AGM

Business Context and Reporting Period

Company: Federal Agricultural Mortgage Corporation (Farmer Mac)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: Farmer Mac is a federally chartered instrumentality of the United States established to create a secondary market for agricultural real estate and rural housing mortgage loans. It operates through two primary programs: Farmer Mac I (purchasing/guaranteeing agricultural loans) and Farmer Mac II (purchasing/guaranteeing USDA-guaranteed loan portions). As of December 31, 2007, total program volume was $8.5 billion.

Key Financial Metrics

Material Changes vs. Prior Period

• Significant Earnings Decline: Net income available to common stockholders dropped 85% from $29.8 million in 2006 to $4.4 million in 2007. This was primarily driven by a $40.3 million loss on financial derivatives and trading assets, compared to a $1.6 million gain in 2006. The derivative losses resulted from significant declines in interest rates during the latter half of 2007.
• Revenue Growth: Despite the earnings drop, core revenue streams grew. Net interest income increased to $44.5 million (from $38.3 million), and guarantee/commitment fees rose to $25.2 million (from $21.8 million) due to higher outstanding balances.
• Program Volume: Total outstanding program volume increased 18% to $8.5 billion from $7.2 billion. However, new business volume for the year decreased to $2.3 billion from $3.0 billion in 2006.
• Capital Position: Stockholders' equity decreased by approximately $25 million, largely due to $29 million in stock repurchases and $8.1 million in after-tax unrealized losses on available-for-sale securities.

Guidance, Outlook, and Risks

• Outlook: Management anticipates favorable conditions for 2008 based on USDA forecasts of increased net cash farm income and rising farm real estate values. Farmer Mac expects to continue paying quarterly dividends of $0.10 per share, subject to capital requirements.
• Legislative Opportunity: Farmer Mac is monitoring Farm Bill legislation (H.R. 2419 and Senate "Food and Energy Security Act") that could expand its charter to include rural utility loans, potentially creating new business opportunities.
• Key Risks:
  • Interest Rate Risk: Volatility in interest rates significantly impacts earnings through financial derivatives. A decline in rates caused substantial unrealized losses in 2007.
  • Credit Risk: Exposure to agricultural mortgage loans is dependent on commodity prices, weather, and farm income. While 90-day delinquencies remained low at 0.21% of the portfolio, peak default years (years 3-5) are approaching for a portion of the portfolio.
  • Liquidity Risk (Auction Rate Certificates): Farmer Mac holds $131.5 million in Auction Rate Certificates (ARCs). Widespread auction failures in early 2008 have frozen liquidity for these securities, though management does not believe they are impaired or will impact operations.

Investor Verification Checklist

• Derivative Exposure: Verify the impact of interest rate volatility on future earnings, given the $40.3 million loss in 2007 and the company's reliance on undesignated financial derivatives.
• Auction Rate Certificates (ARCs): Confirm the liquidity status of the $131.5 million ARC portfolio and the likelihood of issuer calls in 2008 following the auction market freeze.
• Capital Adequacy: Review the regulatory capital surplus ($40.4 million above minimum) to ensure it supports the growth in off-balance sheet guarantees ($6.49 billion).
• Portfolio Aging: Assess the credit risk of the $1.4 billion in loans entering their peak default years (years 3-5 post-origination).
• Legislative Progress: Monitor the status of the Farm Bill to determine if expanded authority for rural utility loans will materialize.