Business context and reporting period
Federal Agricultural Mortgage Corporation (“Farmer Mac”) filed this unaudited Form 10-Q for the quarter ended March 31, 2014. Its business provides liquidity and credit support to agricultural and rural lenders through Farm & Ranch, USDA Guarantees, Rural Utilities and Institutional Credit (AgVantage) activities.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / December 31, 2013 |
|---|---|---|
| Interest income | $49.7 million | $61.5 million in Q1 2013 |
| Net interest income | $15.0 million | $28.4 million in Q1 2013 |
| Net interest yield | 0.47% | 0.95% in Q1 2013 |
| Net effective spread | $23.7 million; 0.75% | $26.3 million; 0.90% in Q1 2013 |
| Net income attributable to Farmer Mac | $1.8 million | $17.0 million in Q1 2013 |
| Net income attributable to common stockholders; diluted EPS | $0.8 million; $0.07 | $16.2 million; $1.45 in Q1 2013 |
| Core earnings, non-GAAP | $11.0 million; $0.97 per diluted share | $11.3 million; $1.01 per diluted share in Q1 2013 |
| Operating cash flow | $92.7 million | $142.1 million in Q1 2013 |
| Total assets | $13.55 billion | $13.36 billion at December 31, 2013 |
| Notes payable | $12.39 billion | $12.34 billion at December 31, 2013 |
| Total equity | $679.0 million | $574.5 million at December 31, 2013 |
| Cash and cash equivalents | $866.6 million | $749.3 million at December 31, 2013 |
Net cash increased $117.3 million during the quarter. Investing activities used $76.9 million and financing activities provided $101.6 million. Farmer Mac reported $3.34 billion of cash and investment securities available for liquidity. It maintained an average 138 days of liquidity in Q1 and had 127 days at quarter-end, above the then-applicable 60-day minimum; a 90-day minimum rule became effective April 30, 2014.
Material changes and notable items
- GAAP common earnings fell sharply year over year, chiefly reflecting derivative and hedged-asset fair-value effects: a $7.6 million pretax derivative/hedging loss in Q1 2014 versus a $4.5 million gain in Q1 2013. Lower net interest income and accelerated premium amortization also weighed on results.
- Q1 2014 included $11.6 million of accelerated premium amortization on refinanced Rural Utilities loans; management said this acceleration and related spread compression were not expected to reduce net interest income in future periods.
- New business volume was $728.6 million, down from $904.1 million in Q1 2013. Outstanding program volume increased $157.9 million from year-end to $14.1 billion. Farm & Ranch loan purchases rose 20% year over year; AgVantage purchases fell 46%.
- On January 1, 2014, Farmer Mac reclassified $1.6 billion of Farmer Mac Guaranteed Securities from available-for-sale to held-to-maturity, citing intent and ability to hold to maturity or payoff. The transferred securities included a $22.3 million unrealized gain at transfer.
- Farmer Mac issued $75.0 million of 6.875% non-cumulative Series B preferred stock in March, generating approximately $73.3 million net proceeds. It increased its common dividend to $0.14 per share from $0.12.
- Accumulated other comprehensive income improved, contributing to higher equity; the filing attributes the increase principally to fair-value gains on available-for-sale securities as U.S. Treasury rates declined.
Outlook, risks and contingencies
Management gave no specific numerical earnings or growth guidance. It cited potential growth across all four business lines, supported by lender liquidity and capital needs, rural utility financing demand, and interest-rate-related demand for longer-term products. Management expects business growth to help replace income from maturing or paying-down assets, but noted spread pressure and refinancing activity.
- Credit: Farm & Ranch 90-day delinquencies were $29.4 million, or 0.56% of that portfolio, versus 0.55% at year-end and 0.83% a year earlier. The total allowance for losses was $14.0 million. Rural Utilities had no reported delinquencies; USDA exposure is backed by the U.S. government.
- Off-balance-sheet exposure: maximum outstanding principal was $1.74 billion for guaranteed securities and $2.3 billion under long-term standby purchase commitments (LTSPCs), before collateral, recourse or recoveries. These commitments expose Farmer Mac to potential future payments.
- Capital: actual core capital was $664.0 million, $261.0 million above the $403.0 million minimum requirement. Regulatory capital of $678.0 million exceeded the $90.4 million risk-based requirement by approximately $587.6 million.
- Interest-rate and valuation risk: management reported that a 100-basis-point increase would reduce estimated market value of equity 1.1% but increase projected 12-month net interest income 4.0%; a 25-basis-point decrease would reduce projected net interest income 10.9%. These are model estimates. Level 3 fair-value assets were $5.2 billion, or 38% of total assets, and depend on significant management assumptions.
- Sector and concentration risks include agricultural commodity prices, weather, farmland values and California drought. Management had not observed a material portfolio effect from drought as of quarter-end, but prolonged extreme conditions could increase delinquencies or losses, particularly in permanent plantings and dairy.
- Other risks include possible changes to farm policy and ethanol standards, spread compression or non-replacement of maturing AgVantage securities, access to debt and equity markets, and cyber incidents. Farmer Mac disclosed a prior malware incident with immaterial operational and remediation costs and no known unauthorized access to confidential information.
- Farmer Mac said it believed liquidity and capital were sufficient for the next 12 months and foreseeable future, assuming continued market access. It reported no legal proceedings and no material changes to previously disclosed risk factors other than the added cybersecurity risk.
Most important facts for investors to verify
- Whether core earnings and net interest spread stabilize after the refinancing-related amortization and spread-compression effects, and how those non-GAAP results reconcile to GAAP earnings.
- Trends in Farm & Ranch delinquencies, loss reserves and specialized collateral exposures, including permanent plantings, agricultural storage and processing, and drought-affected regions.
- Liquidity compliance under the new 90-day rule, continued access to funding markets, and the timing and refinancing of $12.4 billion of notes payable.
- AgVantage issuer concentration, collateral quality and maturity/replacement risk, alongside the scale of off-balance-sheet guarantees and LTSPCs.
- Assumptions supporting Level 3 valuations and the ability to maintain capital and dividends under regulatory thresholds and adverse scenarios.