Business Context and Reporting Period
Company: Federal Agricultural Mortgage Corporation (Farmer Mac)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Farmer Mac is a federally chartered instrumentality of the United States providing a secondary market for agricultural and rural utility loans. The reporting period was significantly impacted by historic global financial market turmoil, including the conservatorship of Fannie Mae and the bankruptcy of Lehman Brothers Holdings Inc.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Dec 31, 2007 (Balance Sheet) |
|---|---|---|---|
| Net Interest Income | $21.3 million | $63.6 million | - |
| Net (Loss)/Income | $(105.6) million | $(91.3) million | - |
| Net (Loss)/Income Available to Common Stockholders | $(106.1) million | $(93.0) million | - |
| (Loss)/Earnings Per Share (Diluted) | $(10.55) | $(9.33) | - |
| Total Assets | $4.66 billion | - | $4.98 billion |
| Total Liabilities | $4.49 billion | - | $4.75 billion |
| Cash and Cash Equivalents | $50.7 million | - | $101.4 million |
| Core Capital | $212.3 million | - | $226.4 million |
| Minimum Capital Requirement | $182.3 million | - | $186.0 million |
Material Changes vs. Prior Period
- Significant Losses: The Company reported a net loss of $105.6 million for the quarter, compared to a net loss of $8.0 million in the same period in 2007. For the nine months ended September 30, 2008, the net loss was $91.3 million, compared to net income of $15.4 million in 2007.
- Impairment Charges: The primary driver of the loss was $97.1 million in other-than-temporary impairment charges on investment securities during the third quarter. This included a $52.4 million write-down on Lehman Brothers senior debt and a $44.7 million write-down on Fannie Mae floating rate preferred stock.
- Trading and Derivative Losses: Losses on financial derivatives totaled $19.0 million for the quarter and $29.7 million for the nine months. Losses on trading assets were $14.5 million for the quarter and $21.7 million for the nine months.
- Capital Position: Core capital decreased to $212.3 million from $226.4 million at year-end 2007 due to impairment losses. However, the Company remained in compliance with statutory minimum capital requirements, exceeding them by $30.0 million.
- Balance Sheet Contraction: Total assets decreased by approximately $319 million from December 31, 2007, primarily due to the reduction of investment securities and borrowings to manage capital ratios.
Guidance, Outlook, and Risks
- Capital Strategy: To address capital erosion, Farmer Mac issued $65.0 million of Series B Preferred Stock on September 30, 2008. Management is evaluating further strategies to strengthen capital, including potential asset sales and additional equity offerings.
- Investment Portfolio Revision: Following the significant losses, management is revising liquidity investment portfolio guidelines to minimize exposure to financial market volatility and preserve capital.
- Liquidity: The Company maintains access to capital markets at favorable rates. It held 69 days of liquidity as of September 30, 2008. However, $81.7 million invested in The Reserve Primary Fund is currently suspended and being liquidated; while Farmer Mac expects to receive par value, timing is uncertain.
- Dividends: The Board deferred the declaration of dividends for the fourth quarter of 2008 until its December meeting to evaluate the financial condition and capital needs.
- Key Risks:
- Potential for additional other-than-temporary impairment charges on remaining investment securities.
- Market volatility affecting the ability to issue debt or raise capital.
- Regulatory capital requirements potentially increasing or becoming harder to meet.
- Liquidity risks associated with auction-rate certificates (ARCs) and the Reserve Primary Fund.
Investor Verification Checklist
- Impairment Scope: Verify the remaining exposure to Lehman Brothers, Fannie Mae, and other financial institution securities in the investment portfolio to assess risk of further write-downs.
- Capital Adequacy: Monitor the Company's core capital buffer above the statutory minimum ($30.0 million as of Q3) and the effectiveness of the Series B Preferred Stock issuance.
- Liquidity Contingencies: Review the status of the $81.7 million investment in The Reserve Primary Fund and the $192.0 million in auction-rate certificates (ARCs) regarding redemption timelines and potential losses.
- Dividend Policy: Confirm the outcome of the December 2008 Board meeting regarding the declaration of Q4 dividends.
- Asset Sales: Track any announced asset sales intended to reduce the balance sheet and improve capital ratios.