Federal Agricultural Mortgage Corporation (Farmer Mac) — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed March 13, 2014. Farmer Mac provides a secondary market for eligible agricultural real estate, USDA-guaranteed and rural utilities loans through its Farm & Ranch, USDA Guarantees and Rural Utilities businesses. It is a stockholder-owned, federally chartered GSE; its obligations are not guaranteed by the U.S. government.
Financial and operating highlights
| Metric | 2013 | 2012 |
|---|---|---|
| GAAP net income attributable to common stockholders | $71.8 million; $6.41 diluted EPS | $43.9 million; $3.98 diluted EPS |
| Core earnings, non-GAAP | $54.9 million; $4.90 diluted share | $49.6 million; $4.51 diluted share |
| Net interest income | $98.1 million | $122.0 million |
| Net effective spread | $105.3 million; 86 basis points | $106.6 million; 95 basis points |
| Guarantee and commitment fees | $27.0 million | $25.0 million |
| Total assets | $13.36 billion | $12.62 billion |
| Total liabilities | $12.79 billion | $12.03 billion |
| Notes payable | $12.34 billion | $11.60 billion |
| Cash and cash equivalents | $749.3 million | $785.6 million |
| Cash, cash equivalents and investment securities | $3.23 billion | $3.29 billion |
| Operating cash flow | $314.0 million | $33.3 million |
Net income rose substantially, but management attributed much of the GAAP increase to fair-value movements in derivatives and hedged assets. Core earnings, which exclude specified fair-value effects and other items, increased about 11%. Net interest income and spread declined, reflecting repayments of higher-spread Farm & Ranch loans, higher refinancing costs on floating-rate assets, lower reinvestment spreads and a $15.9 million accelerated premium amortization associated with Rural Utilities refinancing.
New business volume was $3.09 billion, up from $2.95 billion; total outstanding program volume grew to $13.95 billion from $13.02 billion. Farm & Ranch loan purchases increased 45% to $824.9 million. Rural Utilities new volume was $907.0 million, including $820.0 million of AgVantage securities. Total equity was $574.5 million, including $332.6 million of stockholders’ equity and $241.9 million of non-controlling preferred stock. Statutory core capital was $590.7 million, $192.2 million above the $398.5 million minimum; Farmer Mac was in the highest regulatory compliance category.
Farmer Mac reported 134 days of liquidity at year-end and an average of 167 days during 2013 under the then-current calculation. It targets 90 days; an FCA rule effective April 30, 2014 raises the minimum to 90 days and changes the calculation. Debt outstanding included $4.9 billion of discount notes and $7.4 billion of medium-term notes. The cash-flow statement reports operating, investing and financing cash flows of $314.0 million, negative $995.1 million and positive $644.9 million, respectively.
Material changes and portfolio quality
- 90-day delinquencies across program business fell to 0.20% from 0.26%; Farm & Ranch delinquencies declined to $28.3 million, or 0.55% of that non-AgVantage portfolio, from $33.3 million, or 0.70%.
- The allowance for losses declined to $13.3 million from $16.9 million. 2013 net credit losses were $3.0 million versus $1.7 million, including a $3.6 million charge-off on an ethanol loan that was foreclosed.
- Available-for-sale securities’ fair-value declines reduced accumulated other comprehensive income; total equity fell to $574.5 million from $593.0 million despite stronger retained earnings.
- In January 2013, Farmer Mac issued $60.0 million of Series A preferred stock and redeemed its Series C preferred stock. Common dividends were $0.48 per share for 2013; the quarterly rate was raised to $0.14 in February 2014, subject to capital and board determinations.
- Effective January 1, 2013, $674.0 million of loans were transferred from held for sale to held for investment. Beginning January 1, 2014, $1.6 billion of available-for-sale securities were reclassified as held to maturity.
Outlook, risks and unusual items
Management described earnings and financial condition as strong and saw potential for continued growth, but provided no quantified earnings or volume guidance. It cited lender capital and liquidity needs, demand for longer-term fixed-rate loans and possible future rural power investment as opportunities. Growth is expected to help replace income from maturing assets and reinvestment at lower spreads.
- Management said Farm & Ranch spreads on new loans stabilized in the second half of 2013 and expanded modestly in the fourth quarter. Quarterly core earnings were $15.3 million in Q4; GAAP net income attributable to common stockholders was $12.5 million.
- Management was monitoring persistent western drought, farmland values, commodity prices, and implementation of the 2014 Farm Bill. Drought had no measurable portfolio credit impact at year-end, but prolonged conditions could increase delinquencies or losses, particularly in permanent plantings and dairy.
- Key structural risks include dependence on capital-market access, interest-rate and refinancing exposure, borrower and collateral performance, and concentration in counterparties. Five issuers accounted for nearly all $6.0 billion of AgVantage securities; CFC accounted for all Rural Utilities business to date, and ten institutions generated 53% of Farm & Ranch loan purchase volume.
- AgVantage maturities create liquidity and earnings exposure: $921 million were scheduled to mature in 2014 and $676 million in 2015. Farmer Mac reported replacing $170 million of 2014 maturities with new securities in early 2014.
- Fair-value estimates are a significant judgment area: $6.8 billion of instruments measured at fair value used Level 3 inputs, representing 51% of assets. Derivative fair-value gains were $31.8 million in 2013 versus losses of $19.8 million in 2012, contributing to GAAP earnings volatility.
- CoBank could call Farmer Mac’s $78.5 million par-value preferred-stock investment, which paid an 11% annual dividend; management considered a call likely. Farmer Mac also disclosed illiquid auction-rate certificates valued at $65.3 million, below their $74.1 million amortized cost.
- The $250 million Farmer Mac II LLC preferred stock has a dividend rate scheduled to rise from 8.875% to 10.875% in 2015 and then float at three-month LIBOR plus 8.211% in 2020. The subsidiary’s assets are not directly available to Farmer Mac creditors until subsidiary obligations are satisfied.
- The $1.5 billion statutory U.S. Treasury borrowing authority is restricted to guarantee obligations, has never been used, and is not a general government guarantee of Farmer Mac securities or debt.
PricewaterhouseCoopers issued an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2013. No legal proceedings were reported.
Important facts for investors to verify
- Reconcile GAAP earnings with core earnings and assess how much of 2013’s GAAP improvement depended on derivative and hedge fair-value changes.
- Review spread trends, refinancing and premium amortization effects, and the outlook for income as AgVantage securities and other assets mature.
- Assess liquidity against the new 90-day FCA requirement, near-term debt and AgVantage maturities, and continued access to debt markets.
- Evaluate counterparty concentration, especially AgVantage issuers, CFC and major Farm & Ranch loan sellers, as well as the collateral and renewal terms of maturing transactions.
- Examine Level 3 valuation assumptions, drought and farmland-value exposures, specialized-property and ethanol credit performance, and derivative collateral requirements.
- Confirm capital-policy compliance and the potential effect of preferred-stock dividends, redemption or refinancing on capital and common-stock distributions.