Federal Agricultural Mortgage Corporation (Farmer Mac) — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; filed August 9, 2011. Financial statements are unaudited. Farmer Mac provides liquidity and credit support to agricultural and rural-utilities lenders through Farmer Mac I, Farmer Mac II, and Rural Utilities programs.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total interest income | $66.9m | $57.3m | $130.9m | $118.1m |
| Net interest income | $29.2m | $21.6m | $56.2m | $45.2m |
| Net income | $11.4m | $8.1m | $36.0m | $21.7m |
| Net income available to common stockholders | $5.2m | $1.8m | $23.5m | $3.6m |
| Diluted EPS | $0.48 | $0.17 | $2.20 | $0.34 |
| Management-reported core earnings | $10.0m | $5.3m | $19.1m | $10.7m |
Net interest income rose on higher outstanding business volume, partly offset by lower average asset yields. Six-month net interest yield before certain trust effects was 1.27%, versus 1.48%; adjusted net interest yield including consolidated trusts was 1.20%, versus 1.29%. Net effective spread increased to $21.0m for Q2 and $40.6m for the first half, while yields declined to 0.96% and 0.95%, respectively, from 1.08% and 1.05%. The filing attributes lower yields mainly to low-yielding liquidity investments, including U.S. Treasuries.
Q2 included $17.8m of derivative losses and $2.0m of gains on trading assets. First-half derivative losses were $13.8m, versus $21.6m a year earlier. The first-half 2011 results also included $4.0m of previously deferred gains recognized in other income and a $0.9m expense for terminating a third-party administration agreement. Core earnings are a non-GAAP measure that excludes specified fair-value effects and unusual items.
Balance sheet, funding, liquidity, and credit
- At June 30, 2011, assets were $10.44bn, up from $9.48bn at year-end 2010. Cash and cash equivalents were $768.3m; investment securities were $2.09bn; and net loans were $2.79bn.
- Notes payable totaled $8.95bn, including $5.20bn due within one year; debt securities of consolidated trusts held by third parties were $755.4m. Total liabilities were $9.92bn and total equity was $520.6m.
- First-half cash flows were $(19.4)m from operations, $(848.8)m from investing, and $906.7m from financing; cash increased $38.4m to $768.3m. The filing notes that prior cash-flow classifications were restated; the corrections affected operating-versus-investing presentation, not total cash change or previously reported balance sheets, income, or equity.
- Management reported 166 days of liquidity at June 30, above the 60-day regulatory minimum and 90-day target. Farmer Mac said it retained capital-market access at favorable rates and believed liquidity and capital resources were sufficient for the next 12 months, assuming continued market access.
- Core capital was $484.2m, $162.3m above the $321.9m statutory minimum. Regulatory capital of $502.7m exceeded the new risk-based capital requirement of $122.9m by approximately $379.8m. The corporation reported compliance with its capital requirements.
- Total program volume outstanding was $12.20bn, roughly unchanged from year-end 2010 and above $10.76bn a year earlier. First-half new business was $1.57bn, compared with $637.9m in the first half of 2010; approximately $976m of AgVantage securities matured during the first half.
- Farmer Mac I 90-day delinquencies were $54.6m, or 1.27% of the relevant portfolio, down from $70.2m (1.63%) at year-end 2010 and $56.0m (1.30%) a year earlier. Non-performing assets were $67.3m (1.56%), versus $81.8m (1.90%) at year-end. The overall program delinquency rate, including guaranteed and other program exposures, was 0.45%.
- Total allowance for losses was $18.5m, down from $20.1m at year-end. Management cited lower estimated probable losses related to ethanol and dairy exposures. The allowance included $11.1m for loan losses and $7.4m of reserves for off-balance-sheet guarantees and commitments.
Changes, outlook, and principal risks
- Farmer Mac transferred $878.8m of Farmer Mac I loans from held for sale to held for investment in January 2011 because management no longer expected to securitize or sell them in the foreseeable future.
- New program volume included $300m of Rabo Agrifinance AgVantage bonds in Q2 and a $500m MetLife AgVantage bond in Q1. Management said placing the MetLife transaction on balance sheet increased expected future profitability relative to the prior off-balance-sheet guarantee.
- After quarter-end, a $1.0bn MetLife AgVantage guarantee matured in July. Farmer Mac purchased or expected to purchase replacement MetLife securities totaling $1.0bn, to be accounted for on balance sheet in Q3. A $475m M&I Bank AgVantage security was due to mature in August; management did not expect a replacement issuance, implying a reduction in outstanding volume.
- Management saw opportunities for continued agricultural and rural-utilities growth, but said growth depended on industry capital needs and financial-market stability. Risks cited include debt-market access and borrowing costs, interest rates and derivative fair values, agricultural commodity and farmland-value cycles, ethanol-sector economics and policy, and rural-utilities demand and regulation.
- Farmer Mac reported $212.3m of ethanol exposure across 27 plants plus $19.8m of undisbursed commitments; it did not expect to add further ethanol loans beyond existing commitments and servicing troubled loans. Ethanol margins remained uncertain, with federal tax-credit and import-tariff support scheduled to expire at year-end 2011.
- Derivative contracts had $5.5bn notional value. The net fair value of derivatives in a liability position at counterparty level was $87.2m; $5.1m of cash collateral was posted, and an additional $82.1m could have been required if specified contract provisions were breached. A 100-basis-point parallel rate increase was estimated to reduce net interest income by 9.4%; a 25-basis-point decrease by 5.6%.
- Level 3 fair-value instruments totaled $5.1bn, reflecting significant management estimates. Auction-rate certificates of $64.7m had no active auction market and were carried at 87% of par; management said it expected interest payments to continue and did not expect the securities to impair liquidity.
- In June, Farmer Mac amended its 2010 Form 10-K to correct cash-flow classifications and disclosed a material weakness in controls over those classifications. Management said it implemented a new process and remediated the weakness; CEO and CFO concluded disclosure controls were effective as of June 30, 2011. The filing reported no legal proceedings and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the reported improvement in earnings and core earnings is sustained, and how much depends on portfolio growth, releases from reserves, or excluded fair-value and unusual items.
- The status and replacement of the $475m M&I maturity, completion and accounting for the $1.0bn MetLife replacement transactions, and the resulting effect on program volume and margins.
- Credit trends in Farmer Mac I, especially non-performing assets, permanent-planting and regional concentrations, and ethanol and dairy exposures; review the assumptions supporting the allowance.
- Ongoing access to debt markets, short-term refinancing needs, liquidity days, and the effect of U.S. and GSE rating developments on funding costs.
- Derivative collateral requirements and interest-rate sensitivities, and the reliability of Level 3 valuations and auction-rate certificate liquidity assumptions.
- Whether cash-flow control remediation remains effective and whether any further corrections are needed following the restatement.