Business Context and Reporting Period
Company: Federal Agricultural Mortgage Corporation (Farmer Mac)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
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 three primary segments: Farmer Mac I, Farmer Mac II, and Rural Utilities.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Income (GAAP) | $13.6 million | $37.5 million |
| Net Income Available to Common Stockholders | $1.8 million | $33.5 million |
| Diluted EPS (Common) | $0.17 | $3.31 |
| Net Interest Income | $23.6 million | $23.4 million |
| Total Assets | $7.48 billion | $6.14 billion (Dec 31, 2009) |
| Total Liabilities | $7.03 billion | $5.80 billion (Dec 31, 2009) |
| Cash and Cash Equivalents | $418.2 million | $654.8 million (Dec 31, 2009) |
| Core Capital | $439.5 million | $337.2 million (Dec 31, 2009) |
Material Changes vs. Prior Period
- Significant Decline in GAAP Net Income: Net income available to common stockholders dropped from $33.5 million in Q1 2009 to $1.8 million in Q1 2010. This was primarily driven by a $5.8 million loss on the retirement of Series B preferred stock and a $5.8 million loss on financial derivatives, compared to significant gains in trading assets and derivatives in the prior year.
- Accounting Standard Adoption (VIE Consolidation): Effective January 1, 2010, Farmer Mac adopted new consolidation guidance (FASB ASU 2009-16 and 2009-17). This resulted in the consolidation of approximately $1.5 billion in assets and liabilities from Variable Interest Entities (VIEs) previously held off-balance sheet. This reclassified certain Farmer Mac Guaranteed Securities to "Loans held for investment in consolidated trusts."
- Capital Restructuring: In January 2010, Farmer Mac contributed substantially all Farmer Mac II program assets (over $1.1 billion) to a new subsidiary, Farmer Mac II LLC. Proceeds from a $250 million preferred stock issuance by the subsidiary were used to retire $150 million of Farmer Mac's Series B preferred stock, reducing the cost of capital.
- Balance Sheet Expansion: Total assets increased by $1.34 billion from December 31, 2009, largely due to the consolidation of VIEs and the addition of USDA Guaranteed Securities.
Guidance, Outlook, and Risks
- Outlook: Management expects the agricultural sector to remain subject to traditional commodity price cycles. While the protein sector (cattle, poultry, pork) saw improved prices in Q1 2010, the dairy sector faces continued challenges due to oversupply and price volatility. Ethanol margins tightened, and profitability remains elusive for some operations.
- Business Volume: Farmer Mac added $306.4 million in new program volume in Q1 2010. The company anticipates continued growth in the rural utilities segment, though at a slower pace than 2008-2009, with a shift toward direct loan purchases rather than AgVantage transactions.
- Regulatory Capital: As of March 31, 2010, Farmer Mac's core capital of $439.5 million exceeded its statutory minimum requirement of $244.5 million by $195.0 million. The company remains well-capitalized relative to its risk-based capital stress test requirements.
- Risks:
- Credit Risk: 90-day delinquencies were $70.4 million (1.64% of portfolio), with ethanol loans comprising a significant portion ($18.6 million). Non-performing assets totaled $84.0 million (1.95%).
- Interest Rate Risk: Farmer Mac manages duration gaps using financial derivatives. A parallel increase of 100 basis points in interest rates would decrease Net Interest Income by 9.2%.
- Liquidity: The company maintains 105 days of liquidity as of March 31, 2010, exceeding its 90-day target.
Key Facts for Investor Verification
- Impact of Accounting Changes: Verify the extent to which the Q1 2010 results are distorted by the one-time $5.8 million loss on preferred stock retirement and the reclassification of assets due to VIE consolidation, which significantly altered the balance sheet presentation.
- Core Earnings vs. GAAP: Review "Core Earnings" ($5.4 million or $0.54 per share), a non-GAAP measure used by management, which excludes volatile fair value changes on derivatives and trading assets to better reflect underlying economic performance.
- Ethanol Exposure: Monitor the $247.2 million exposure to ethanol loans and the associated credit risk, as the industry faces margin pressure and potential delinquencies.
- AgVantage Maturities: Note that $2.1 billion of AgVantage securities mature in 2011; failure to refinance these could adversely affect income if not offset by new business volume.
- Derivative Valuation: Assess the $5.8 million loss on financial derivatives, which reflects market rate fluctuations rather than cash settlements, and understand its impact on regulatory capital.