Business Context and Reporting Period
Company: Federal Agricultural Mortgage Corporation (Farmer Mac)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Farmer Mac is a federally chartered instrumentality providing liquidity and lending capacity to agricultural and rural utilities lenders through loan purchases, guarantees, and long-term standby purchase commitments (LTSPCs). The company operates under the supervision of the Farm Credit Administration (FCA).
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Dec 31, 2008 (Balance Sheet) |
|---|---|---|---|
| Net Interest Income | $19.8 million | $63.1 million | - |
| Net Income (Loss) | $22.3 million | $89.2 million | - |
| Net Income Available to Common Stockholders | $17.9 million | $76.8 million | - |
| Diluted EPS | $1.74 | $7.54 | - |
| Total Assets | - | - | $5.73 billion |
| Total Liabilities | - | - | $5.38 billion |
| Stockholders' Equity | - | - | $205.0 million |
| Cash and Cash Equivalents | - | - | $274.9 million |
| Notes Payable (Total Debt) | - | - | $5.12 billion |
| Core Capital | - | - | $331.0 million |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $22.3 million for the quarter ended September 30, 2009, a significant improvement from a net loss of $105.6 million in the same period in 2008. Year-to-date net income was $89.2 million compared to a loss of $91.3 million in 2008.
- Investment Portfolio Performance: The 2008 losses were driven by massive other-than-temporary impairment (OTTI) charges ($97.1 million in Q3 2008). In Q3 2009, OTTI losses were minimal ($1.6 million). Conversely, the company recorded significant gains on trading assets ($25.0 million in Q3 2009) compared to losses in 2008.
- Asset Composition: Total assets increased to $5.73 billion from $5.11 billion at year-end 2008. This was driven by a $1.0 billion increase in on-balance sheet program assets (Farmer Mac Guaranteed Securities and loans), partially offset by a reduction in non-program investment securities.
- Capital Position: Core capital increased to $331.0 million, exceeding the statutory minimum capital requirement by $126.3 million, a substantial improvement from the $13.5 million surplus recorded at December 31, 2008.
Guidance, Outlook, and Risks
- Outlook: Management expects delinquencies to increase during the remainder of 2009 and beyond due to economic pressures in specific agricultural sectors (protein, dairy, ethanol), though losses are expected to remain within historical experience. The company sees growth opportunities in the rural utilities segment.
- Volatility Warning: Earnings remain subject to significant volatility due to changes in the fair value of financial derivatives and trading assets. While 2009 saw gains, these fluctuations can produce significant losses in other periods.
- Credit Risk: Non-performing assets were $84.8 million (1.94% of portfolio) as of September 30, 2009. Ethanol loans comprised a significant portion ($28.4 million) of non-performing assets. The company is not seeking to add more ethanol loan exposure.
- Regulatory Capital: The company is in compliance with all statutory and risk-based capital requirements. It is evaluating strategies to strengthen its capital position, including potential equity offerings.
- Unusual Items: The company sold three of four ethanol facilities classified as Real Estate Owned (REO) in Q3 2009. It also recorded a $1.6 million OTTI loss on HSBC Finance debt, subsequently hedging the remaining exposure with a credit default swap.
Investor Verification Checklist
- Capital Adequacy: Verify the $126.3 million surplus above the statutory minimum capital requirement and the $305.8 million surplus above the risk-based capital stress test requirement.
- Derivative Exposure: Review the $4.5 billion notional amount of interest rate swaps and the impact of fair value changes on earnings, noting the cumulative after-tax losses of $69.2 million recorded on derivatives as of September 30, 2009.
- Ethanol Exposure: Confirm the total ethanol exposure of $275.8 million (including loans, LTSPCs, and REO) and the status of the remaining unsold ethanol facility.
- Investment Portfolio Quality: Assess the $14.4 million in unrealized losses on available-for-sale securities held for more than 12 months and the company's assertion that these are temporary.
- Liquidity: Confirm the 123 days of liquidity maintained as of September 30, 2009, and the company's access to capital markets for discount notes and medium-term notes.