Business Context and Reporting Period
Company: Federal Agricultural Mortgage Corporation ("Farmer Mac")
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1999
Business Overview: Farmer Mac is a federally chartered instrumentality of the United States that provides liquidity to the agricultural mortgage market. It purchases agricultural mortgage loans and issues Agricultural Mortgage-Backed Securities (AMBS). The company operates under a retained portfolio strategy, holding assets to earn net interest income rather than selling them immediately for gains.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 1999 |
Six Months Ended June 30, 1999 |
Six Months Ended June 30, 1998 |
|---|---|---|---|
| Total Revenues | $5,723 | $10,834 | $7,547 |
| Net Interest Income | $3,947 | $7,527 | $4,908 |
| Net Income | $1,692 | $3,273 | $3,520 |
| Diluted EPS | $0.15 | $0.29 | $0.32 |
| Total Assets | $2,565,528 (as of June 30, 1999) | ||
| Total Liabilities | $2,481,200 (as of June 30, 1999) | ||
| Stockholders' Equity | $84,328 (as of June 30, 1999) | ||
| Cash and Cash Equivalents | $546,399 (as of June 30, 1999) | ||
| Net Cash Provided by Operating Activities | $36,494 (Six Months 1999) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 48% year-over-year for the six months ended June 30, 1999 ($10.8M vs. $7.5M). Net interest income rose 53% ($7.5M vs. $4.9M), driven by a 33% increase in the balance of program assets (Farmer Mac guaranteed securities and loans).
- Profitability: Net income for the six months ended June 30, 1999, was $3.3 million, a 7% decrease from $3.5 million in the prior year period. However, on a fully taxable equivalent basis, net income increased 62% compared to the prior year due to the recognition of previously deferred tax benefits in 1998.
- Asset Expansion: Total assets grew 32% from $1.9 billion at year-end 1998 to $2.6 billion at June 30, 1999. This was primarily due to a $490 million increase in program assets.
- Expense Management: Operating expenses increased 9% year-to-date ($4.2M vs. $3.9M), significantly outpaced by the 44% growth in total revenues.
- Provision for Losses: The provision for loan losses increased to $1.7 million for the six months ended June 30, 1999, compared to $0.6 million in the prior year, reflecting growth in the outstanding post-1996 Act loan portfolio.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Business Volume: Management anticipates continued growth in loan purchase and guarantee volume. Cash window volume increased 65% year-to-date. Total loans held or guaranteed reached $2.0 billion.
- Delinquencies: Post-1996 Act loan delinquencies declined to 1.03% at June 30, 1999, from 1.59% at March 31, 1999. However, management anticipates higher delinquencies in the third quarter due to payment due dates and adverse agricultural economic conditions.
- Capital Position: Return on equity increased to 7.9% for the first six months of 1999. Surplus capital over regulatory minimums decreased to $8.0 million but is deemed sufficient to support anticipated business volume for the next 12 months.
Risks and Contingencies
- Credit Risk: Farmer Mac assumes 100% of the credit risk on post-1996 Act loans. Adverse agricultural conditions (low commodity prices, weak export markets) could lead to deteriorating credit quality and land values.
- Interest Rate Risk: The company uses derivatives (swaps, caps, futures) to manage interest rate risk. A 300 basis point increase in rates would decrease the fair value of equity by 18.9%.
- Regulatory Risk: The Farm Credit Administration (FCA) is developing a risk-based capital test. The final requirements could exceed current statutory minimums, potentially restricting asset growth.
- Year 2000 Readiness: Management believes systems are compliant and expects direct costs not to exceed $150,000. Contingency plans involving manual procedures are in place.
Investor Verification Checklist
- Capital Adequacy: Verify the impact of the pending FCA risk-based capital rulemaking on Farmer Mac's ability to expand its portfolio, given the reduced surplus capital ($8.0M).
- Credit Quality Trends: Monitor the delinquency rate of post-1996 Act loans, specifically the 1996 vintage which showed a 4.86% delinquency rate, and the impact of adverse agricultural economic conditions.
- Strategy Execution: Confirm the sustainability of the "retained portfolio strategy" which eliminated gains on sale of AMBS but increased net interest income.
- Stock Structure: Note the three-for-one split of Class C stock and the elimination of dividend preferences effective August 2, 1999, which equalized EPS across all share classes.
- Off-Balance Sheet Exposure: Review the $824.2 million in outstanding off-balance sheet guarantees and the associated credit risk.