Business Context and Reporting Period
Company: Federal Agricultural Mortgage Corporation (Farmer Mac)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Farmer Mac is a federally chartered government-sponsored enterprise (GSE) that provides a secondary market for agricultural real estate, rural housing, USDA-guaranteed, and rural utilities loans. Its primary activities include purchasing eligible loans, guaranteeing securities backed by these loans, and issuing Long-Term Standby Purchase Commitments (LTSPCs). As of December 31, 2009, the total outstanding volume across all programs was $10.7 billion.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Income (Loss) | $99.6 million | ($150.4 million) |
| Net Income Available to Common Stockholders | $82.3 million | ($154.1 million) |
| Diluted EPS | $8.04 | ($15.40) |
| Total Assets | $6.14 billion | $5.11 billion |
| Total Liabilities | $5.80 billion | $4.95 billion |
| Stockholders' Equity | $196.2 million | $15.3 million |
| Net Interest Income | $85.9 million | $88.7 million |
| Guarantee and Commitment Fees | $31.8 million | $28.4 million |
| Cash and Cash Equivalents | $654.8 million | $278.4 million |
| Outstanding Debt (Notes Payable) | $5.57 billion | $4.65 billion |
Material Changes vs. Prior Period
- Return to Profitability: The Company returned to profitability in 2009 with net income of $99.6 million, a significant turnaround from the $150.4 million net loss in 2008. The 2008 loss was driven primarily by $106.2 million in other-than-temporary impairment (OTTI) losses on investments (Fannie Mae and Lehman Brothers) and $130.4 million in losses on financial derivatives.
- Derivative Gains: In contrast to 2008, 2009 saw a net gain of $21.3 million on financial derivatives and $43.3 million on trading assets, largely due to changes in fair value of GSE preferred stock and Farmer Mac Guaranteed Securities.
- Capital Position: Stockholders' equity increased from $15.3 million in 2008 to $196.2 million in 2009. This was driven by retained earnings, unrealized gains on available-for-sale securities, and the issuance of $48.4 million in Series C Preferred Stock.
- Program Volume Growth: Total outstanding program volume grew 6.3% to $10.7 billion. Growth was primarily driven by the Rural Utilities program, which reached $2.1 billion in outstanding volume, compared to $1.05 billion in 2008.
- Credit Quality: 90-day delinquencies decreased to $49.5 million (1.13% of portfolio) from $67.1 million (1.35%) in 2008. Non-performing assets declined to $62.0 million from $80.0 million.
Guidance, Outlook, and Risks
- Outlook: Management anticipates continued stress in the protein and dairy sectors of agriculture, which may lead to higher delinquencies and provisions for losses in 2010. However, farmland values are expected to remain stable. The Rural Utilities sector is viewed as a strong growth area, though growth may not match the pace of 2008-2009.
- Capital Strategy: In January 2010, Farmer Mac raised $250 million in preferred stock via a subsidiary (Farmer Mac II LLC) to retire its higher-cost Series B Preferred Stock, reducing annual dividend costs by approximately $3.6 million.
- Key Risks:
- Market Access: Reliance on debt capital markets for funding; disruptions could adversely affect liquidity and operations.
- Credit Risk: Exposure to agricultural commodity cycles, weather events, and specific sector stress (e.g., ethanol, dairy).
- Interest Rate Risk: Sensitivity to changes in interest rates affecting the spread between asset yields and funding costs.
- Regulatory Risk: Changes in GSE regulation or capital requirements could impact operations.
Important Facts for Investor Verification
- Derivative Accounting Volatility: Earnings are significantly impacted by fair value changes in financial derivatives and trading assets, which are recorded in net income. While these provided gains in 2009, they caused substantial losses in 2008.
- Related Party Transactions: A significant portion of business volume comes from related parties (e.g., Zions First National Bank, National Rural Utilities Cooperative Finance Corporation). In 2009, transactions with National Rural represented 100% of the Rural Utilities program volume.
- Ethanol Exposure: While ethanol exposure has been reduced, the Company retains exposure to 29 ethanol plants ($263.9 million). Management does not expect to add new ethanol loan exposure beyond existing undisbursed commitments.
- Regulatory Capital: As of December 31, 2009, Farmer Mac was classified as "Level I" (highest compliance level) by the Farm Credit Administration, with core capital of $337.2 million exceeding the minimum requirement of $217.0 million by $120.2 million.
- Subsequent Events: The formation of Farmer Mac II LLC and the issuance of $250 million in preferred stock in January 2010 fundamentally changed the capital structure and operational scope of the Farmer Mac II program.