Federal Agricultural Mortgage Corporation (Farmer Mac) — Q1 2016 10-Q
Reporting period: Three months ended March 31, 2016; filed May 10, 2016. Farmer Mac provides a secondary market for agricultural and rural utility financing through Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit businesses.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior date |
|---|---|---|
| Total interest income | $73.9 million | $64.0 million, Q1 2015 |
| Net interest income | $33.6 million | $30.8 million, Q1 2015 |
| Net effective spread | $29.9 million; 0.82% | $29.3 million; 0.86%, Q1 2015 |
| Net income attributable to Farmer Mac | $13.6 million | $13.3 million, Q1 2015 |
| Net income attributable to common stockholders | $10.3 million; diluted EPS $0.94 | $1.8 million; diluted EPS $0.16, Q1 2015 |
| Non-GAAP core earnings | $12.4 million; diluted core EPS $1.12 | $9.1 million; diluted core EPS $0.80, Q1 2015 |
| Cash and cash equivalents | $1.73 billion | $1.21 billion, December 31, 2015 |
| Total assets / total liabilities | $16.16 billion / $15.61 billion | $15.54 billion / $14.99 billion, December 31, 2015 |
| Notes payable | $14.59 billion | $14.08 billion, December 31, 2015 |
| Total equity | $544.0 million | $553.7 million, December 31, 2015 |
Cash provided by operating activities was $51.9 million, versus $89.0 million in Q1 2015. Investing activities provided $14.2 million, compared with $403.9 million used in Q1 2015; financing activities provided $453.3 million. Cash increased $519.5 million during the quarter.
Outstanding business volume reached $16.22 billion, up $316.8 million from year-end 2015 and $1.56 billion year over year. New business volume was $1.30 billion, led by $927.2 million of AgVantage securities. Farm & Ranch loans and commitments represented $5.71 billion of volume.
Liquidity was 178 days at quarter-end, against a 90-day regulatory minimum; the quarterly average was 172 days. Regulatory core capital was $562.7 million, $84.9 million above the $477.8 million minimum. Farmer Mac reported compliance with capital requirements and the highest compliance level.
Material changes versus comparable periods
- Common-stockholder net income rose from $1.8 million to $10.3 million. The prior-year quarter included an $8.1 million pretax charge to write off deferred issuance costs when Farmer Mac II LLC preferred stock was redeemed, as well as related preferred-stock dividend expense. The charge is excluded from core earnings.
- Core earnings increased from $9.1 million to $12.4 million year over year, while net effective spread dollars rose modestly. Spread yield declined to 0.82% from 0.86%, reflecting higher short-term funding costs, a tighter spread on a refinanced AgVantage security, lower cash-basis interest on nonaccrual loans, and higher average holdings of lower-yielding liquidity assets.
- Derivative and hedging activities generated a $6.8 million net loss, compared with a $3.9 million loss in Q1 2015. Other comprehensive income shifted from $35.7 million of income to a $7.9 million loss, contributing to lower equity.
- Farm & Ranch 90-day delinquencies rose to $34.7 million, or 0.61% of that portfolio, from $32.1 million, or 0.56%, at year-end. Management described credit quality as stable and noted the usual seasonal fluctuation.
Outlook, risks, and unusual items
- Management sees continued growth opportunities across its four business lines, but provided no specific numerical earnings or volume guidance. Growth depends on customer financing needs and the ability to replace maturing assets at attractive spreads.
- Management cited lower agricultural commodity prices and farmland values in some areas, drought in the western United States, weather and water conditions, export demand, and agricultural policy changes as risks. It had not observed a material portfolio impact from drought as of the filing, but warned persistent drought could affect delinquencies and collateral values, particularly for permanent plantings.
- Interest-rate, refinancing, and basis risks remain important. Funding costs relative to LIBOR were less attractive than historically, although they improved somewhat during Q1. Net interest spread is sensitive to funding costs, asset prepayments, and reinvestment rates.
- Farmer Mac had $1.78 billion of off-balance-sheet guaranteed securities and $2.7 billion of maximum potential LTSPC purchases at quarter-end. These amounts exclude collateral, recoveries, and other contractual offsets.
- Unrealized losses on available-for-sale AgVantage securities were $76.6 million at March 31, including $42.8 million on securities in loss positions for more than 12 months. Management attributed losses principally to interest-rate changes and stated it did not intend, and was not likely required, to sell before recovery.
- Level 3 fair-value assets were $6.5 billion, about 40% of total assets; valuations rely on management models and significant unobservable assumptions. Auction-rate certificate holdings were $17.7 million and remained affected by the lack of an active auction market.
- The board increased the quarterly common dividend to $0.26 per share from $0.16 in 2015. The company had repurchased approximately 668,000 Class C shares for $19.6 million under its $25 million authorization. Dividend capacity may be restricted if capital requirements are not met.
- Management reported no material change in previously disclosed risk factors, no legal proceedings, and effective disclosure controls. A seller repurchased two loans totaling $0.8 million after representation-and-warranty breaches; management said no such repurchases had been required in the prior three years.
Important facts for investors to verify
- Whether spread pressure and funding costs continue to constrain net effective spread and core earnings.
- Whether higher delinquencies, impaired loans, or agricultural stress lead to increased credit provisions, particularly in drought-affected and permanent-planting areas.
- Concentration and renewal exposure in AgVantage securities, including large counterparties and upcoming maturities.
- How much liquidity and capital headroom remains as assets and required minimum capital grow; quarter-end core capital exceeded the minimum by $84.9 million.
- The sensitivity of reported equity and asset values to interest rates and model assumptions, given the large Level 3 portfolio and derivative positions.
- Whether management’s non-GAAP core earnings adjustments provide a useful supplement to GAAP results; core earnings are not directly comparable across companies.