Federal Agricultural Mortgage Corporation (Farmer Mac) — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed March 9, 2017. This is an annual report, not a stand-alone fourth-quarter filing. Amounts are in U.S. dollars unless stated otherwise.
Business context
Farmer Mac is a stockholder-owned, federally chartered government-sponsored enterprise that provides a secondary market for eligible agricultural real estate, USDA-guaranteed, rural utilities, and institutional loans. It earns primarily from interest spreads and guarantee and commitment fees, funding assets mainly through debt issuance. Its obligations are not guaranteed by the full faith and credit of the United States.
Outstanding business volume rose 9.4% to $17.4 billion. Institutional Credit was the largest line at $7.3 billion, followed by Farm & Ranch at $6.1 billion.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Total interest income | $311.9 million | $264.8 million |
| Net interest income | $140.3 million | $125.8 million |
| Net interest income after loan-loss provision | $139.2 million | $123.4 million |
| Non-interest income | $20.5 million | $20.1 million |
| Non-interest expense | $40.3 million | $35.5 million |
| Net income | $77.3 million | $73.8 million |
| Net income attributable to common stockholders | $64.2 million | $47.4 million |
| Diluted earnings per common share | $5.97 | $4.19 |
| Core earnings, non-GAAP | $53.8 million | $47.0 million |
| Net effective spread, non-GAAP | $125.1 million; 0.86% | $119.4 million; 0.87% |
Return on average assets was 0.41%, compared with 0.32% in 2015; return on average common equity was 16.78%, versus 13.83%. Common earnings improved partly because of higher spread income and the absence of 2015 costs associated with redeeming Farmer Mac II LLC preferred stock. Net income also reflects fair-value changes in derivatives and other items excluded from core earnings.
At year-end, total assets were $15.6 billion, liabilities $15.0 billion, and total equity $643.6 million. Notes payable totaled $13.7 billion, including $8.4 billion due within one year. Cash and cash equivalents were $265.2 million and investment securities $2.52 billion, together $2.78 billion versus $3.99 billion a year earlier. Farmer Mac reported 165 days of liquidity at year-end, above its 90-day regulatory minimum.
Operating cash flow was $208.6 million; investing cash flow was negative $593.4 million and financing cash flow negative $560.0 million. Cash and cash equivalents declined by $944.9 million during the year.
Statutory core capital was $609.7 million, $143.2 million above the $466.5 million minimum. Regulatory capital exceeded the risk-based requirement by approximately $512.3 million. The Tier 1 capital ratio was 12.7%; the filing notes a methodology change that increased the reported ratio by 320 basis points.
Changes and credit quality
- Business volume increased from $15.9 billion to $17.4 billion; new purchases, guarantees, and commitments totaled $4.4 billion, up from $3.2 billion in 2015.
- Common dividends increased from $0.26 per share quarterly during 2016 to $0.36 declared for first-quarter 2017. The board’s stated objective is a sustainable, growing dividend, with a core-earnings payout ratio anticipated to rise toward approximately 30%; future dividends remain discretionary and subject to capital and other conditions.
- Credit quality showed mixed signals: 90-day Farm & Ranch delinquencies declined to $21.0 million, or 0.34% of that portfolio, from $32.1 million, or 0.56%. Substandard assets increased to $165.2 million, or 2.7%, from $104.5 million, or 1.8%.
- The allowance for losses rose to $7.4 million from $6.6 million. Net credit losses were $0.2 million, compared with $3.9 million in 2015.
- Approximately 95.3% of AgVantage volume was issued by three counterparties. CFC accounted for all Rural Utilities line-of-business activity to date and approximately 25.7% of total outstanding business volume through its Rural Utilities and AgVantage relationships.
Outlook, risks, and unusual items
Management sees opportunities for growth in Farm & Ranch, USDA Guarantees, and Institutional Credit, but provides no specific earnings or volume forecast. It expects growth to help replace income from assets that mature, repay, or may be reinvested at lower spreads. Management also says growth depends on rural lenders’ capital and liquidity needs and continued access to funding markets.
Management cited declining U.S. net farm income since its 2013 peak and weakening farmland values in some regions. It reported emerging stress in substandard assets but said delinquencies and credit losses remained low and had not yet reflected broader agricultural-cycle pressures. Commodity prices, farm income, land values, weather and drought, interest rates, funding spreads, capital-market access, regulation, and borrower concentration are significant risks.
Farmer Mac reported $4.9 billion of contingent obligations for third-party guarantees and LTSPCs; the amount is a maximum-exposure measure and does not account for recoveries or collateral. It held $2.8 billion of cash, cash equivalents, and investment securities available as a potential funding source. A separate $1.5 billion Treasury borrowing authority for guarantee obligations has never been used; the filing emphasizes that this does not make Farmer Mac obligations U.S.-guaranteed.
On October 1, 2016, Farmer Mac transferred $2.0 billion of USDA Securities and $32.8 million of guaranteed USDA securities from available-for-sale to held-to-maturity. The transfer retained $73.8 million of unrealized appreciation in accumulated other comprehensive income, to be amortized over the securities’ remaining terms. Management-estimated Level 3 fair-value instruments totaled $4.9 billion, 31% of total assets.
Other notable items: derivative fair-value accounting caused earnings volatility; CME variation-margin rule changes were expected to affect presentation beginning in 2017. Management stated that Dodd-Frank margin rules were not expected to have a material effect. No legal proceedings were reported. Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion.
Important facts for investors to verify
- Whether the rise in substandard Farm & Ranch assets develops into higher delinquencies, provisions, or realized credit losses.
- Concentration and refinancing risk in AgVantage exposures, especially the three major issuers and the $1.6 billion and $1.7 billion scheduled to mature in 2017 and 2018.
- Whether liquidity remains adequate as cash balances decline, short-term debt matures, and market access or derivative collateral needs change.
- The effect of the Tier 1 ratio calculation change and business growth on regulatory capital headroom, dividend capacity, and repurchases.
- How much reported earnings growth is sustained by core spread and fee performance versus derivative fair-value movements and other adjustments; review the company’s non-GAAP reconciliations.
- Key assumptions and sensitivity in Level 3 valuations, credit-loss estimates, and the outlook for agricultural income, commodity prices, and farmland values.