Federal Agricultural Mortgage Corporation (Farmer Mac) — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; filed November 8, 2012. Farmer Mac provides liquidity, guarantees and financing for agricultural and rural utilities lending through Farmer Mac I, Farmer Mac II and Rural Utilities programs.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total interest income | $63.8m | $71.1m | $208.5m | $202.0m |
| Net interest income | $30.4m | $31.7m | $99.2m | $87.9m |
| Net income (loss) attributable to common stockholders | $16.4m | $(23.0)m | $34.3m | $0.5m |
| Diluted EPS | $1.49 | $(2.22) | $3.12 | $0.04 |
| Core earnings, non-GAAP | $13.4m | $11.2m | $38.0m | $30.3m |
Q3 net effective spread was $27.3m, or 0.95%, versus $22.8m, or 0.93%, a year earlier. For the nine months, net interest yield was 1.14%, down from 1.20%; net effective spread was 0.96%, versus 0.94%. The filing attributes higher nine-month net interest income mainly to growth in AgVantage securities held on balance sheet, while lower market rates reduced average asset yields.
Q3 GAAP earnings improved sharply year over year, primarily because derivative fair-value effects were less adverse. Core earnings, which exclude specified fair-value effects and other items, also increased. These are different measures; core earnings is a company-defined non-GAAP measure.
Balance sheet, cash flow and capital
- At September 30, total assets were $12.50bn, compared with $11.88bn at year-end 2011; total equity was $600.3m, up from $554.5m.
- Notes payable totaled $11.48bn ($6.78bn due within one year); debt securities of consolidated trusts held by third parties were $163.9m. Notes payable increased from $10.19bn at December 31, 2011.
- Cash and cash equivalents were $870.0m; cash plus investment securities totaled $3.51bn. Liquidity was 128 days at quarter-end and averaged 142 days in Q3, against a 60-day regulatory minimum and 90-day management target.
- For the first nine months, operating cash flow was $83.8m, investing cash flow was $(1.18)bn, and financing cash flow was $1.15bn. Cash increased $53.0m to $870.0m.
- Core capital was $508.5m, exceeding the $368.4m statutory minimum by $140.1m. Regulatory capital exceeded the $42.0m risk-based requirement by approximately $484.3m.
Material changes and portfolio performance
- Outstanding program volume reached $12.47bn, up from $11.91bn at year-end 2011. Q3 additions were $841.5m; nine-month purchases, guarantees and commitments totaled $2.10bn.
- Farmer Mac designated $950m notional of interest-rate swaps as fair-value hedges effective July 1, 2012. Management expects effective hedge accounting to reduce future GAAP earnings volatility; hedge ineffectiveness can still affect earnings.
- In Q2, Farmer Mac deconsolidated $460.3m of securitization trusts after a counterparty ceased to be a related party. The change shifted assets and debt off the balance sheet and increased off-balance-sheet guarantee exposure.
- Farmer Mac I 90-day delinquencies were $40.8m, or 0.93% of the relevant portfolio, versus $44.8m, or 1.02%, a year earlier. Across total program business, delinquencies were 0.33%. Total allowance for losses was $17.8m, approximately 40 basis points of the applicable portfolio.
- Management reported no measurable drought-related credit deterioration as of quarter-end, but identified potential pressure on livestock, dairy and ethanol borrowers from higher feed costs. Ethanol exposure was $153.5m, with $14.8m of undisbursed commitments; the company said it did not expect to add further ethanol loans apart from those commitments.
Outlook, risks and unusual items
Management expects opportunities for continued growth in agricultural and rural utilities financing, but provided no numerical earnings or volume guidance. It said access to capital markets, lender demand, interest rates, commodity prices, weather, land values and regulatory developments could affect results. Management believed liquidity and capital were sufficient for the next 12 months and foreseeable future, assuming continued capital-market access.
- The Midwest and Great Plains drought, high agricultural land values, commodity-price volatility and weaker margins in ethanol and other input-sensitive industries may affect borrower repayment capacity. Farmer Mac tightened underwriting standards in certain upper Midwest states, including reducing maximum loan-to-value ratios from 70% to 60%.
- Many agricultural policies in the 2008 Farm Bill expired in September 2012; replacement legislation had not been enacted as of the filing. A change to the Renewable Fuel Standard could also hurt ethanol demand.
- Interest-rate and prepayment risk remain material. Management estimated that a parallel 100-basis-point rate increase would reduce net interest income by 4.7%, while a 25-basis-point decrease would reduce it by 7.4%.
- About $6.3bn of recurring fair-value assets were Level 3 measurements, including Farmer Mac and USDA guaranteed securities; valuations rely on models and unobservable inputs. Auction-rate certificates had no active auction liquidity: $60.0m carrying value was about 81% of par, although the securities were backed by federally guaranteed student loans.
- Off-balance-sheet Farmer Mac Guaranteed Securities totaled $2.00bn and LTSPCs had a maximum potential principal amount of $1.9bn. These are potential obligations, not expected losses.
- CEO Timothy L. Buzby was appointed October 3, 2012, while continuing as CFO and Treasurer pending a successor. A former CEO severance payment was expected to create approximately $968,000 of after-tax expense in Q4.
- No legal proceedings or material changes to previously disclosed risk factors were reported. The company said it had access to capital markets at favorable rates and did not expect the cited regulatory changes to materially affect operations.
Investor verification priorities
- Reconcile GAAP earnings to core earnings and assess how much reported improvement reflects derivative fair-value accounting and the new hedge designation.
- Track delinquencies, impaired loans, the allowance and exposures to drought-affected borrowers, especially ethanol, dairy and livestock.
- Review the concentration and maturity profile of AgVantage securities, including issuer credit quality and the effect of maturities or replacement margins.
- Assess liquidity and refinancing dependence, including the $6.78bn of notes payable due within one year and access to capital markets.
- Monitor Level 3 valuation assumptions, auction-rate certificate liquidity, derivative collateral requirements and off-balance-sheet guarantee commitments.
- Confirm subsequent developments in Farm Bill legislation, FCA rules, CEO/CFO succession and the anticipated severance expense.