AGM

Business Context and Reporting Period

Company: Federal Agricultural Mortgage Corporation (Farmer Mac)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: Farmer Mac is a federally chartered instrumentality of the United States that provides liquidity to agricultural and rural residential mortgage lenders through the purchase of loans and the issuance of guaranteed securities. The company operates primarily through the Farmer Mac I and Farmer Mac II programs.

Key Financial Metrics

Material Changes vs. Prior Period

• Quarterly Performance: The company reported a net loss of $8.0 million for the third quarter of 2007, compared to a net loss of $5.7 million in the same period of 2006. The increase in the loss was primarily driven by a $24.9 million loss on financial derivatives, compared to a $20.3 million loss in Q3 2006.
• Year-to-Date Performance: Net income for the nine months ended September 30, 2007, was $15.4 million, a decrease from $23.9 million in the prior year period. This decline is attributed to volatility in financial derivative valuations due to interest rate fluctuations.
• Balance Sheet: Total assets increased by approximately $472 million from December 31, 2006, to September 30, 2007. This was driven by a $449 million increase in notes payable used to fund asset purchases. Investment securities grew from $1.83 billion to $2.68 billion.
• Credit Quality: 90-day delinquencies decreased to $17.0 million (0.35% of the portfolio) as of September 30, 2007, down from $28.4 million (0.62%) as of September 30, 2006. Non-performing assets totaled $37.4 million (0.76%).

Guidance, Outlook, and Risks

• Market Volatility: Management notes that accounting treatment under SFAS 133 causes GAAP earnings to be more volatile than the underlying economic performance due to the classification of financial derivatives as undesignated hedges. Losses on derivatives are recognized in net income immediately, while offsetting economic gains on hedged items may not be.
• Business Volume: New business volume for Q3 2007 was $231.5 million, a significant decrease from $1.3 billion in Q2 2007 and Q3 2006. Management attributes this to a strategic shift toward large program transactions with high asset quality and lower risk-adjusted returns.
• Legislative Outlook: The company is monitoring the 2007 Farm Bill, which proposes expanding Farmer Mac's charter to include rural utility loans. As of the filing date, the Senate had approved a version of the bill, but no assurance of enactment was given.
• Capital and Liquidity: Farmer Mac maintains strong liquidity with over 90 days of liquidity coverage. Core capital of $250.4 million exceeded the statutory minimum requirement of $196.7 million. The company continues to repurchase Class C Non-Voting Common Stock under an authorized program.
• Risks: Primary risks include interest rate risk, credit risk related to agricultural borrowers, and the potential impact of widening credit spreads on the fair value of investment securities.

Investor Verification Checklist

• Derivative Accounting Impact: Verify the extent to which the reported net loss is driven by non-cash, mark-to-market losses on financial derivatives versus core operating performance.
• Business Volume Trends: Assess the sustainability of the shift from high-volume, lower-margin transactions to lower-volume, higher-quality transactions and its impact on future fee income.
• Credit Portfolio Health: Review the concentration of non-performing assets by geographic region (notably the Northwest region at 2.73% non-performing rate) and commodity type (Permanent plantings at 1.40%).
• Legislative Changes: Monitor the progress of the 2007 Farm Bill to determine if the proposed expansion into rural utility lending will materialize and affect future growth.
• Capital Adequacy: Confirm that the company remains in compliance with the Farm Credit Administration's risk-based capital stress test requirements, particularly given the proposed regulatory rule changes mentioned in the filing.