Business Context and Reporting Period
Company: Federal Agricultural Mortgage Corporation (Farmer Mac)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Filing Date: November 9, 2006
Overview: Farmer Mac is a federally chartered instrumentality of the United States that provides liquidity to agricultural and rural residential mortgage lenders. The report includes unaudited condensed consolidated financial statements and a significant restatement of prior period results due to accounting corrections regarding financial derivatives.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 | Dec 31, 2005 (Balance Sheet) |
|---|---|---|---|
| Total Assets | $4,892.7 million | $4,892.7 million | $4,341.4 million |
| Total Liabilities | $4,647.9 million | $4,647.9 million | $4,095.4 million |
| Stockholders' Equity | $244.8 million | $244.8 million | $246.0 million |
| Net Interest Income | $9.1 million | $29.9 million | - |
| Net Income (Loss) | $(5.7) million | $23.9 million | - |
| Net Income Available to Common Stockholders | $(6.3) million | $22.2 million | - |
| Diluted EPS | $(0.58) | $1.98 | - |
| Cash and Cash Equivalents | $804.6 million | $804.6 million | $458.9 million |
| Total Notes Payable | $4,554.3 million | $4,554.3 million | $3,994.2 million |
Material Changes vs. Prior Comparable Period
- Restatement of Prior Periods: The company restated financial results for periods prior to June 30, 2006, to correct the accounting for financial derivatives under SFAS 133. Previously reported hedge accounting was reversed; changes in fair value are now recognized in earnings. This restatement increased net income available to common stockholders for the nine months ended September 30, 2005, by $14.4 million.
- Net Income Volatility: The company reported a net loss of $5.7 million for the third quarter of 2006, compared to net income of $19.9 million in the same period in 2005. This decline was primarily driven by a $20.3 million loss on financial derivatives in Q3 2006, contrasting with a $12.0 million gain in Q3 2005.
- Net Interest Income: Net interest income decreased to $9.1 million in Q3 2006 from $11.5 million in Q3 2005. The net interest yield for the nine months ended September 30, 2006, was 89 basis points, down from 135 basis points in the prior year period.
- Allowance for Losses: The total allowance for losses decreased to $5.1 million (11 basis points of the portfolio) as of September 30, 2006, from $8.7 million (20 basis points) as of December 31, 2005. This included a release of $1.2 million in the third quarter.
- Delinquencies: 90-day delinquencies totaled $28.4 million (0.62% of the portfolio) as of September 30, 2006, a decrease from $40.6 million (0.95%) as of September 30, 2005.
Guidance, Outlook, Risks, and Unusual Items
- Financial Derivatives Risk: A primary risk factor is the volatility in GAAP earnings caused by the accounting treatment of financial derivatives. While these derivatives effectively hedge economic interest rate risk, changes in their fair value are recognized immediately in earnings, causing GAAP results to be more volatile and potentially counter-directional to the underlying business economics.
- Internal Control Weakness: Management concluded that disclosure controls and procedures were not effective as of September 30, 2006, due to a material weakness in internal control over financial reporting related to the accounting for financial derivatives.
- Regulatory Capital: As of September 30, 2006, core capital was $237.0 million, exceeding the statutory minimum requirement of $171.7 million. The company is in compliance with risk-based capital standards, with regulatory capital exceeding the stress test requirement by approximately $195.8 million.
- Business Volume: New business volume for the third quarter was $1.3 billion, driven by a $1.0 billion AgVantage transaction and $177.9 million in LTSPCs. Management remains confident in opportunities for growth but notes potential constraints from regulatory changes and market competition.
- Stock Repurchases: The company repurchased 384,900 shares of Class C Non-Voting Common Stock in Q3 2006 at an average price of $26.98, reducing capital by approximately $10.4 million.
Investor Verification Checklist
- Restatement Impact: Verify the specific adjustments made to prior period earnings and equity due to the SFAS 133 derivative accounting correction.
- Derivative Exposure: Review the notional amounts and fair value of outstanding interest rate swaps ($1.7 billion notional) and assess the sensitivity of earnings to interest rate changes.
- Credit Quality Trends: Monitor the 90-day delinquency rate (currently 0.62%) and the composition of non-performing assets, particularly in the Northwest region which showed a higher non-performing asset rate (2.93%).
- Liquidity Position: Confirm the maintenance of the 90-day liquidity target, supported by $804.6 million in cash and $1.9 billion in investment securities.
- Regulatory Developments: Track the finalization of the FCA's proposed risk-based capital stress test rule, which could increase capital requirements.