Federal Agricultural Mortgage Corporation (Farmer Mac) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; filed May 9, 2013. Farmer Mac provides liquidity and credit-risk management to agricultural and rural utility lenders through Farm & Ranch, USDA Guarantees, and Rural Utilities programs. Dollar figures below are in millions unless noted.
Financial results and position
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior date |
|---|---|---|
| Interest income | $61.5 | $73.1 in Q1 2012 |
| Net interest income | $28.4 | $34.2 in Q1 2012 |
| Net interest yield | 0.95% | 1.19% in Q1 2012 |
| Net effective spread | $26.3; 0.90% | $25.6; 0.94% in Q1 2012 |
| Net income attributable to Farmer Mac | $17.0 | $22.9 in Q1 2012 |
| Net income attributable to common stockholders | $16.2; diluted EPS $1.45 | $22.2; diluted EPS $2.04 in Q1 2012 |
| Core earnings, non-GAAP | $11.3; $1.01 per diluted share | $11.8; $1.08 per diluted share in Q1 2012 |
| Total assets | $12,892.7 | $12,622.2 at December 31, 2012 |
| Total liabilities / notes payable | $12,263.8 / $11,522.1 | $12,029.2 / $11,602.1 at December 31, 2012 |
| Total equity | $628.8 | $593.0 at December 31, 2012 |
| Cash and cash equivalents | $893.4 | $785.6 at December 31, 2012 |
| Operating cash flow | $142.1 | $72.8 in Q1 2012 |
At March 31, total business volume was a record $13.44 billion, up from $13.02 billion at year-end and $12.07 billion a year earlier. New business volume was $904.1 million. Loan balances, net of allowance, were $2.77 billion; Farmer Mac Guaranteed Securities were $5.10 billion and USDA Guaranteed Securities were $1.66 billion.
Farmer Mac reported 183 days of liquidity at quarter-end, above its 60-day regulatory minimum and 90-day target. Core capital was $536.5 million, $155.6 million above the $380.9 million minimum requirement. Regulatory capital exceeded the risk-based requirement by approximately $484.2 million.
Material changes versus prior periods
- Common-stockholder net income fell 27% year over year. Management attributed the decline primarily to lower net interest income and changes in derivative and hedge-accounting effects; GAAP results also reflect fair-value volatility.
- Net effective spread dollars increased, supported by larger business volume, but the spread yield contracted four basis points year over year as funding advantages relative to LIBOR normalized.
- On January 1, Farmer Mac reclassified $674.0 million of loans from held for sale to held for investment, recording a $5.9 million discount to be amortized over the loans’ lives.
- In January, Farmer Mac issued $60.0 million of 5.875% non-cumulative Series A preferred stock and used the proceeds to redeem $57.6 million of Series C preferred stock. The company said the transaction strengthened capital and lowered projected long-term dividends.
- Q1 purchases included $325.0 million of Rural Utilities AgVantage securities and $100.0 million of Farm & Ranch AgVantage securities. The Rural Utilities purchase settled April 1 and contributed to higher quarter-end other liabilities.
- Available-for-sale securities’ accumulated unrealized gains increased, and total equity rose to $628.8 million. Operating cash flow improved; investing activities provided $79.2 million versus using $493.5 million in Q1 2012, while financing activities used $113.4 million.
Outlook, risks, and unusual items
- Outlook: Management sees potential for continued Farm & Ranch and Rural Utilities growth, but provided no specific numerical earnings or volume guidance. Growth depends on lender demand, Farmer Mac’s lender network, capital, and liquidity. Management expects new business to help replace maturities and paydowns.
- Credit: Farm & Ranch 90-day delinquencies were $39.7 million, or 0.83% of the non-AgVantage portfolio, versus 0.70% at year-end and 1.21% a year earlier. Delinquencies across total program business were 0.30%. A $3.6 million charge-off related to an ethanol loan transferred to real estate owned; higher reserves also reflected increased estimated losses in non-ethanol agricultural storage and processing loans.
- Sector exposure: Ethanol profitability remains narrow and volatile; Farmer Mac had $137.1 million of ethanol exposure and $11.9 million of undisbursed commitments, and did not expect to add further ethanol loans beyond those commitments. Management is monitoring drought effects, agricultural commodity and land values, interest rates, and the Farm Bill scheduled to expire in September 2013.
- Portfolio and market risks: Approximately $6.0 billion of business volume was in AgVantage securities, generally with fixed maturities and exposure to issuer credit. Interest-rate changes, prepayments, refinancing costs, and access to capital markets can affect earnings and asset values. Management reported $6.8 billion of Level 3 fair-value assets, whose valuations rely on significant estimates and unobservable inputs.
- Liquidity considerations: $65.2 million of auction-rate certificates remained illiquid following failed auctions beginning in 2008; Farmer Mac valued them at 88% of par. Management said the securities are backed by federally guaranteed student loans and did not expect the auction failures to impair liquidity.
- Other items: Farmer Mac expects the issuer may call its $78.5 million par investment in CoBank preferred stock beginning in October 2014; that investment generated approximately $7.7 million of annual after-tax dividend income. Mandatory clearing of most derivatives was expected to begin in Q2 2013. The filing reported no legal proceedings and no material changes to previously disclosed risk factors; disclosure controls were deemed effective.
Most important facts for investors to verify
- Whether core earnings and net effective spread hold up as funding costs, asset yields, and business volume change; assess the reconciliation from non-GAAP core earnings to GAAP results.
- Whether elevated delinquency and reserve trends persist, particularly in permanent plantings and agricultural storage and processing loans, and the performance of the ethanol exposure.
- How the $325 million Rural Utilities AgVantage transaction and the concentration in AgVantage issuers affect credit, liquidity, and future income.
- Whether capital-market access, liquidity days, and regulatory capital margins remain adequate as debt maturities and business commitments evolve.
- How interest-rate movements, derivative collateral requirements, Level 3 valuation assumptions, and the possible CoBank preferred-stock call affect earnings and capital.
- Developments in the Farm Bill, USDA programs, agricultural conditions, and proposed FCA capital-planning and liquidity rules.