AGM

Business Context and Reporting Period

Company: Federal Agricultural Mortgage Corporation (Farmer Mac)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Filing Date: March 15, 2007

Farmer Mac is a federally chartered instrumentality of the United States created to establish a secondary market for agricultural real estate and rural housing mortgage loans. It operates through two primary programs: Farmer Mac I (purchasing and guaranteeing agricultural mortgages) and Farmer Mac II (purchasing USDA-guaranteed loan portions). As of December 31, 2006, the total volume of loans held and loans underlying guarantees and commitments across both programs was $7.2 billion.

Key Financial Metrics

Material Changes Versus Prior Period

• Decline in Net Income: Net income available to common stockholders decreased 36.5% to $29.8 million from $47.0 million in 2005. This was primarily driven by a decrease in net interest income and a significant increase in non-interest expenses.
• Expense Increase: Non-interest expenses rose to $23.1 million from $11.5 million. This increase was attributed to higher compensation and employee benefits ($11.9 million vs. $8.2 million) and the adoption of SFAS 123(R) requiring the recognition of stock-based compensation expense ($2.4 million).
• Net Interest Income Compression: Net interest income fell to $38.3 million from $50.6 million. The net interest yield decreased to 85 basis points from 131 basis points, reflecting higher funding costs due to rising short-term interest rates.
• Business Volume Growth: Despite lower profitability, program volume surged to a record $3.0 billion in 2006, compared to $771.7 million in 2005. This included $1.1 billion in new Long-Term Standby Purchase Commitments (LTSPCs) and $1.5 billion in AgVantage securities.
• Improved Credit Quality: The allowance for losses was reduced by $3.4 million (a release) due to improved credit quality and a change in accounting estimate. Net charge-offs were $0.7 million, compared to net recoveries of $0.3 million in 2005.

Guidance, Outlook, and Risks

Outlook: Management remains confident in opportunities for increased business volume and income growth in 2007, citing strong USDA forecasts for net farm income and rising farm real estate values. Initiatives include expanded AgVantage transactions and an alliance with the American Bankers Association.

Capital Position: Farmer Mac maintained a "Level I" regulatory capital classification (highest compliance level). Core capital of $243.5 million exceeded the minimum statutory requirement of $174.5 million by $69.0 million. Regulatory capital exceeded the risk-based capital requirement by approximately $205.2 million.

Risks and Contingencies:

• Interest Rate Risk: Farmer Mac is exposed to interest rate risk on assets and liabilities. While it uses derivatives to hedge, changes in rates can impact net interest income and market value of equity.
• Credit Risk: The company assumes credit risk on agricultural loans. Repayment depends on farming operations, which are subject to weather, commodity prices, and disease outbreaks. Non-performing assets totaled $39.2 million (0.82% of the portfolio).
• Regulatory Risk: As a GSE, Farmer Mac is subject to legislative and regulatory changes that could impact its operations or capital requirements. A new risk-based capital rule effective March 31, 2007, was noted, though the company remains well-capitalized under the new standards.
• Contingent Liabilities: Off-balance sheet obligations, including LTSPCs and guaranteed securities, totaled $5.2 billion. While fees and reserves are maintained, these represent significant potential future payment obligations.

Key Facts for Investor Verification

• Profitability Trend: Verify the sustainability of earnings given the 36% drop in net income and the compression of net interest margins due to rising funding costs.
• Expense Management: Monitor the trajectory of non-interest expenses, particularly compensation and stock-based compensation, which doubled year-over-year.
• Capital Adequacy: Confirm continued compliance with the new risk-based capital stress test rules effective March 31, 2007, which increase capital requirements.
• Off-Balance Sheet Exposure: Assess the adequacy of the $4.6 million allowance for losses relative to the $5.2 billion in off-balance sheet guarantees and commitments.
• Related Party Transactions: Review transactions with major shareholders (e.g., Zions First National Bank, AgStar Financial Services) which accounted for a significant portion of loan purchase volume and LTSPC activity.