AGM

Business Context and Reporting Period

Company: Federal Agricultural Mortgage Corporation (Farmer Mac)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Farmer Mac is a federally chartered instrumentality of the United States designed to establish a secondary market for agricultural real estate and rural housing mortgage loans. In May 2008, its charter was expanded to include rural utilities loans. The Corporation operates through three programs: Farmer Mac I (agricultural real estate), Farmer Mac II (USDA-guaranteed portions), and Rural Utilities. As of December 31, 2008, total program volume was $10.1 billion.

Key Financial Metrics

Material Changes vs. Prior Period

• Significant Net Loss: The Company reported a net loss of $154.1 million in 2008, a sharp reversal from the $4.4 million net income in 2007. This was primarily driven by non-recurring and market-related losses.
• Investment Impairments: Farmer Mac recognized $106.2 million in other-than-temporary impairment charges on investment securities, specifically related to Fannie Mae floating rate preferred stock ($51.7 million) and Lehman Brothers senior debt securities ($54.5 million).
• Derivative Losses: Losses on financial derivatives totaled $130.4 million in 2008, compared to $39.9 million in 2007. These losses were recorded due to fair value accounting (SFAS 133) on interest rate swaps used to hedge interest rate risk.
• Equity Erosion: Stockholders' equity plummeted from $223.6 million to $15.3 million due to the net loss, unrealized losses on available-for-sale securities, and the redemption of Series A preferred stock.
• Program Growth: Despite financial losses, program volume grew 18% to $10.1 billion, driven by the new Rural Utilities program ($1.1 billion) and growth in Farmer Mac I and II programs.
• Credit Quality Deterioration: 90-day delinquencies rose to $67.1 million (1.35% of portfolio) from $10.6 million (0.21%) in 2007. This increase was concentrated in the ethanol portfolio, which saw significant stress and defaults.

Guidance, Outlook, and Risks

• Dividend Reduction: On March 11, 2009, the Board declared a quarterly dividend of $0.05 per share, a 50% reduction from the previous $0.10 rate, to preserve capital and ensure compliance with regulatory requirements.
• Capital Position: As of December 31, 2008, Farmer Mac remained in compliance with its statutory minimum capital requirement ($193.5 million) with a core capital surplus of $13.5 million. However, the margin was significantly thinner than in 2007 ($40.4 million surplus).
• Outlook for 2009: Management anticipates that loan problems in the ethanol, protein, and dairy sectors will increase in 2009, potentially leading to higher delinquencies and provisions. However, these are expected to remain within manageable levels. The rural utilities sector is expected to see robust demand.
• Key Risks:
  • Market Access: Continued disruptions in capital markets could impair the ability to issue debt at favorable rates.
  • Investment Portfolio: Significant exposure to financial institution securities (e.g., Goldman Sachs, Merrill Lynch, HSBC) remains in unrealized loss positions. Selling these assets would realize losses and further erode capital.
  • Derivative Accounting: The mismatch between fair value accounting for derivatives and the accounting for hedged items continues to create earnings volatility.
  • Ethanol Exposure: The portfolio has reached its maximum tolerance for ethanol loans ($280.4 million outstanding), and no new ethanol loans are being sought.

Important Facts for Investor Verification

• Capital Adequacy: Verify the Company's ability to maintain the $13.5 million capital surplus above the statutory minimum in a volatile market environment.
• Investment Recovery: Monitor the status of the $1.2 billion investment portfolio, particularly the $106.2 million in realized impairments and the remaining unrealized losses on corporate debt and GSE preferred stock.
• Ethanol Portfolio Performance: Track the specific performance of the $280.4 million ethanol loan portfolio, including the impact of the VeraSun Energy Corporation bankruptcy ($41.2 million exposure).
• Liquidity of Auction-Rate Certificates (ARCs): Verify the resolution of the $178.6 million ARC portfolio, which has been illiquid since February 2008. The Company exercised put rights on $119.9 million in January 2009.
• Derivative Strategy: Confirm the Company's strategy regarding interest rate swaps, as it discontinued entering into new pay-fixed swaps in October 2008 to reduce earnings volatility.