Business Context and Reporting Period
Company: Federal Agricultural Mortgage Corporation (Farmer Mac)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 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 | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|---|
| Net Interest Income | $21.6 million | $45.2 million | $43.3 million |
| Net Income | $8.1 million | $21.7 million | $67.0 million |
| Net Income Attributable to Common Stockholders | $1.8 million | $3.6 million | $58.9 million |
| Diluted EPS (Common) | $0.17 | $0.34 | $5.80 |
| Total Assets | $7.1 billion (as of June 30, 2010) | - | - |
| Total Liabilities | $6.6 billion (as of June 30, 2010) | - | - |
| Cash and Cash Equivalents | $325.3 million (as of June 30, 2010) | - | - |
| Core Capital | $442.0 million (as of June 30, 2010) | - | - |
Material Changes vs. Prior Period
- Significant Earnings Decline: Net income available to common stockholders dropped from $58.9 million in the first half of 2009 to $3.6 million in the first half of 2010. This decline is primarily attributed to a reversal in financial derivative performance and one-time costs.
- Financial Derivatives: The company recorded a net loss of $21.6 million on financial derivatives for the six months ended June 30, 2010, compared to a net gain of $23.2 million in the same period in 2009. This volatility is due to changes in fair value of interest rate swaps and other hedging instruments.
- Accounting Standard Adoption: Effective January 1, 2010, Farmer Mac adopted new consolidation guidance (eliminating QSPEs). This resulted in the consolidation of approximately $1.5 billion in assets and liabilities, significantly altering the balance sheet presentation. Assets previously classified as "Farmer Mac Guaranteed Securities" were reclassified 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, resulting in a $5.8 million loss on retirement.
- Loan Portfolio Growth: Total outstanding program volume increased to $10.8 billion as of June 30, 2010, driven by purchases in the Farmer Mac I and Rural Utilities programs.
Guidance, Outlook, and Risks
- Outlook: Management expects the agricultural sector to remain stable but subject to traditional commodity cycles. Specific challenges are noted in the dairy sector due to oversupply and the ethanol sector due to tightening margins and expiring federal tax credits. The rural utilities sector is viewed as a strong, growing industry with significant future financing needs.
- Core Earnings: Management utilizes "Core Earnings" (a non-GAAP measure) to assess performance, excluding unrealized gains/losses on derivatives and trading assets. Core earnings for the six months ended June 30, 2010, were $10.7 million, compared to $9.5 million in the prior year period.
- Regulatory Capital: Farmer Mac remains well-capitalized. As of June 30, 2010, core capital of $442.0 million exceeded the statutory minimum requirement of $235.4 million by $206.6 million. The company also exceeded its risk-based capital requirement by approximately $431.1 million.
- Key Risks:
- Interest Rate Risk: Mismatches between asset and liability cash flows in a changing rate environment. The company manages this via duration matching and derivatives.
- Credit Risk: Exposure to borrower defaults, particularly in the ethanol and dairy sectors. Non-performing assets were 1.66% of the portfolio as of June 30, 2010.
- Liquidity: Dependence on capital markets for funding. The company maintains a liquidity contingency plan and held 169 days of liquidity as of June 30, 2010.
- Regulatory Changes: Potential impact of the Dodd-Frank Act on derivatives regulation and capital requirements.
Investor Verification Checklist
- Derivative Exposure: Verify the magnitude of unrealized losses on financial derivatives ($21.6 million for six months) and the company's hedging strategy effectiveness.
- Consolidation Impact: Review the impact of the new VIE consolidation rules on the balance sheet, specifically the reclassification of $1.5 billion in assets and the resulting amortization of premiums.
- Capital Structure: Confirm the details of the Farmer Mac II LLC subsidiary formation and the retirement of Series B preferred stock.
- Credit Quality: Monitor the 1.66% non-performing asset ratio and specific exposure to the ethanol sector ($239.8 million).
- Regulatory Compliance: Assess the company's capital surplus relative to the Farm Credit Administration's (FCA) proposed risk-based capital stress test revisions.