Business Context and Reporting Period
Company: Federal Agricultural Mortgage Corporation (Farmer Mac)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Filing Date: May 10, 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, issuance of guaranteed securities, and long-term standby purchase commitments (LTSPCs).
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2007 | Q1 2006 |
|---|---|---|
| Net Income | $4,482 | $15,651 |
| Net Income Available to Common Stockholders | $3,922 | $15,091 |
| Diluted Earnings Per Share | $0.37 | $1.32 |
| Total Assets | $5,275,762 | $4,953,673 (Dec 31, 2006) |
| Total Liabilities | $5,028,133 | $4,705,184 (Dec 31, 2006) |
| Stockholders' Equity | $247,629 | $248,489 (Dec 31, 2006) |
| Cash and Cash Equivalents | $816,930 | $877,714 (Dec 31, 2006) |
| Net Interest Income | $9,082 | $10,667 |
| Net Interest Yield | 0.73% | 1.00% |
| Operating Cash Flow | $51,243 | $78,694 |
Material Changes vs. Prior Period
- Significant Earnings Decline: Net income available to common stockholders dropped 74% to $3.9 million from $15.1 million in Q1 2006. This was primarily driven by a $4.0 million loss on financial derivatives in Q1 2007, compared to an $11.7 million gain in Q1 2006. These fluctuations are due to SFAS 133 accounting rules where derivative losses/gains are recognized in net income while offsetting economic gains/losses on hedged items are not.
- Net Interest Income Compression: Net interest income decreased to $9.1 million (yield of 73 bps) from $10.7 million (yield of 100 bps). While interest income increased due to higher rates on assets, interest expense rose more significantly due to higher funding costs.
- Balance Sheet Growth: Total assets increased by $322 million to $5.3 billion, driven by a $443 million increase in notes payable used to fund asset purchases. Investment securities grew by $443 million, largely due to a mission-related purchase of $366 million in asset-backed securities from the National Rural Utilities Cooperative Finance Corporation.
- Allowance for Losses: The total allowance for losses decreased to $3.9 million (8 basis points of the portfolio) from $4.6 million, resulting in a $0.6 million recovery/release of provision for losses.
Guidance, Outlook, and Risks
- Outlook: Management remains confident in opportunities for increased business volume and income growth through product development and marketing initiatives, including expanded AgVantage transactions and agribusiness loans. Outstanding program volume reached $7.4 billion as of March 31, 2007, and exceeded $8.0 billion following a $1.0 billion AgVantage guarantee in April 2007.
- Capital Position: Core capital totaled $237.9 million, exceeding the statutory minimum requirement of $184.6 million by $53.3 million. Regulatory capital of $241.8 million exceeded the risk-based capital requirement of $80.8 million by approximately $161.0 million.
- Stock Repurchases: The company completed a program to repurchase 10% of Class C shares and initiated a new program to repurchase up to 1 million additional shares. In Q1 2007, 360,482 shares were repurchased at an average price of $26.24.
- Risks:
- Interest Rate Risk: Earnings volatility is exacerbated by the accounting treatment of financial derivatives (undesignated hedges). A 100 basis point parallel increase in rates would increase Net Interest Income by 1.1%, while a decrease would reduce it by 1.9%.
- Credit Risk: 90-day delinquencies were $28.3 million (0.58% of the portfolio). Non-performing assets totaled $50.0 million (1.02%). Management believes the credit profile is consistent with historical trends.
- Liquidity: The company maintains a target of 90 days of liquidity and held $816.9 million in cash and $1.4 billion in liquidity investment securities as of March 31, 2007.
Key Facts for Investor Verification
- Derivative Accounting Impact: Verify the extent to which GAAP net income volatility is driven by SFAS 133 accounting for undesignated hedges rather than underlying economic performance.
- Capital Adequacy: Confirm that core capital ($237.9M) and regulatory capital ($241.8M) remain well above statutory and risk-based requirements despite the increase in the risk-based capital stress test requirement.
- Credit Quality Trends: Monitor the 90-day delinquency rate (0.58%) and non-performing asset ratio (1.02%) against historical averages and USDA forecasts for farm income and real estate values.
- Business Volume: Track the conversion of LTSPCs to Guaranteed Securities and the growth of the AgVantage program as key drivers of future fee income.
- Liquidity Coverage: Verify the company's ability to maintain its 90-day liquidity target given the high volume of short-term discount note rollovers.