Federal Agricultural Mortgage Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 11, 2015. Farmer Mac provides secondary-market financing and credit support for agricultural and rural utility lending.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Interest income | $64.0 million | $52.5 million |
| Net interest income | $30.8 million | $17.7 million |
| Net interest yield | 0.88% | 0.55% |
| Net effective spread | $29.3 million; 0.86% | $26.4 million; 0.84% |
| Consolidated net income | $18.6 million | $7.3 million |
| Net income attributable to Farmer Mac | $13.3 million | $1.8 million |
| Net income attributable to common stockholders | $1.8 million; $0.16 diluted EPS | $0.8 million; $0.07 diluted EPS |
| Non-GAAP core earnings | $9.1 million; $0.80 diluted per share | $11.0 million; $0.97 diluted per share |
| Net cash from operating activities | $89.0 million | $92.7 million |
Net interest income increased primarily because Q1 2014 included $11.6 million of accelerated premium amortization on refinanced Rural Utilities loans, with no comparable effect this quarter, and because of higher average balances and lower funding costs. Net effective spread also benefited from lower funding costs and increased nonaccrual income, partly offset by the loss of $2.1 million in CoBank preferred dividends. Core earnings declined mainly due to that lost dividend income and higher dividends on Farmer Mac preferred stock issued in 2014.
Balance sheet, funding and capital
- Total assets were $14.85 billion at March 31, 2015, up from $14.29 billion at year-end. Cash and cash equivalents were $1.56 billion; investment securities were $2.14 billion; Farmer Mac Guaranteed Securities were $5.61 billion; USDA Securities were $1.83 billion; and net loans were $3.53 billion.
- Notes payable totaled $13.61 billion, including $7.96 billion due within one year. Total liabilities were $14.27 billion, versus $13.51 billion at year-end.
- Total equity was $582.5 million, down from $781.8 million, primarily following redemption of Farmer Mac II LLC preferred stock. Stockholders’ equity was $582.3 million.
- Regulatory core capital was $531.3 million, $97.1 million above the $434.2 million minimum; Farmer Mac reported compliance with its capital requirements. The Tier 1 capital ratio was 11.0%.
- Liquidity averaged 176 days during the quarter and stood at 183 days at quarter-end, against a 90-day regulatory minimum. Management said available liquidity and capital were sufficient for the next 12 months, assuming continued capital-market access.
- Cash flow was $89.0 million from operations, $(403.9) million from investing, and $507.7 million from financing; cash increased $192.9 million to $1.56 billion.
Business changes and credit quality
- Outstanding business volume reached $14.66 billion, up $62.5 million from December 31, 2014 and $0.6 billion year over year. New business volume was $502.3 million, versus $728.6 million in Q1 2014; AgVantage purchases were $214.9 million and Farm & Ranch loan purchases were $130.2 million.
- Total allowances for losses were $9.4 million, down from $10.1 million at year-end, mainly reflecting reserve releases as processing loans underlying commitments paid down. There were no loan charge-offs in Q1 2015.
- Farm & Ranch 90-day delinquencies rose to $32.1 million, or 0.60% of that portfolio, from $18.9 million, or 0.35%, at year-end. Management attributed the increase primarily to one newly delinquent Northwest borrower, with $9.8 million of Farmer Mac exposure, and said it believed the loan remained well collateralized. Rural Utilities reported no delinquencies or credit losses; USDA exposure is backed by the U.S. government.
- Farmer Mac reported $1.60 billion of off-balance-sheet guaranteed securities and $2.2 billion of long-term standby purchase commitments (LTSPCs). These commitments create potential credit and funding obligations.
Outlook, risks and unusual items
- Management sees opportunities for continued growth across its four business lines, while noting that growth depends on lenders’ capital and liquidity needs and that maturing assets may need replacement at potentially lower spreads. No numerical earnings or volume guidance was provided.
- Farmer Mac completed its capital-structure initiative by redeeming all Farmer Mac II LLC preferred stock and related FALConS on March 30, 2015, for $244 million. It recorded an $8.1 million write-off of deferred issuance costs, reducing common-stockholder earnings; management expects preferred-dividend payments to decline by about $14.1 million after tax annually going forward.
- Risks include agricultural commodity prices, farmland values, borrower repayment capacity, weather and drought, interest-rate and prepayment movements, market funding access, and regulatory changes. Management highlighted continuing severe drought in the western U.S., while reporting no material portfolio effect to date.
- Fair-value estimates include $5.7 billion of Level 3 instruments, or 39% of total assets, dependent on significant management assumptions. Auction-rate certificates remained illiquid; their $40.4 million carrying value was 87% of par, though backed by federally guaranteed student loans.
- Farmer Mac cited a proposed FCA rule on governance and conduct, with comments due June 24, 2015. It reported no legal proceedings and no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether the higher delinquency balance—especially the single Northwest borrower exposure—remains adequately collateralized and resolves without material loss.
- Whether Farmer Mac maintains capital and liquidity buffers after the preferred-stock redemption and continues to access debt markets on acceptable terms.
- Whether business growth and replacement of maturing AgVantage securities and other assets sustain net effective spread and core earnings.
- How Level 3 valuation assumptions, interest rates, prepayments, drought, commodity prices, and farmland values affect reported fair values and credit performance.
- The durability of expected annual preferred-dividend savings and the distinction between GAAP common earnings and management’s non-GAAP core earnings.