Federal Agricultural Mortgage Corporation (Farmer Mac) — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed March 10, 2016. Although the request identifies 2015 Q4, this 10-K reports full-year results and year-end balances, with quarterly information also included. Farmer Mac provides a secondary market for eligible agricultural, USDA-guaranteed, rural utilities, and lender obligations.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Interest income | $264.8 million | $241.1 million |
| Net interest income | $125.8 million | $70.3 million |
| Net income attributable to common stockholders | $47.4 million; diluted EPS $4.19 | $38.3 million; diluted EPS $3.37 |
| Core earnings, non-GAAP | $47.0 million; diluted $4.15 per share | $53.0 million; diluted $4.67 per share |
| Net effective spread | $119.4 million; 0.87% | $113.7 million; 0.91% |
| Total assets | $15.54 billion | $14.29 billion |
| Total liabilities / notes payable | $14.99 billion / $14.08 billion | $13.51 billion / $12.83 billion |
| Cash and cash equivalents | $1.21 billion | $1.36 billion |
| Cash, cash equivalents and investment securities | $3.99 billion | $3.30 billion |
| Operating / investing / financing cash flow | $184.4 million / $(1.25) billion / $912.9 million | $155.1 million / $(83.7) million / $542.7 million |
| Year-end business volume | $15.90 billion | $14.60 billion |
Farmer Mac’s total equity was $553.7 million, down from $781.8 million, chiefly reflecting the redemption of Farmer Mac II LLC preferred stock. Core capital was $564.5 million, $102.4 million above the $462.1 million statutory minimum; the Tier 1 capital ratio was 10.5%. The company reported 166 days of liquidity at year-end, above the 90-day regulatory minimum. Discount notes and medium-term notes totaled approximately $14.1 billion, including $9.1 billion due within one year. The filing does not provide a single conventional operating-revenue figure; its principal income sources are interest income and guarantee and commitment fees.
Material changes versus 2014
- Business volume increased 9% to $15.9 billion. New business totaled $3.23 billion, up from $2.77 billion; growth included the first Rural Utilities LTSPCs ($522.3 million) and a $300 million undrawn revolving AgVantage facility.
- Net interest income rose substantially, while net effective spread dollars increased but its yield contracted from 0.91% to 0.87%. Management attributed the dollar increase mainly to business growth and lower funding expense versus 2014 items.
- Common-stockholder net income rose to $47.4 million, but non-GAAP core earnings fell to $47.0 million from $53.0 million. Net income benefited from a $7.1 million after-tax gain on unrealized derivative and hedge fair-value changes; core earnings exclude such fair-value effects and the preferred-stock retirement charge.
- Credit indicators were mixed: total allowance for losses declined to $6.6 million from $10.1 million, while Farm & Ranch 90-day delinquencies increased to $32.1 million (0.56% of that portfolio) from $18.9 million (0.35%). Two loans tied to one canola facility drove much of the increase; $9.8 million was collected to pay them off in January 2016 after a $3.7 million charge-off.
- Farmer Mac redeemed all Farmer Mac II LLC preferred stock on March 30, 2015, reducing non-controlling interest and core capital. It repurchased about 362,000 Class C shares for $10.5 million under a $25 million authorization.
Outlook, commentary, and risks
- Management sees potential for continued growth across all four business lines as rural lenders seek liquidity, capital relief, and risk management, but says growth depends on participants’ financing needs and replacing maturing assets at potentially lower spreads. No numerical earnings or business-volume guidance is provided.
- Management described credit quality as stable overall. It highlighted falling farmland values and commodity prices in some sectors and persistent Western drought, particularly as risks to permanent-planting borrowers; it had not observed a material drought effect on its portfolio at year-end.
- Concentration is important: three counterparties issued approximately 95.7% of AgVantage volume, and CFC represented all Rural Utilities business to date. Related-party transactions include significant CFC activity and servicing relationships.
- Other material exposures include access to debt and equity markets, refinancing and maturity risk, interest-rate and LIBOR basis risk, borrower defaults and balloon-payment risk, derivatives collateral demands, regulatory or charter changes, and valuation uncertainty. Level 3 fair-value instruments totaled $6.1 billion, or 39% of assets.
- Farmer Mac stated its obligations are not guaranteed by the full faith and credit of the United States. It had $4.6 billion of off-balance-sheet guarantees and LTSPCs to third parties; the $1.5 billion U.S. Treasury borrowing authority is restricted to guarantee obligations and had never been used.
- Unusual items included the $8.1 million pretax write-off of deferred issuance costs on the Farmer Mac II LLC preferred-stock retirement and a major 2014 cash-management initiative benefit that did not recur. Management also reported effective internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Review the full audited statements and notes, including the distinction between GAAP net income and management’s non-GAAP core earnings, and the drivers of the large year-over-year net-interest-income change.
- Track Farm & Ranch delinquencies, the canola-loan payoff and charge-off, allowance adequacy, and performance in specialized collateral categories such as permanent plantings and agricultural storage and processing.
- Assess AgVantage issuer concentration, CFC exposure and related-party arrangements, and the timing and refinancing of the $1.4 billion and $1.6 billion of AgVantage maturities scheduled for 2016 and 2017.
- Monitor liquidity and capital headroom, including the large portion of notes payable due within one year, the reduced excess over minimum capital after the subsidiary preferred-stock redemption, and dividend restrictions tied to capital requirements.
- Evaluate fair-value assumptions and derivative-related risks, including Level 3 valuations, basis-spread movements, collateral requirements, and the effect of market or regulatory changes.