Federal Agricultural Mortgage Corporation (Farmer Mac) — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; filed August 9, 2012. Farmer Mac provides secondary-market liquidity and credit support for agricultural and rural utilities lending through Farmer Mac I, Farmer Mac II and Rural Utilities programs.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Interest income | $71.6 million | $66.9 million | $144.7 million | $130.9 million |
| Net interest income | $34.6 million | $29.2 million | $68.8 million | $56.2 million |
| Net income attributable to common stockholders | $(4.3) million | $5.2 million | $17.9 million | $23.5 million |
| Diluted earnings per common share | $(0.41) | $0.48 | $1.63 | $2.20 |
| Non-GAAP core earnings | $12.9 million | $10.0 million | $24.7 million | $19.1 million |
Q2 net effective spread increased to $27.2 million, with a 0.99% yield, from $21.0 million and 0.96%. For the first half, spread rose to $52.8 million from $40.6 million, while yield was 0.97% versus 0.95%. Management attributed spread growth mainly to increased on-balance-sheet program volume. The six-month net interest yield was 1.19%, versus 1.20% a year earlier.
Q2 GAAP results included a $31.3 million net loss on financial derivatives, including $21.6 million of unrealized fair-value losses. The decline in long-term rates drove losses on derivatives that were not designated for hedge accounting during the quarter; the corresponding hedged items did not receive offsetting fair-value adjustments. This was the principal reason for the quarterly common-stockholder loss. Core earnings are a non-GAAP measure and exclude specified fair-value effects and other items; they are not directly comparable across companies.
Balance sheet, liquidity and capital
- Total assets were $12.05 billion at June 30, 2012, versus $11.88 billion at year-end 2011. Cash and cash equivalents were $752.5 million, down from $817.0 million.
- Total notes payable were $11.00 billion, up from $10.19 billion. Debt securities of consolidated trusts held by third parties fell to $184.5 million from $701.6 million, primarily following a $460.3 million trust deconsolidation associated with a change in related-party status.
- Total equity was $582.0 million, up from $554.5 million. Regulatory core capital was $492.3 million, $135.9 million above the $356.4 million minimum requirement; regulatory capital exceeded the $42.5 million risk-based requirement by approximately $468.0 million.
- Liquidity averaged 146 days in Q2 and stood at 152 days at quarter-end, compared with a regulatory minimum of 60 days and management target of 90 days. Management said it had favorable capital-market access and expected sufficient resources for the next 12 months, assuming continued access.
- First-half cash flow was $(6.0) million from operating activities, $(778.7) million from investing activities and $720.2 million from financing activities. Cash decreased $64.5 million to $752.5 million.
Material changes and portfolio activity
- New program volume was $639.8 million in Q2; outstanding program volume reached a record $12.25 billion, up from $11.91 billion at December 31, 2011. First-half new volume totaled $1.26 billion.
- Q2 activity included $200.0 million of AgVantage securities, $203.7 million of Farmer Mac I and Rural Utilities loan purchases, $160.3 million of USDA-guaranteed securities and $70.5 million of LTSPCs.
- Farmer Mac I 90-day delinquencies were $47.0 million, or 1.07% of the non-AgVantage portfolio, down from $54.6 million, or 1.27%, a year earlier. Across total program business, delinquencies were 0.38% of volume.
- The allowance for losses was $18.1 million, compared with $17.5 million at year-end. Q2 included a $1.2 million release from loan-loss allowance and a $1.4 million provision to the reserve for losses, primarily including an increased specific reserve for an ethanol loan underlying an LTSPC.
- Effective July 1, 2012, Farmer Mac designated $950.0 million notional of interest-rate swaps as fair-value hedges of certain fixed-rate AgVantage securities. Management expects the accounting change to reduce some future earnings volatility; hedge ineffectiveness may still affect earnings.
Outlook, risks and unusual items
Management described growth opportunities in agricultural and rural utilities lending but gave no specific earnings or volume guidance. It noted that strong farm profitability, low rates, lender liquidity and subdued rural electricity demand were constraining demand for some Farmer Mac products.
- Drought and heat had reduced crop-yield expectations and raised feed-grain costs. Management had not identified a measurable portfolio credit impact by quarter-end, but said longer-term effects—particularly for livestock, dairy and ethanol borrowers—were uncertain.
- Farmer Mac reported one ethanol facility loan 30 days delinquent with a specific allowance; ethanol exposure was $151.8 million across 27 plants, plus $21.9 million in undisbursed commitments. Grain-price increases and possible changes to the Renewable Fuel Standard were identified as risks to ethanol profitability.
- Beginning in mid-August, Farmer Mac planned more conservative underwriting in designated upper Midwest states, including reducing the maximum loan-to-value ratio from 70% to 60% for specified loans and increasing the minimum working-capital ratio.
- Many provisions of the 2008 Farm Bill were scheduled to expire September 30, 2012; replacement legislation had not been enacted. Proposed FCA liquidity and investment rule changes were also pending.
- AgVantage securities totaled $5.29 billion. Of $251.8 million scheduled to mature in the second half of 2012, Farmer Mac expected to replace $250.0 million with a CFC security; management noted the replacement was expected to carry a lower margin.
- Farmer Mac reported $2.03 billion of off-balance-sheet guaranteed securities and $1.9 billion of LTSPCs. Derivative collateral posted was $68.6 million; an additional $74.0 million could have been required if specified contract provisions had been breached.
- Investment securities included $59.7 million of auction-rate certificates with limited liquidity due to failed auctions; their carrying value was 80.6% of par. Management said the securities were backed by government-guaranteed student loans and all interest due had been received.
Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether the July 2012 hedge-accounting designation reduces reported GAAP volatility as anticipated, and how any hedge ineffectiveness affects earnings.
- How drought, higher feed costs and agricultural land values affect borrower performance, especially ethanol, dairy and livestock exposures.
- Completion and economics of the expected $250 million CFC AgVantage replacement, along with maturities and concentration of other AgVantage exposures.
- Continued access to debt markets, liquidity levels, derivative collateral requirements and compliance with capital requirements.
- Progress on Farm Bill legislation and FCA rulemaking, and the effect of any resulting policy or regulatory changes.