Business context and reporting period
Federal Agricultural Mortgage Corporation (Farmer Mac), a federally chartered instrumentality, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. Its businesses include Farm & Ranch, USDA Guarantees, Rural Utilities and Institutional Credit.
Financial results and position
- Third-quarter results: Interest income was $60.9 million and interest expense $48.9 million, producing net interest income of $12.0 million, down from $28.2 million in Q3 2013. Net income was $20.3 million; net income attributable to Farmer Mac was $14.9 million, and net income attributable to common stockholders was $11.6 million, or $1.02 per diluted share, versus $15.4 million, or $1.37 per diluted share.
- Nine-month results: Interest income was $172.4 million, net interest income $46.3 million, net income $55.9 million and income attributable to common stockholders $32.6 million, or $2.87 per diluted share. The comparable 2013 figures were $186.2 million, $84.7 million, $78.6 million and $59.3 million, or $5.30 per diluted share. Nine-month 2014 income tax expense was just $0.1 million, reflecting tax benefits and valuation-allowance reductions described below.
- Spread and non-GAAP earnings: Q3 net effective spread was $27.2 million (0.89%), compared with $25.8 million (0.83%) a year earlier. Nine-month spread was $77.3 million (0.83%) versus $78.1 million (0.87%). Q3 core earnings were $9.3 million versus $11.8 million; excluding the two short-term initiatives described below, Q3 core earnings were $12.5 million. Nine-month core earnings were $43.5 million versus $39.6 million; excluding those initiatives, they were $36.9 million. Core earnings are non-GAAP measures.
- Balance sheet and capital: Total assets were $14.5 billion at September 30, 2014, up from $13.4 billion at year-end 2013. Notes payable totaled $11.5 billion, down from $12.3 billion; total liabilities were $13.7 billion and total equity $782.4 million. Farmer Mac reported $627.7 million in cash, $1.6 billion in securities purchased under resale agreements, and $2.0 billion in investment securities. Core capital was $761.3 million, $332.9 million above the $428.4 million minimum requirement; the company reported compliance with capital requirements.
- Credit, volume and cash flow: Loans net of allowance were $3.35 billion. Total allowance for losses was $10.6 million, down from $13.3 million at year-end. Farm & Ranch 90-day delinquencies were $24.7 million, or 0.46% of that portfolio, down from $28.3 million (0.55%) at year-end. Outstanding program business was $14.0 billion, up $54.5 million from year-end. Nine-month operating cash flow was $1.83 billion, investing cash outflow $1.21 billion and financing cash outflow $747 million; cash declined $121.6 million to $627.7 million.
- Liquidity: Under revised FCA requirements, Farmer Mac held an average of 165 days of liquidity in Q3 and 160 days at quarter-end, above the 90-day minimum. Management said it believed funding and capital resources were sufficient for the next 12 months and foreseeable future, assuming continued capital-market access.
Material changes versus comparable periods
- Common-stockholder earnings declined year over year in Q3 and the first nine months, while nine-month core earnings increased. Lower GAAP earnings reflected, among other items, weaker derivative and hedge results year to date, preferred dividends from newly issued Series B and C stock, and accelerated premium amortization on certain Rural Utilities assets.
- The Q2 2014 cash-management initiative added approximately $1.6 billion of repo assets and related Treasury short-position liabilities by quarter-end. Q3 included $17.9 million of related interest expense and $16.4 million of unrealized gains. A $11.6 million tax benefit from previously reserved capital-loss carryforwards was recognized in Q2.
- Farmer Mac issued $75 million each of Series B and Series C preferred stock in 2014, increasing equity and preferred-dividend costs. The company planned to use these proceeds and cash on hand to redeem the remaining $244 million of FALConS on March 30, 2015.
- Business volume additions were $630.5 million in Q3, below $820.9 million in Q3 2013. Nine-month additions were $1.95 billion versus $2.37 billion, including lower Farm & Ranch and AgVantage activity.
Outlook, commentary and risks
- Management cited opportunities for growth across its four business lines, but gave no specific earnings or volume guidance. It expects the 2014 cash-management initiative to produce an estimated $8–$9 million full-year net economic benefit, with approximately $1 million of incremental after-tax financing expense in Q4; estimates assume interest rates remain constant. Management expected to close term repo positions as they matured through Q4 and reassess repo activity for 2015.
- CoBank called Farmer Mac’s $78.5 million par-value preferred-stock investment on October 1, 2014. The related approximately $7.7 million annual after-tax income will not continue.
- Risks include access to debt and equity funding, interest-rate and fair-value volatility, agricultural land values and commodity prices, weather and drought, borrower repayment capacity, regulatory changes and refinancing/prepayment behavior. Management reported drought conditions in parts of the West, including California, but no material portfolio effect as of quarter-end; prolonged severe drought could affect delinquencies or losses. Some farmland values and commodity prices had recently declined, particularly in parts of the Midwest.
- Fair-value estimates warrant attention: Level 3 instruments totaled $5.1 billion, representing 35% of assets and 58% of financial instruments measured at fair value. Management reported no material change in risk factors from prior filings and no legal proceedings.
Important facts for investors to verify
- Track whether reported net interest income and common earnings recover, and distinguish GAAP results from core earnings and core earnings excluding initiatives.
- Verify the realized after-tax economics of the repo/short-Treasury strategy, its Q4 closeout, and the use of capital-loss carryforwards; compare actual results with management’s $8–$9 million estimate.
- Monitor refinancing of the remaining $244 million FALConS, preferred-dividend burden, capital buffers and dividend capacity.
- Review portfolio credit performance, especially Farm & Ranch delinquencies, ethanol and other specialized collateral, drought exposure, and the adequacy of the $10.6 million allowance.
- Assess AgVantage issuer concentration, off-balance-sheet guarantees and LTSPCs, and the sensitivity of Level 3 valuations to discount-rate and prepayment assumptions.
- Confirm liquidity remains above the 90-day regulatory minimum and that capital-market access and debt maturities remain manageable.