Business Context and Reporting Period
Company: Federal Agricultural Mortgage Corporation (Farmer Mac)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: Farmer Mac is a federally chartered instrumentality providing liquidity and lending capacity to agricultural and rural utilities lenders through three primary programs: Farmer Mac I, Farmer Mac II, and Rural Utilities. The company guarantees securities, purchases loans, and issues Long Term Standby Purchase Commitments (LTSPCs).
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 | Dec 31, 2009 (Balance Sheet) |
|---|---|---|---|
| Total Assets | $8.22 billion | $8.22 billion | $6.14 billion |
| Net Interest Income | $25.0 million | $70.3 million | - |
| Net Income (GAAP) | $12.3 million | $33.9 million | - |
| Net Income Attributable to Common Stockholders | $6.0 million | $9.6 million | - |
| Diluted EPS (Common) | $0.56 | $0.91 | - |
| Core Earnings (Non-GAAP) | $7.9 million | $18.6 million | - |
| Cash and Cash Equivalents | $453.3 million | $453.3 million | $654.8 million |
| Total Debt (Notes Payable) | $6.62 billion | $6.62 billion | $5.57 billion |
| Core Capital | $448.0 million | $448.0 million | $337.2 million |
Material Changes vs. Prior Period
- Significant Decline in GAAP Net Income: Net income available to common stockholders dropped to $6.0 million for Q3 2010 from $17.9 million in Q3 2009. This decline is primarily attributed to unrealized losses on financial derivatives ($6.9 million loss in Q3 2010 vs. $7.7 million loss in Q3 2009) and trading assets ($1.7 million loss in Q3 2010 vs. $25.0 million gain in Q3 2009).
- Asset Growth: Total assets increased by $2.1 billion (34%) from December 31, 2009, driven by $1.1 billion in new program volume and the consolidation of off-balance sheet trusts due to new accounting guidance (VIE consolidation).
- Accounting Changes: Adoption of new consolidation standards (ASU 2009-16 and 2009-17) on January 1, 2010, resulted in the consolidation of approximately $1.5 billion in assets and liabilities previously held off-balance sheet. This reclassified certain guarantee fees to net interest income.
- Capital Structure: In January 2010, Farmer Mac retired $150 million of Series B preferred stock and issued $250 million of preferred stock in its subsidiary, Farmer Mac II LLC, reducing the cost of capital.
Guidance, Outlook, and Risks
- Outlook: Management foresees opportunities for growth in agricultural and rural utilities segments but notes that growth pace depends on capital demands and financial market stability. The agricultural sector remains subject to commodity price cycles and weather patterns.
- Ethanol Sector Risk: The ethanol industry remains a key risk area. Margins tightened in the first three quarters of 2010, and federal tax credits expire at the end of 2010. Farmer Mac's ethanol exposure is $244.5 million, and the company does not intend to add more exposure beyond existing commitments.
- Interest Rate Risk: Farmer Mac manages interest rate risk using financial derivatives (swaps, futures) to match asset and liability durations. As of September 30, 2010, the effective duration gap was minus 2.1 months. A 100 basis point parallel increase in rates would decrease Net Interest Income by 4.0%.
- Credit Quality: Non-performing assets totaled $78.4 million (1.86% of portfolio). 90-day delinquencies were $64.8 million (1.53%). The allowance for losses increased to $19.0 million (45 basis points of exposure) to cover probable losses, particularly in the ethanol sector.
- Regulatory Matters: The company is monitoring the impact of the Dodd-Frank Act, particularly regarding derivatives regulation and corporate governance, though certain provisions (like risk retention) do not apply to Farmer Mac.
Investor Verification Checklist
- Core Earnings vs. GAAP: Verify the reconciliation between GAAP net income and Core Earnings, noting the significant impact of unrealized gains/losses on derivatives and trading assets on reported GAAP figures.
- Consolidation Impact: Review the impact of the new VIE consolidation guidance on the balance sheet size and the reclassification of guarantee fees to interest income.
- Ethanol Exposure: Assess the concentration of risk in the ethanol sector ($244.5 million exposure) and the potential impact of expiring federal tax credits on loan performance.
- Capital Adequacy: Confirm that Core Capital ($448.0 million) remains well above the statutory minimum requirement ($264.8 million) and the risk-based capital requirement ($36.7 million).
- Derivative Valuation: Examine the fair value of financial derivatives, which resulted in a net liability of $144.7 million, and the associated unrealized losses impacting earnings.