
500,301 shares issued and outstanding 500 500
Class C Non-Voting, $1 par value, no
maximum authorization, 1,170,301 shares
issued and outstanding 1,170 1,170
Additional paid in capital 19,331 19,331
Unrealized gain on securities available
available-for-sale 140 - _
Accumulated deficit (10,099) (9,452)
TOTAL STOCKHOLDERS' EQUITY 11,712 12,219
Commitments (Note 11)
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $512,464 $477,238
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
December 31,
1995 1994 1993
INTEREST INCOME:
Investments and cash equivalents $ 7,327 $ 5,085 $ 3,522
Farmer Mac I and II Securities 29,097 26,627 29,120
TOTAL INTEREST INCOME 36,424 31,712 32,642
INTEREST EXPENSE 34,709 30,303 30,848
NET INTEREST INCOME 1,715 1,409 1,794
OTHER INCOME:
Guarantee fees 1,166 1,050 1,203
Miscellaneous 171 177 176
TOTAL OTHER INCOME 1,337 1,227 1,379
OTHER EXPENSES:
Compensation and employee benefits 1,928 2,034 1,915
Professional fees 412 567 717
Insurance 216 141 141
Rent 166 179 162
Regulatory fees 289 302 306
Board of Directors fees
and meeting expenses 328 297 301
Administrative 360 448 434
TOTAL OTHER EXPENSES 3,699 3,968 3,976
LOSS BEFORE EXTRAORDINARY ITEM (647) (1,332) (803)
Extraordinary gain from early
extinguishment of debt _ - 127
NET LOSS $ (647) $(1,332) $ (676)
LOSS PER SHARE BEFORE
EXTRAORDINARY ITEM $ _ $ - $(0.34)
NET LOSS PER SHARE $ (0.28) $ (0.57) $(0.28)
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
December 31,
____________________________________
1995 1994 1993
CASH FLOWS FROM
OPERATING ACTIVITIES:
Loss from Operations $ (647) $ (1,332) $ (676)
Adjustments to reconcile net loss
to cash provided by operating
activities:
Amortization of premium on Farmer
Mac I and II Securities 4,791 6,554 11,074
Discount Note amortization 9,522 4,807 1,174
(Increase) decrease in guarantee
fees receivable (119) 66 (285)
(Increase) decrease in interest
receivable (1,549) 1,484 1,567
(Increase) decrease in Farmer Mac I
& II payments receivable (3,743) (690) 2,631
Decrease (increase) in prepaid
expenses and other assets 27 (127) 79
Amortization of debt issuance
costs 203 245 313
(Decrease) increase in accounts
payable and accrued expenses (232) 200 311
Increase (decrease) in accrued
interest payable 944 (882) (670)
Provision for losses on Farmer Mac
I Program 97 93 115
Gain on early extinguishment of
debt - - (127)
Other (49) (41) (201)
Net cash provided by operating
activities 9,245 10,377 15,305
CASH FLOWS FROM
INVESTING ACTIVITIES:
Farmer Mac I & II purchases (104,674) (47,712) (38,730)
Purchases of investments (78,865) (44,905) (119,370)
Proceeds from maturity of
investments 33,496 65,408 123,253
Proceeds from Farmer Mac I & II
principal repayments 50,641 65,212 76,852
Purchases of office equipment (7) (40) (44)
Net cash (used) provided by
investing activities (99,409) 37,963 41,961
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance of Medium-
Term Notes 68,536 - 11,718
Payments to redeem Medium-Term
Notes (42,095) (67,915) (77,395)
Proceeds from issuance of
Discount Notes 2,785,917 775,437 153,425
Discount notes redeemed (2,786,987) (758,500) (77,000)
Net cash provided (used) by
financing activities 25,371 (50,978) 10,748
Net (decrease) increase in
cash and cash equivalents (64,793) (2,638) 68,014
Cash and cash equivalents at
beginning of period 73,129 75,767 7,753
Cash and cash equivalents
at end of period $ 8,336 $ 73,129 $ 75,767
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest $ 24,146 $ 26,229 $ 31,012
Income Taxes _ _ _
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. ORGANIZATION
The Federal Agricultural Mortgage Corporation ("Farmer Mac" or
the "Company"), a federally chartered instrumentality of the
United States, was established pursuant to Title VIII of the Farm
Credit Act of 1971 (the "Charter Act") to attract new capital for
the financing of agricultural real estate and rural housing loans
and to provide liquidity to agricultural and rural housing
lenders.
Farmer Mac is intended to aid the development of a secondary
market for certain loans secured by a first lien on agricultural
real estate or rural housing ("Qualified Loans") by providing
guarantees for securities representing interests in, or
obligations backed by, pools of such loans. This program is
known as the "Farmer Mac I Program."
The Food, Agriculture, Conservation and Trade Act of 1990 (the
"1990 Act") authorized Farmer Mac to purchase portions
("Guaranteed Portions") of loans guaranteed by the United States
Department of Agriculture (the "USDA") and to issue and guarantee
securities backed by such Guaranteed Portions. This program is
known as the "Farmer Mac II Program." Eligible sellers are any
participating lenders in the USDA guaranteed loan program or
subsequent holders of Guaranteed Portions. There is no Farmer
Mac stock ownership requirement for participation in the Farmer
Mac II Program as there is in the Farmer Mac I Program.
The Food, Agriculture, Conservation and Trade Act Amendments of
1991 (the "1991 Act") clarified Farmer Mac's authority to issue
debt obligations for the purpose of purchasing Guaranteed
Portions and guaranteed securities issued under the Farmer Mac I
and Farmer Mac II Programs ("Securities") and maintaining
reasonable amounts for business operations (including liquidity)
relating to its activities. This is known as the Linked
Portfolio Strategy.
In 1991, Farmer Mac formed Farmer Mac Mortgage Securities
Corporation, a wholly owned subsidiary incorporated under the
laws of the State of Delaware. The principal activities of the
subsidiary are: (i) to deal in Farmer Mac I and Farmer Mac II
Securities and issue securities representing interests in, or
obligations backed by, Farmer Mac I and Farmer Mac II Securities
and Guaranteed Portions; and (ii) to incur indebtedness in
connection with its activities. Farmer Mac Mortgage Securities
Corporation commenced business in 1992. In 1992, Farmer Mac
formed Farmer Mac Acceptance Corporation, a wholly owned
subsidiary incorporated under the laws of the State of Delaware.
The principal purpose of the subsidiary is to act as the
registrant under registration statements to be filed with the
Securities and Exchange Commission in connection with the
registration of Securities under the Federal securities laws.
Farmer Mac Acceptance Corporation commenced business in May 1992.
The Farm Credit System Reform Act of 1996 (the "1996 Act"),
enacted on February 10, 1996, substantially changed the manner in
which Farmer Mac is authorized to do business. The 1996 Act:
(i) authorizes Farmer Mac to act in the capacity of a Pooler for
Qualified Loans under the Farmer Mac I Program; (ii) eliminates
the previously mandated 10% minimum cash reserve or subordinated
interest; (iii) delays the implementation of higher minimum and
critical capital requirements, originally scheduled to be
effective December 13, 1996; (iv) delays the promulgation by the
Farm Credit Administration (the "FCA") of any final risk-based
capital regulation; (v) requires Farmer Mac to recapitalize
within two years of enactment of the 1996 Act (or sooner if
business volume increases substantially); and (vi) expands the
authorized enforcement powers of the FCA. Apart from these
significant changes to Farmer Mac's authorities, the 1996 Act
contains other provisions intended to improve the efficiency of
Farmer Mac's operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following comprises the significant accounting policies which
Farmer Mac follows in preparing and presenting its financial
statements:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of
Farmer Mac and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
(b) Cash Equivalents
Farmer Mac considers highly liquid investment securities with
original maturities of three months or less to be cash
equivalents. Cash equivalents are carried at amortized cost,
which approximates market value.
(c) Farmer Mac I and II Securities and Investment Securities
Farmer Mac I and II Securities and investment securities which
Farmer Mac has the positive intent and ability to hold to
maturity are classified as held-to-maturity. Such securities are
carried at cost, adjusted for unamortized premiums and unearned
discounts. Premiums are amortized and discounts are accreted to
interest income using the interest method over the remaining
period to contractual maturity, adjusted, in the case of mortgage-
backed securities, for actual prepayments.
Other Farmer Mac I and II Securities and investment securities
for which Farmer Mac does not have the positive intent to hold to
maturity have been classified as available-for-sale and are
carried at estimated fair value. Unrealized gains and losses are
reported as a separate component of stockholders' equity.
(d) Yield Maintenance Income
Farmer Mac receives yield maintenance payments when mortgage
loans underlying certain Farmer Mac I Securities prepay. These
payments are designed to minimize Farmer Mac's exposure to
reinvestment risk and are calculated such that, when reinvested
with the prepaid principal, they should generate substantially
the same cash flows that would have been generated by the Farmer
Mac I and II Securities had the underlying mortgage loans not
prepaid. Income from yield maintenance payments is recognized
when the mortgage loans prepay and is classified as interest
income in the statements of operations. Farmer Mac recognized
$842 thousand, $1.9 million and $3.6 million in yield maintenance
income in 1995, 1994 and 1993, respectively.
During the fourth quarter of 1993, Farmer Mac received the
information necessary to calculate yield maintenance payments on
partial prepayments of certain mortgage loans, which resulted in
the recognition of $1.6 million in yield maintenance income
during 1993.
(e) Loss Per Share
The actual number of Class A, Class B and Class C shares
outstanding at December 31, 1995, 1994 and 1993 was 2,340,602.
Loss per share is calculated using the actual number of common
shares outstanding for the year.
(f) Office Equipment
Office equipment is stated at cost less accumulated depreciation.
Depreciation is computed on a straight line basis over the
estimated useful lives of the related assets as follows:
Estimated
Lives
Furniture and fixtures 10 Years
Computer equipment and software 3 Years
Other equipment 5 Years
(g) Income Taxes
Deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and
the tax basis of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to
reverse. Management has established a valuation allowance for
100 percent of the net deferred assets.
(h) Guarantee Fees
Farmer Mac recognizes guarantee fees as income when earned.
Farmer Mac recognizes the portion of guarantee fees generated by
Farmer Mac I and II Securities held in portfolio as guarantee fee
income (rather than interest income) in its statements of
operations. Approximately $934 thousand, $905 thousand and $971
thousand of guarantee fees in 1995, 1994 and 1993, respectively,
relate to Farmer Mac I and II Securities held in portfolio.
(i) Allowance for Losses
An allowance has been established for potential losses under the
Farmer Mac I Program equal to a percentage of guarantee fees
earned. Farmer Mac considers the amount of the allowance
adequate to cover its exposure to guarantee payments in the
Farmer Mac I Program. Before Farmer Mac is required to make a
guarantee payment on pools existing at December 31, 1995, full
recourse must be taken against the then-required reserve or
subordinated interest equal to at least ten percent (10%) of the
original Pool balance. Farmer Mac has not established an
allowance for the Farmer Mac II Program because Farmer Mac's
credit exposure on Farmer Mac II Securities is covered by the
"full faith and credit" of the United States by virtue of the
USDA guarantee of the principal and interest thereon.
(j) Debt Issuance Costs
Debt issuance costs are deferred and amortized over the estimated
life of the related debt.
(k) Reclassifications
Certain reclassifications of prior year information were made to
conform with the 1995 presentation.
3. REGULATORY CAPITAL
Since its inception in 1988, Farmer Mac has not generated
sufficient business volume to achieve profitability, resulting in
net losses that have reduced its capital. Farmer Mac's retained
earnings have decreased $10.1 million since inception, including
$647 thousand, $1.3 million and $676 thousand during the years
ended December 31, 1995, 1994 and 1993, respectively.
The 1991 Act established capital requirements for Farmer Mac.
Certain types of assets and guarantee obligations are required to
be supported by specific amounts of "core capital." That
legislation further defined capital levels as "minimum" or
"critical." The FCA has been given certain enforcement powers if
Farmer Mac is unable to meet its minimum and critical capital
requirements. These include requiring a capital restoration
plan, restricting or prohibiting payment of dividends, limiting
growth, restricting activities, and appointing a conservator.
At December 31, 1995, Farmer Mac was in compliance with all
currently applicable regulatory capital requirements.
Current Regulatory Requirements
At December 31, 1995, the minimum capital level for Farmer Mac
was the amount of capital equal to the sum of: (1) 2.50% of
the aggregate on-balance sheet assets of Farmer Mac, other than
assets acquired under the Linked Portfolio Strategy, as
determined in accordance with generally accepted accounting
principles; (2) 0.45% of the unpaid principal balance of
outstanding securities guaranteed by Farmer Mac and backed by
pools of Qualified Loans and substantially equivalent instruments
issued or guaranteed by Farmer Mac and other off-balance sheet
obligations of Farmer Mac; and (3) 0.45% of any aggregate assets
of Farmer Mac acquired pursuant to the Linked Portfolio Strategy.
Critical capital levels are approximately one-half of the minimum
capital levels for comparable assets.
The following is an analysis of Farmer Mac's minimum capital
requirements at December 31, 1995 and 1994 (dollars in
thousands):
Required Required
Minimum Minimum
Capital Capital
December 31, December 31, December 31, December 31,
1995 1995 1994 1994
(Unaudited) (Unaudited)
On-balance sheet assets $ 95,295 $ 2,382 $ 109,244 $ 2,731
Off-balance sheet assets 99,573 448 98,610 444
Assets acquired under the
Linked Portfolio Strategy 417,169 1,877 367,994 1,656
TOTAL MINIMUM
CAPITAL REQUIRED 4,707 4,831
ACTUAL CAPITAL 11,712 12,219
EXCESS CAPITAL $ 7,005 $ 7,388
Revisions to Regulatory Requirements
The 1996 Act, effective February 10, 1996, not only broadened the
scope of Farmer Mac's permitted business activities (Note 1), but
also altered its capital requirements. Prior to the enactment of
the 1996 Act, the minimum level of core capital required to be
maintained by Farmer Mac was to increase on December 13, 1996 to
2.50% of all assets owned by Farmer Mac (on-balance sheet
assets), while the amount required to be maintained against off-
balance sheet guaranteed securities and other off-balance sheet
obligations was to remain at 0.45%. The 1996 Act delayed the
imposition of these requirements, established a new minimum
capital requirement and provided a three-year transition period
following the enactment of the 1996 Act to reach the new minimum
capital requirement. The amount of minimum capital Farmer Mac is
required to hold under the 1996 Act is as follows:
(a) prior to January 1, 1997, the sum of 0.45% of off-balance
sheet obligations of Farmer Mac, plus 0.45% of the sum of:
(i) the aggregate on-balance sheet assets acquired under
the Linked Portfolio Strategy; and (ii) the aggregate
amount of loans purchased and held by Farmer Mac (together,
"designated assets"), plus 2.50 percent of on-balance
sheet assets other than designated assets;
(b) during the 1-year period ending December 31, 1997, the sum
of 0.55% of the aggregate off-balance sheet obligations,
plus 1.20 percent of designated assets, plus 2.55 percent
of on-balance sheet assets other than designated assets;
(c) during the 1-year period ending December 31, 1998, the sum
of 0.65 percent of the aggregate off-balance sheet
obligations, plus 1.95 percent of designated on-balance sheet
assets, plus 2.65% of on-balance sheet assets other than
designated assets; except that, if Farmer Mac's core
capital is less than $25 million on January 1, 1998, the
minimum capital level shall be as stated in (d); and
(d) on and after January 1, 1999, 2.75% of Farmer Mac's
aggregate on-balance sheet assets, plus 0.75% of aggregate
off-balance sheet obligations.
If the fully-phased in standard under the 1996 Act (as
specified in clause (d) above) had been in effect at December
31, 1995, Farmer Mac's actual capital would have been less
than the total minimum capital required by $3.1 million.
The 1996 Act also provides that Farmer Mac must increase its
total core capital to at least $25 million by the earlier of
February 10, 1998, or within 180 days after the end of the first
calendar quarter that its aggregate on-balance sheet assets, plus
outstanding off-balance sheet obligations, equal or exceed $2
billion. The 1996 Act further provides that Farmer Mac's on-
balance sheet assets plus off-balance sheet obligations may not
exceed $3 billion, unless and until its total core capital is at
least $25 million. Under the 1996 Act, if the Company fails to
meet the recapitalization requirements within the applicable
time, it may not purchase new loans or issue or guarantee
additional securities until its core capital level is increased
to the required level. Accordingly, if the $25 million
recapitalization requirement had been in effect at December 31,
1995, Farmer Mac's actual capital would have been less than the
required capital level by $13.3 million.
In addition to the enforcement powers granted to FCA under the
1991 Act, the 1996 Act also provides FCA with the ability to
appoint a receiver if Farmer Mac's authority to purchase loans or
issue or guarantee securities is suspended or Farmer Mac is
classified under certain enforcement levels and the FCA
determines that the appointment of a conservator would not be
appropriate. There is no assurance that Farmer Mac will be able
to meet the higher capital requirements, when effective, or the
$25 million recapitalization requirement.
4. INVESTMENT SECURITIES
The amortized cost and fair values of investments in debt
securities were as follows:
December 31, 1995
_____________________________________________
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
(in thousands)
Held-to-maturity securities
U.S. Agency Securities $ 2,000 $ - $ 1 $ 1,999
Mortgage-Backed Securities 5,419 9 - 5,428
Total $ 7,419 $ 9 $ 1 $ 7,427
Available-for-sale securities
Mortgage-Backed securities 55,722 140 - 55,862
Total $ 55,722 $ 140 $ _ $ 55,862
December 31, 1994
_____________________________________________
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
(in thousands)
Held-to-maturity securities
U.S. Agency Debt Securities $4,000 $ 2 $ 22 $3,980
Mortgage-Backed Securities 5,437 - 736 4,701
Total $9,437 $ 2 $758 $8,681
The amortized cost and estimated fair value of debt securities by
remaining contractual maturity at December 31, 1995 were as
follows:
December 31, 1995
___________________
Amortized Fair
Cost Value
(in thousands)
Held-to-maturity securities
Due after 1 year through 5 years $ 2,000 $ 1,999
Due after 10 years 5,419 5,428
Total $ 7,419 $ 7,427
Available-for-sale ecurities
Due after 10 years $55,722 $55,862
Total $55,722 $55,862
Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
During 1995 and 1994, there were no sales of investment
securities.
5. FARMER MAC I and II SECURITIES
The table sets forth the amortized costs and estimated fair
values of the Farmer Mac I and II Securities at December 31, 1995
and 1994.
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
(in thousands)
December 31, 1995
Held-to-maturity securities
Farmer Mac I Securities $278,625 $8,505 $ 257 $286,873
Farmer Mac II Securities 138,544 1,623 _ 140,167
Total $417,169 $10,128 $ 257 $427,040
December 31, 1994
Held-to-maturity securities
Farmer Mac I securities $282,498 $ _ $ 6,595 $275,903
Farmer Mac II 85,496 _ 3,376 82,120
Total $367,994 $ _ $9,971 $358,023
There were no sales of Farmer Mac I or Farmer Mac II Securities
during 1995, 1994 or 1993.
The amortized cost and estimated fair value of Farmer Mac I and
Farmer Mac II Securities by remaining contractual maturity at
December 31, 1995 were as follows:
December 31, 1995
Amortized Fair
Cost Value
(in thousands)
Due within 1 year $ 230 $ 231
Due after 1 year through 5 years 256,864 262,932
Due after 5 years through 10 years 39,854 40,210
Due after 10 years 120,221 123,667
Total $ 417,169 $ 427,040
Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Amortized Cost of Farmer Mac I and II Securities
Farmer Mac I and II Securities are shown net of unamortized
premium, deferred fees and the allowance for losses. The
following table sets forth those components at December 31, 1995
and 1994:
1995 1994
___________________ ___________________
Farmer Farmer Farmer Farmer
Mac I Mac II Mac I Mac II
(dollars in thousands)
Outstanding Principal Balance $264,272 $138,520 $265,831 $85,490
Unamortized premium and
deferred fees, net 14,633 24 16,881 6
Less:
Allowance for Losses (280) _ (214) _
$278,62 $138,54 $282,498 $85,496
6. OTHER INVESTMENTS
The following is a summary of other investments:
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
(in thousands)
December 31, 1995
Cash Investment in Guaranteed
Investment Contract $ 2,340 $ _ $ 2 $ 2,338
Total $ 2,340 $ _ $ 2 $ 2,338
December 31, 1994
Cash Investment in Guaranteed
Investment Contract $ 1,290 $ 10 $ 10 $ 1,280
Farmer Mac II Guaranteed
Portions $ 9,401 $ - $ 29 $ 9,372
Total $10,691 $ _ $ 39 $10,691 10,652
At December 31, 1995 and 1994, the remaining maturity of the cash
investment in the guaranteed investment contract approximated 3.3
years and at December 31, 1994, the remaining maturity of the
Farmer Mac II Guaranteed Portions was greater than 10 years.
During 1995, 1994 and 1993, there were no sales of other
investments.
7. ALLOWANCE FOR LOSSES
Changes in the allowance for losses for 1995, 1994 and 1993 are
summarized below:
On-Balance Off-Balance
Sheet Sheet
Farmer Mac I Farmer Mac I
& II Securities & II Securities Total
(in thousands)
December 31, 1993 $ 142 $ 59 $ 201
Provision 72 22 94
December 31, 1994 214 81 295
Provision 66 31 97
December 31, 1995 $ 280 $ 112 $ 392
Farmer Mac has not incurred any losses to date.
At December 31, 1995, $280 thousand of the allowance for losses
related to securities issued under the Farmer Mac I Program and
held in portfolio. Accordingly, the allowance is recorded as a
component of "Farmer Mac I and II Securities" in the Consolidated
Balance Sheets.
8. OFFICE EQUIPMENT
Office equipment is summarized as follows:
December 31,
1995 1994
Furniture and fixtures $ 62 $ 60
Computer equipment and software 210 204
Other equipment 43 44
SUBTOTAL 315 308
Less accumulated depreciation (250) (210)
TOTAL $ 65 $ 98
Depreciation expense for the years ended December 31, 1995, 1994
and 1993 totaled $40 thousand, $53 thousand and $62 thousand,
respectively.
9. DEBENTURES, NOTES AND BONDS, NET
Total debt outstanding at December 31, 1995 and 1994 amounted to
$491.5 million and $456.5 million, net of unamortized discounts,
premiums and issuance costs. The effective interest rate of
total debt outstanding was 6.76% and 6.74% at December 31, 1995
and 1994, respectively. The average maturity of all debt
outstanding at December 31, 1995 and 1994 was 2.9 years.
Borrowings Due Within One Year
As of December 31, 1995 and 1994, Farmer Mac's borrowings due
within one year were as follows:
Maximum Maximum
Amount Amount Effective
Effective Outstanding Outstanding Interst Rate
Interest during the during the during the
Balance Rate Period Period Period
(dollars in thousands)
December 31, 1995
Discount Notes $132,788 5.62% $297,341 $166,055 5.80%
Current Portions of
Medium-Term Note 74,634 6.65% 79,436 72,298 6.53%
Total $207,422
December 31, 1994
Discount Notes $124,337 5.81% $124,337 $112,150 4.32%
Current Portion of
Medium-Term Note 43,970 5.94% 63,938 51,746 5.63%
Total $168,307
The Current Portion of Medium-Term Notes refers to those Medium-
Term Notes maturing within the next twelve months, and includes
$6.9 million of Medium-Term Notes with optional redemption
provisions.
During 1993, Farmer Mac called $14.9 million of debt, resulting
in an extraordinary gain of $127 thousand.
Borrowings Due After One Year
Borrowings due after one year are comprised of Medium-Term Notes.
In accordance with its Medium-Term Note program, Farmer Mac
issues, from time to time, unsecured notes with maturities from 9
months to 30 years from date of issue. The average cost of all
Medium-Term Notes outstanding with maturities in excess of one
year at December 31, 1995 and 1994 was 7.32% and 7.26%,
respectively, with an average effective maturity of 5.0 years and
3.9 years, respectively.
The following table sets forth the outstanding balances (net of
any unamortized discounts, premiums and debt issuance costs), and
effective interest rates of Farmer Mac's Medium-Term Notes due
after one year at December 31, 1995 and 1994:
1995 1994
_________________________ ______________________
Effective Effective
Interest Interest
Balance Rate Balance Rate
1996 _ _ $ 68,399 6.70%
1997 $ 30,393 6.80% 27,657 6.83%
1998 58,038 6.87% 35,425 7.11%
1999 41,164 7.23% 38,107 7.27%
2000 46,090 7.44% 42,672 7.50%
2001 39,033 7.61% 36,578 7.66%
Thereafter 69,366 7.72% 39,371 8.01%
TOTAL $284,084 $288,209
Authority to Borrow from the Treasury of the United States
The Charter Act authorizes, under certain conditions, Farmer Mac
to borrow up to $1.5 billion from the Secretary of the Treasury,
if necessary, to fulfill the obligations of Farmer Mac under any
guarantee. The debt would bear interest at a rate determined by
the Secretary of the Treasury based on the then current cost of
funds to the United States. The debt is required to be repaid
within a reasonable time. As of December 31, 1995, Farmer Mac
had no such debt outstanding.
10. STOCKHOLDERS' EQUITY
Common Stock
Farmer Mac has three classes of common stock outstanding. Class
A Voting Common Stock may be held only by banks, insurance
companies and other financial institutions or entities that are
not institutions of the Farm Credit System. Class B Voting
Common Stock may be held only by institutions of the Farm Credit
System. There are no ownership restrictions on the Class C Non-
Voting Common Stock.
In December 1988, Farmer Mac received $22,820,870, before
expenses, in a sale of its common stock at $19.50 per unit, net
of underwriting discount, in a unit offering of Class A Units and
Class B Units. A Class A Unit consisted of one share of Class A
Voting Common Stock and one share of Class C Non-Voting Common
Stock. A Class B Unit consisted of one share of Class B Voting
Common Stock and one share of Class C Non-Voting Common Stock.
The rights of the Class A and Class B Voting Common Stock are
identical, except with respect to election of directors.
Pursuant to the terms of the offering, the Voting Common Stock
and the Class C Non-Voting Common Stock included in the units
separated in November 1993.
Under the Charter Act, no holder of Class A Voting Common Stock
may directly or indirectly be a beneficial owner of more than 33%
of the outstanding shares of Class A Voting Common Stock. There
are no restrictions on the maximum purchase or holdings of Class
B Voting Common Stock. In 1991, the Board adopted a policy
stating that no dividends would be paid on Farmer Mac Voting or
Non-Voting Common Stock until such time as Farmer Mac's
stockholders' equity is at least $22,000,000. Thereafter, no
more than 50% of accumulated net earnings will be paid out as
dividends.
There is no preference established relating to dividends paid to
holders of Voting Common Stock and Class C Non-Voting Common
Stock. The ratio of any dividends paid on each share of Class C
Non-Voting Common Stock to each share of Voting Common Stock will
be three-to-one. Farmer Mac does not expect to pay dividends in
the near future.
In the event of liquidation of Farmer Mac, the ratio of any
distributions to holders of Non-Voting Common Stock and holders
of Voting Common Stock will be three-to-one.
In November 1994, Farmer Mac and Western Farm Credit Bank, a Farm
Credit System institution based in Sacramento, California
("WFCB"), entered into a five-year strategic alliance agreement
pursuant to which WFCB agreed to establish and operate an
agricultural loan pooling program open to all Farmer Mac
stockholders. As part of its commitment to establish and operate
the program, WFCB agreed to purchase Class C Non-Voting Common
Stock to be issued by Farmer Mac in amounts equal to the costs
and expense incurred (or expected to be incurred) in establishing
and operating the program, up to a maximum amount of
$1.5 million. The alliance agreement also provides for Farmer
Mac, concurrently with the sale of stock to WFCB, to purchase
from WFCB a note in a principal amount equal to the stock
purchased by WFCB. The terms of the note provide for interest at
market rates and repayment from the segregated assets and
property, including profits, if any, of the strategic alliance
and not from the assets and property of WFCB. In December 1995,
the alliance was amended to permit WFCB to purchase up to
$500,000 of Class B Voting Common Stock in partial satisfaction
of its $1.5 million purchase commitment. On January 23, 1996,
93,100 shares of Class B Voting Common Stock and 44,162 shares of
Class C Non-Voting Common Stock were issued for an aggregate
purchase price of $557,196. Concurrently, Farmer Mac purchased a
note from WFCB in the principal amount of $557,196.
As part of its commitment to Farmer Mac, WFCB also agreed to
submit at least $50 million of loans to Farmer Mac for guarantee
in a "swap transaction," in return for which it would receive
warrants to purchase additional Class C Non-Voting Common Stock
in an amount based on the amount by which the original aggregate
principal balance of the loans in the swap transaction exceeded
$50 million. The swap transaction closed on February 22, 1995,
with a pool containing approximately $71.3 million principal
balance of loans. On January 31, 1996, Farmer Mac issued
warrants to WFCB to purchase 18,784 shares of Class C Non-Voting
Common Stock. The warrants, which are entitled to certain anti-
dilution protections, have an exercise price of $7.67 per share
and expire on February 28, 2005.
Transactions in common stock, additional paid-in-capital and
accumulated deficit accounts for the three years ended December
31, 1995 are summarized as follows:
Unrealized
Gain (Loss)
on
Common Common Common Additional Available
Stock Stock Stock Paid-in for Sale Accumulated
Class A Class B Class C Capital Securities Deficit Total
(dollars in thousands)
Balance,
December 31, 1992 $670 $500 $1,170 $ 19,331 $(7,444) $14,227
Loss for 1993 _ _ _ _ (676) (676)
Balance,
December 31, 1993 670 500 1,170 19,331 (8,120) 13,551
Loss for 1994 _ _ _ _ (1,332) (1,332)
Balance,
December 31, 1994 670 500 1,170 19,331 (9,452) 12,219
Loss for 1995 _ _ _ _ (647) (647)
Unrealized gain on
available-for-sale
securities _ _ _ $140 _ 140
Balance,
December 31, 1995 $670 $ 500 $1,170$ 19,331 $140 (10,099) $11,712
11. SUBSEQUENT EVENT
On March 14, 1996, Farmer Mac announced that it had reached an
agreement in principle to sell 320,000 newly issued shares of
Class A Voting Common Stock to Zions First National Bank, Salt
Lake City, Utah ("Zions") at a price of $8.00 per share. This
transaction will generate $2.56 million in new capital and
increase the outstanding shares of Class A Voting Common Stock to
990,000 shares, of which Zions would own approximately 33%.
Although it is expected that this transaction will be consummated
on April 10, 1996, no assurances can be given that the
transaction will close.
12. LEASE COMMITMENTS
Farmer Mac leases its office space under a non-cancelable
operating lease expiring January 6, 2002. Farmer Mac has the
option to terminate the lease in January 1997, upon the payment
of a termination fee of $400,000. Future minimum commitments
under leasing arrangements at December 31, 1995 are as follows
(dollars in thousands):
Year ending December 31:
1996 232
1997 235
1998 235
1999 235
2000 235
Thereafter 235
TOTAL $1,407
Rent expense for 1995, 1994 and 1993 was $166 thousand, net of
$35 thousand of sublease income, $179 thousand, net of $25
thousand of sublease income and $162 thousand, net of $37
thousand of sublease income, respectively.
13. INCOME TAXES
Farmer Mac is subject to income taxes at regular corporate
statutory rates. Farmer Mac had book net operating loss
carryforwards of approximately $10.0 million and $9.4 million at
December 31, 1995 and 1994, respectively. Tax net operating loss
carryforwards of $654 thousand expire in 2010, $1.6 million
expire in 2009, $1.1 million expire in 2008, $1.7 million expire
in 2007, $3.0 million expire in 2006, and $2.0 million expire in
2005. Farmer Mac did not pay taxes in 1995, 1994, and 1993.
14. EMPLOYEE BENEFITS
Pension Plan
On December 28, 1989, Farmer Mac adopted a defined contribution
pension plan for all of its employees. Beginning January 1,
1994, the Company contributed 13.2% of the lesser of an
individual's gross salary and $150,000, plus 5.7% of the
difference between (i) the lesser of the gross salary and
$150,000 and (ii) the Social Security Taxable Wage Base. Prior
to 1994, the contributions were equal to 14.4% of gross salaries.
Pension expense for the years ended December 31, 1995, 1994 and
1993 was $188 thousand, $179 thousand and $162 thousand,
respectively.
Stock Option Plan
In 1992, Farmer Mac initiated a Stock Option Plan for key
management employees to acquire shares of Class C Stock. These
stock options are exercisable immediately, and, if not exercised,
will expire ten years from the date of grant. No options have
yet been exercised. The following table summarizes stock option
activity for 1995 and 1994:
Number Option
of Options Price
Balance, January 1, 1994 115,000 $ 15
Granted 0 -
Exercised 0 -
Canceled (10,000) $ 15
Balance, December 3, 1994 105,000 $ 15
Granted 0 -
Exercised 0 -
Canceled 0 -
Balance, December 31, 1995 105,000 $ 15
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Farmer Mac is a party to transactions involving financial
instruments with off-balance sheet risk. These financial
instruments include Farmer Mac Securities and commitments to
purchase and guarantee Farmer Mac Securities. Farmer Mac uses
these financial instruments in the normal course of business to
fulfill its statutory purpose of increasing liquidity for
agricultural and rural residential mortgage lenders.
Farmer Mac guarantees the timely payment of principal and
interest on Securities issued under the Farmer Mac I and
Farmer Mac II Programs.
In the Farmer Mac I Program, until enactment of the 1996 Act,
Poolers were required to establish reserve accounts or issue
subordinated interests equal to at least 10 percent of the
initial balance of the Qualified Loans in the Pool backing the
Securities. Before Farmer Mac is required to make a guarantee
payment on its existing Farmer Mac I Securities, full recourse
must be taken against the reserve or subordinated interest. The
main risk Farmer Mac bears with its existing pools is that the
reserve or subordinated interest will be insufficient ultimately
to cover timely payment of principal and interest to security
holders. To mitigate this risk, Farmer Mac required all loans in
a pool to meet standards with respect to loan-to-value ratios,
other financial ratios, and diversification among crops and
geographic location. Farmer Mac subjected each pool submitted
for guarantee under the Farmer Mac I Program to a "stress test"
designed to analyze the pool's diversification and the
sufficiency of the reserve or subordinated interest under
simulated conditions of greatly increased foreclosures and
losses. As of December 31, 1995, the subordinated interests
represented 10.0% of the outstanding balance of all Farmer Mac I
Securities and subordinated interests; any losses incurred as a
result of foreclosures may reduce the outstanding balance of the
subordinated interests.
The 1996 Act has eliminated the former minimum 10 percent reserve
or subordinated interest requirement. Farmer Mac is now
authorized to issue and guarantee securities backed by Pools of
Qualified Loans in the Farmer Mac I Program up to 100% of the
principal amount of the Qualified Loans in each Pool.
As of December 31, 1995 and 1994, the outstanding principal
balance of securities guaranteed under the Farmer Mac I Program
and not held in Farmer Mac's portfolio was $94.8 million and
$93.0 million, respectively.
At December 31, 1995, a total of two loans aggregating $299
thousand were 90 days or more past due, three loans totaling $683
thousand were in foreclosure and title to two loans with an
aggregate outstanding principal balance of $709 thousand had been
acquired by the trust in the Farmer Mac I Program. The seven
loans combined represent 0.5% of the aggregate principal amount
of outstanding Farmer Mac I Securities at December 31, 1995.
Management believes that no losses will be incurred by Farmer Mac
as a result of the loans in foreclosure or the real estate owned
by the trust.
Farmer Mac's credit exposure on Farmer Mac II Securities is
covered in full by the "full faith and credit" of the United
States by virtue of the USDA guarantee of the principal and
interest on all Guaranteed Portions. As of December 31, 1995 and
1994, the outstanding principal balances of securities guaranteed
under the Farmer Mac II Program and not held in Farmer Mac's
portfolio were $4.8 million and $5.6 million, respectively.
As of December 31, 1995, Farmer Mac had issued a commitment to
guarantee approximately $50 million of Farmer Mac I Securities.
As of December 31, 1994, Farmer Mac had issued commitments to
purchase for investment Farmer Mac I Securities aggregating
approximately $50 million and to guarantee an additional amount
of Farmer Mac I Securities aggregating approximately $65 million.
16. CONCENTRATION OF CREDIT RISK
The following tables set forth the geographic and commodity
diversification, as well as the range of loan-to-value ratios, of
all Farmer Mac I Securities, determined as of December 31, 1995
and 1994:
Geographic Diversification
1995 1994
_________________________ ________________________
On-Balance Off-Balance On-Balance Off-Balance
Sheet Sheet Sheet Sheet
Securities Securities Securities Securities
Geographic Region
Northeast 0.42% 0.44% 0.34% 1.77%
Appalachia 1.04% 1.19% 1.03% 1.54%
Southeast 6.71% 2.25% 7.81% 2.83%
Lake States 5.53% 4.67% 6.27% 6.61%
Corn Belt 8.47% 13.90% 8.90% 19.41%
Delta States 12.29% 3.67% 13.88% 4.70%
Northern Plains 4.52% 5.48% 2.12% 13.33%
Southern Plains 10.71% 3.81% 12.20% 4.70%
Mountain 7.00% 3.90% 5.59% 8.68%
Pacific 43.31% 60.69% 41.86% 36.43%
Totals 100.00% 100.00% 100.00% 100.00%
Commodity Diversification
1995 1994
________________________ ________________________
On-Balance Off-Balance On-Balance Off-Balance
Sheet Sheet Sheet Sheet
Commodity Group Securities Securities Securities Securities
Food Grains 13.27% 8.10% 12.87% 11.13%
Feed Grains 13.35% 17.70% 14.70% 23.64%
Cotton/Tobacco 9.30% 4.60% 10.28% 2.88%
Oilseeds 11.88% 8.00% 12.88% 12.18%
Potatoes, Tomatoes,
and other Veg. 9.25% 5.35% 9.95% 5.50%
Permanent Plantings 23.89% 31.30% 21.56% 18.47%
Sugarbeets, Cane and
Other Crops 4.41% 5.78% 3.69% 5.58%
Dairy 3.08% 5.39% 3.01% 3.59%
Cattle and Calves 9.13% 11.81% 8.70% 12.42%
Other 2.44% 1.97% 2.36% 4.61%
Totals 100.00% 100.00% 100.00% 100.00%
Distribution by Loan-to-Value Ratio
1995 1994
________________________ _______________________
On-Balance Off-Balance On-Balance Off-Balance
Sheet Sheet Sheet Sheet
Securities Securities Securities Securities
Loan-to-Value
0.00 - 10.00% 0.02% 1.52% 0.08% 0.75%
10.01 - 20.00% 0.72% 4.44% 1.17% 3.81%
20.01 - 30.00% 3.76% 13.72% 3.86% 8.13%
30.01 - 40.00% 8.56% 21.45% 9.37% 16.90%
40.01 - 50.00% 19.06% 28.61% 20.21% 23.47%
50.01 - 60.00% 32.19% 22.95% 29.61% 33.89%
60.01 - 70.00% 31.66% 6.90% 31.50% 12.62%
70.01 - 80.00% 4.03% 0.41% 4.20% 0.43%
Total 100.00% 100.00% 100.00% 100.00%
Loan-to-Value ratios represent the original loan-to-value ratios.
Current Loan-to-Value ratios may be higher or lower than the
original Loan-to-Value ratios.
17. FAIR VALUE DISCLOSURES
The majority of Farmer Mac's assets and liabilities are financial
instruments; however, most of these financial instruments lack an
available active trading market. Significant estimates,
assumptions, and present value calculations were therefore used
for purposes of the following disclosure, resulting in a high
degree of subjectivity inherent in the indicated fair values.
Accordingly, these fair value estimates are not necessarily
indicative of what Farmer Mac would realize in an actual sale.
The estimated fair values and carrying values at December 31,
1995 and 1994 are as follows:
1995 1994
______________________ ______________________
Estimated Estimated
Fair Carrying Fair Carrying
Value Value Value Value
(in thousands of dollars)
Financial Assets:
Cash and cash
equivalents $ 8,336 $ 8,336 $ 73,129 $ 73,129
Investment securities 63,289 63,281 8,681 9,437
Farmer Mac I & II
securities 427,040 417,169 358,023 367,994
Other investments 2,338 2,340 10,652 10,691
Financial Liabilities:
Debentures, notes
and bonds net:
Due within one year 207,711 207,422 168,187 168,307
Due after one year 301,698 284,084 283,850 288,209
The following methods and assumptions were used to estimate the
fair value of Farmer Mac's financial instruments:
Cash and cash equivalents
For the short-term financial instruments, the carrying value is a
reasonable estimate of fair value.
Investment securities
The investment securities are comprised of mortgage-backed
securities and agency debt securities. The fair values of these
securities were based on quoted market prices or prices quoted
for similar financial instruments.
Farmer Mac I and II Securities
The fair values of the guaranteed securities issued under the
Farmer Mac I and II Programs and held in portfolio were estimated
by using a model to project each pool's total expected cash
flows, given the original pool subordination level, if any,
payment characteristics and net interest rates of the qualified
loan collateral. Other factors considered in determining the
expected cash flows were yield maintenance provisions and credit
quality. These expected cash flows were then discounted by, in
the case of Farmer Mac I Securities, the corresponding rates
imputed from the U.S. Treasury yield curve plus an incremental
interest spread similar to the spread over Treasury rates found
in agency mortgage-backed securities and, in the case of Farmer
Mac II Securities, Farmer Mac's corresponding net yields at
December 31, 1995 and 1994.
Other investments
Other investments include cash invested in a guaranteed
investment contract and Guaranteed Portions purchased under the
Farmer Mac II Program. For the cash invested in the guaranteed
investment contract, the fair value is derived by discounting the
expected cash flows by a market rate of a similar financial
instrument. The fair values of the Guaranteed Portions purchased
under the Farmer Mac II Program are derived in the same manner as
the Farmer Mac II Securities.
Debentures, notes and bonds, net
Debentures, notes and bonds due within one year are comprised of
Discount Notes and Medium-Term Notes with a remaining maturity of
less than one year. For Discount Notes, the carrying value
approximates the fair value. For Medium-Term Notes with a
remaining maturity of less than one year and debentures, notes
and bonds due after one year, the fair values were based on
quoted market prices or prices quoted for similar credit quality
financial instruments or on the current rates offered to Farmer
Mac for debt of the same approximate remaining maturity.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the
Registrant and persons who have been nominated for election or
reelection to the board of directors at the Registrant's annual
meeting of stockholders to be held on June 13, 1996 is hereby
incorporated by reference from the Registrant's definitive proxy
statement which will be filed with the Commission within 120 days
after the close of the fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is hereby
incorporated by reference from the Registrant's definitive proxy
statement which will be filed with the Commission within 120 days
after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGENT
Information concerning security ownership of certain
beneficial owners and management is hereby incorporated by
reference from the Registrant's definitive proxy statement which
will be filed with the Commission within 120 days after the close
of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related
transactions is hereby incorporated by reference from the
Registrant's definitive proxy statement which will be filed with
the Commission within 120 days after the close of the fiscal
year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements.
Refer to Item 8, above.
(2) Financial Statement Schedules.
All schedules are omitted since they are not
applicable, not required, or the information required to be set
forth therein is included in the financial statements, or in
notes thereto.
(3) Exhibits and Reports on Form 8-K.
Exhibits Description
** 3.1 - Title VIII of the Farm Credit Act of 1971, as most
recently amended by the Farm Credit System Reform Act of 1996,
P.L. 104-105.
* 3.2 - Amended and restated Bylaws of the Registrant
(filed as Exhibit 3.4 to Form 10-Q filed November 14, 1995).
+* 10.1 - Stock Option Plan (Previously filed as Exhibit 19.1 to
Form 10-Q filed August 14, 1992).
+* 10.1.1 - Amendment No. 1 to Stock Option Plan (Previously filed as
Exhibit 10.2 to Form 10-Q filed August 16, 1993).
+* 10.2 - Employment Agreement dated May 5, 1989 between Henry D. Edelman
and the Registrant (Previously filed as Exhibit 10.4 to Form
10-K filed February 14, 1990).
____________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
+* 10.2.1 - Amendment No. 1 dated January 10, 1991 to Employment Agreement
between Henry D. Edelman and the Registrant (Previously filed
as Exhibit 10.4 to Form 10-K filed April 1, 1991).
+* 10.2.2 - Amendment to Employment Contract dated as of June 1,1993
between Henry D. Edelman and the Registrant (Previously filed
as Exhibit 10.5 to Form 10-Q filed November 15, 1993).
+* 10.2.3 - Amendment No. 3 dated as of June 1, 1994 to Employment
Contract between Henry D. Edelman and the Registrant (Previously
filed as Exhibit 10.5 to Form 10-Q filed November 15, 1994).
+** 10.2.4 - Amendment No. 4 dated as of February 8, 1996 to Employment
Contract between Henry D. Edelman and the Registrant.
+* 10.3 - Employment Agreement dated May 11, 1989 between Nancy E.
Corsiglia and the Registrant (Previously filed as Exhibit 10.5
to Form 10-K filed February 14, 1990).
+* 10.3.1 - Amendment dated December 14, 1989 to Employment Agreement
between Nancy E. Corsiglia and the Registrant (Previously filed
as Exhibit 10.5 to Form 10-K filed February 14, 1990).
+* 10.3.2 - Amendment No. 2 dated February 14, 1991 to Employment Agreement
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.7 to Form 10-K filed April 1, 1991).
+* 10.3.3 - Amendment to Employment Contract dated as of June 1, 1993
between Nancy E. Corsiglia and the Registrant (Previously filed
as Exhibit 10.9 to Form 10-Q filed November 15, 1993).
+* 10.3.4 - Amendment No. 4 dated June 1, 1993 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Previously filed
as Exhibit 10.11 to Form 10-K filed March 30, 1994).
___________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
+* 10.3.5 - Amendment No. 5 dated as of June 1, 1994 to Employment
Contract between Nancy E. Corsiglia and the Registrant
(Previously filed as Exhibit 10.12 to Form 10-Q filed
August 15, 1994).
+* 10.3.6 - Amendment No. 6 dated as of June 1, 1995 to Employment
Contract between Nancy E. Corsiglia and the Registrant
(Form 10-Q filed August 14, 1995).
+** 10.3.7 - Amendment No. 7 dated as of February 8, 1996 to Employment
Contract between Nancy E. Corsiglia and the Registrant.
+* 10.4 - Employment Agreement dated June 13, 1989 between
Thomas R. Clark and the Registrant (Previously filed as
Exhibit 10.6 to Form 10-K filed April 1, 1990).
+* 10.4.1 - Amendment No. 1 dated February 14, 1991 to Employment
Agreement between Thomas R. Clark and the Registrant
(Previously filed as Exhibit 10.9 to Form 10-K filed
April 1, 1991).
+* 10.4.2 - Amendment to Employment Contract dated as of June 1,1993
between Thomas R. Clark and the Registrant (Previously filed
as Exhibit 10.12 to Form 10-Q filed November 15, 1993).
+* 10.4.3 - Amendment No. 3 dated June 1, 1993 to Employment Contract
between Thomas R. Clark and the Registrant (Previously filed
as Exhibit 10.16 to Form 10-K filed March 30, 1994).
+* 10.4.4 - Amendment No. 4 dated as of June 1, 1994 to Employment
Contract between Thomas R. Clark and the Registrant
(Previously filed as Exhibit 10.17 to Form 10-Q filed
August 15, 1994).
+* 10.4.5 - Amendment No. 5 dated as of June 1, 1995 to Employment
Contract between Thomas R. Clark and the Registrant (Form 10-Q
filed August 14, 1995).
__________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
+** 10.4.6 - Amendment No. 6 dated as of February 8, 1996 to Employment
Contract between Thomas R. Clark and the Registrant.
+* 10.5 - Employment Agreement dated April 29, 1994 between
Charles M. Lewis and the Registrant (Previously filed as
Exhibit 10.18 to Form 10-Q filed August 15, 1994).
+* 10.5.1 - Amendment No. 1 dated as of June 1, 1995 to Employment
Contract between Charles M. Lewis and the Registrant
(Form 10-Q filed August 14, 1995).
+** 10.5.2 - Amendment No. 2 dated as of February 8, 1996 to Employment
Contract between Charles M. Lewis and the Registrant.
+* 10.6 - Employment Agreement dated October 7, 1991 between
Michael T. Bennett and the Registrant (Previously filed as
Exhibit 10.16 to Form 10-K filed March 30, 1992).
+* 10.6.1 - Amendment to Employment Contract dated as of June 1, 1993
between Michael T. Bennett and the Registrant (Previously
filed as Exhibit 10.17 to Form 10-Q filed November 15, 1993).
+* 10.6.2 - Amendment No. 2 dated June 1, 1993 to Employment Contract
between Michael T. Bennett and the Registrant (Previously filed
as Exhibit 10.21 to Form 10-K filed March 30, 1994).
+* 10.6.3 - Amendment No. 3 dated June 1, 1994 to Employment Contract
between Michael T. Bennett and the Registrant (Previously filed
as Exhibit 10.22 to Form 10-K filed August 15, 1994).
+* 10.6.4 - Amendment No. 4 dated as of June 1, 1995 to Employment Contract
between Michael T. Bennett and the Registrant (Form 10-Q filed
August 14, 1995).
+** 10.6.5 - Amendment No. 5 dated as of February 8, 1996 to Employment
Contract between Michael T. Bennett and the Registrant.
__________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
+* 10.7 - Employment Agreement dated March 15, 1993 between Christopher A.
Dunn and the Registrant (Previously filed as Exhibit 10.17 to
Form 10-Q filed May 17, 1993).
+* 10.7.1 - Amendment to Employment Contract dated as of June 1, 1993
between Christopher A. Dunn and the Registrant (Previously
filed as Exhibit 10.19 to Form 10-Q filed November 15, 1993).
+* 10.7.2 - Amendment No. 2 dated June 1, 1993 to Employment Contract
between Christopher A. Dunn and the Registrant (Previously
filed as Exhibit 10.25 to Form 10-K filed March 30, 1994).
+* 10.7.3 - Amendment No. 3 dated as of June 1, 1994 to Employment
Contract between Christopher A. Dunn and the Registrant
(Previously filed as Exhibit 10.26 to Form 10-Q filed
August 15, 1994).
+* 10.7.4 - Amendment No. 4 dated as of June 1, 1995 to Employment Contract
between Christopher A. Dunn and the Registrant (Form 10-Q filed
August 14, 1995).
+** 10.7.5 - Amendment No. 5 dated as of February 8, 1996 to Employment
Contract between Christopher A. Dunn and the Registrant.
+* 10.8 - Lease Agreement, dated September 30, 1991 between 919
Eighteenth Street, N.W. Associates Limited Partnership and
the Registrant (Previously filed as Exhibit 10.20 to
Form 10-K filed March 30, 1992).
* 10.9 - Strategic Alliance Agreement, dated November 15, 1994
between Western Farm Credit Bank and the Registrant, as
amended January 1, 1995 (Previously filed as Exhibit 10.28
to Form 10-K filed March 31, 1995).
** 10.9.1 - Amendment No. 2 dated as of December 15, 1995 to Strategic
Alliance Agreement between Western Farm Credit Bank and the
Registrant.
21 - Subsidiaries.
__________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
21.1 - Farmer Mac Mortgage Securities Corporation, a Delaware
Corporation.
21.2 - Farmer Mac Acceptance Corporation, a Delaware corporation.
* 99.1 Map of U.S. Department of Agriculture (USDA) Regions (Previously
filed as Exhibit 1.1 to Form 10-K filed April 1, 1991).
(b) Reports on Form 8-K.
The Registrant has not filed any reports on Form 8-K during the quarter
ended December 31, 1995.
__________________
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
/s/ Henry D. Edelman March 29, 1996
_________________________________ ________________________
By: Henry D. Edelman Date
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Name Title Date
/s/ Charles Eugene Branstool Chairman of the Board March 29, 1996
________________________________ and Director
Charles Eugene Brannstool
/s/ Henry D. Edelman President and Chief March 29, 1996
_______________________________ Executive Officer
Henry D. Edelman Officer (Principal
Executive Officer)
/s/ Nancy E. Corsiglia Vice President - Business March 29, 1996
_____________________________ Development and Treasurer
Nancy E. Corsiglia (Principal Financial and
Accounting Officer)
Name Title Date
/s/ William H. Brandon, Jr. Director March 29, 1996
________________________________
William H. Brandon, Jr.
/s/ E. J. Brown Director March 29, 1996
________________________________
E. J. Brown
/s/ James M. Cirona Director March 29, 1996
________________________________
James M. Cirona
/s/ John C. Dean Director March 29, 1996
________________________________
John C. Dean
/s/ C. G. Holthus Director March 29, 1996
________________________________
C.G. Holthus
/s/ Bill Mainer Director March 29, 1996
________________________________
Bill Mainer
/s/ James A. McCarthy Director March 29, 1996
_______________________________
James A. McCarthy
/s/ Michael C. Nolan Director March 29, 1996
_______________________________
Michael C. Nolan
/s/ Marilyn Peters Director March 29, 1996
_______________________________
Marilyn Peters
/s/ Darryl W. Rhodes Director March 29, 1996
_______________________________
Darryl W. Rhodes
/s/ Gordon C. Southern Vice Chairman March 29, 1996
_______________________________
Gordon Clyde Southern
/s/ Clyde A. Wheeler Director March 29, 1996
_______________________________
Clyde A. Wheeler
Securities and Exchange Commission
Washington, D.C. 20549
Exhibits
to
Form 10-K
under
The Securities Exchange Act of 1934
Federal Agricultural Mortgage Corporation
Exhibit Description
** 3.1 - Title VIII of the Farm Credit Act of 1971, as most recently
amended by the Farm Credit System Reform Act of 1996, P.L.
104-105.
+** 10.2.4 - Amendment No. 4 dated as of February 8, 1996 to Employment
Contract between Henry D. Edelman and the Registrant.
+** 10.3.7 - Amendment No. 7 dated as of February 8, 1996 to Employment
Contract between Nancy E. Corsiglia and the Registrant.
+** 10.4.6 - Amendment No. 6 dated as of February 8, 1996 to Employment
Contract between Thomas R. Clark and the Registrant.
+** 10.5.2 - Amendment No. 2 dated as of February 8, 1996 to Employment
Contract between Charles M. Lewis and the Registrant.
+** 10.6.5 - Amendment No. 5 dated as of February 8, 1996 to Employment
Contract between Michael T. Bennett and the Registrant.
+** 10.7.5 - Amendment No. 5 dated as of February 8, 1996 to Employment
Contract between Christopher A. Dunn and the Registrant.
** 10.9.1 - Amendment No. 2 dated as of December 15, 1995 to Strategic
Alliance Agreement between Western Farm Credit Bank and the
Registrant.
____________________
+ Management contract or compensatory plan.
** Filed herewith.
EXHIBIT 3.1
EXHIBIT 10.2.4
EXHIBIT 10.3.7
EXHIBIT 10.4.6
EXHIBIT 10.5.2
EXHIBIT 10.6.5
EXHIBIT 10.7.5