Business context and reporting period
Federal Agricultural Mortgage Corporation (Farmer Mac) filed this Form 10-K on March 16, 2015, for the fiscal year ended December 31, 2014. Farmer Mac is a federally chartered, stockholder-owned GSE that provides a secondary market for rural credit through Farm & Ranch, USDA Guarantees, Rural Utilities and Institutional Credit (AgVantage). Its obligations are not guaranteed by the U.S. government; USDA guarantees on eligible USDA loan portions are backed by the full faith and credit of the United States.
Key financial metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Interest income | $230.6 million | $235.4 million |
| Net interest income | $59.9 million | $98.1 million |
| Net interest income after loan-loss provision/release | $60.8 million | $98.6 million |
| Net income | $70.3 million | $97.5 million |
| Net income attributable to common stockholders | $38.3 million; $3.37 diluted EPS | $71.8 million; $6.41 diluted EPS |
| Core earnings (non-GAAP) | $53.0 million | $54.9 million |
| Core earnings excluding 2014 initiatives (non-GAAP) | $47.9 million | Not applicable |
| Net effective spread | $103.2 million; 0.83% | $105.3 million; 0.86% |
| Net cash provided by operating activities | $155.1 million | $314.0 million |
| Cash and cash equivalents | $1.36 billion | $749.3 million |
| Total assets | $14.29 billion | $13.36 billion |
| Total liabilities | $13.51 billion | $12.79 billion |
| Notes payable | $12.83 billion | $12.34 billion |
| Total equity | $781.8 million | $574.5 million |
Net cash used in investing activities was $83.7 million and net cash provided by financing activities was $542.7 million. Cash and cash equivalents increased by $614.1 million during the year. At year-end, cash, cash equivalents and investment securities totaled $3.30 billion. Regulatory liquidity was 146 days at year-end, above the 90-day minimum; the 2014 average was 162 days.
Statutory core capital was $766.3 million, $345.0 million above the $421.3 million minimum. The Tier 1 capital ratio was 11.3%. Outstanding business volume was $14.60 billion, up 5% from $13.95 billion in 2013; $10.72 billion was on balance sheet and $3.88 billion off balance sheet. Allowance and reserve for losses totaled $10.1 million, down from $13.3 million.
Material changes versus comparable periods
- Common-stockholder net income fell 47% year over year. Management attributed much of the decline from 2013 to the swing in after-tax fair-value effects on derivatives and hedged assets: a $6.5 million loss in 2014 versus a $29.4 million gain in 2013. Higher preferred dividends also reduced common earnings.
- Net interest income declined $38.3 million. The 2014 cash-management initiative added $39.4 million of financing interest expense; the October 2014 redemption of CoBank preferred stock also reduced spread income. Net effective spread narrowed modestly, from 0.86% to 0.83%.
- Core earnings decreased modestly, to $53.0 million from $54.9 million; excluding the effects of the cash-management and capital-structure initiatives, 2014 core earnings were $47.9 million.
- Business volume grew despite lower annual new business additions: $2.77 billion in 2014 versus $3.09 billion in 2013. Growth in on-balance-sheet Farm & Ranch loans and AgVantage securities more than offset repayments and reductions in some off-balance-sheet Farm & Ranch exposures.
- Farm & Ranch 90-day delinquencies improved to $18.9 million, or 0.35% of that portfolio, from $28.3 million, or 0.55%, at year-end 2013. Net credit recoveries were approximately $6,000 in 2014, versus $3.0 million net losses in 2013.
- Total equity increased following $150 million of Series B and Series C preferred stock issuances and higher retained earnings. Accumulated other comprehensive income also improved, principally with lower Treasury rates.
Outlook, commentary and risks
Management sees potential for continued growth across all four business lines, supported by lenders’ capital and liquidity needs, expanded marketing and product development, and possible financing demand in rural utilities. No quantified earnings or growth guidance is provided. Management says it has sufficient liquidity and capital for the next 12 months and foreseeable future, assuming continued capital-market access.
- Management reported favorable credit quality but noted that 90-day delinquencies were at historically low levels and could move back toward historical averages. Farmland values and commodity prices had declined in some sectors; persistent western drought could pressure borrowers, particularly permanent-planting and dairy operations.
- Concentration is material: five institutions issued approximately 97.6% of outstanding AgVantage securities; CFC has generated all Rural Utilities business to date. Ten institutions generated 61% of 2014 Farm & Ranch loan purchase volume. AgVantage maturities of $732 million in 2015 and $1.33 billion in 2016 create refinancing, liquidity and replacement-volume exposure.
- Other principal risks include access to debt and equity markets, interest-rate and derivative valuation volatility, borrower defaults and balloon maturities, regulatory or legislative change, and uncertainty in estimated fair values. Level 3 instruments totaled $5.5 billion, 38% of total assets.
- Farmer Mac implemented a cash-management and liquidity initiative in 2014, producing a reported $11.4 million net economic benefit after related financing costs and tax benefits. It was accepted as a counterparty to the Federal Reserve’s overnight reverse repo facility effective January 2015.
- Farmer Mac II LLC announced redemption of its $250 million preferred stock on March 30, 2015, which triggers redemption of the related FALConS. Farmer Mac expected to fund the redemption with 2014 preferred-stock proceeds and cash on hand, without further preferred issuance.
- Farmer Mac’s $1.5 billion U.S. Treasury borrowing authority is limited to fulfilling guarantee obligations and has never been used. Farmer Mac states its own debt and guarantees are not U.S.-government guaranteed.
The independent auditor issued an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2014. The filing reports no material legal proceedings or unresolved SEC staff comments.
Most important facts an investor should verify
- Reconcile the sharp GAAP earnings decline with core earnings and the specific derivative fair-value and 2014 initiative effects; assess the sustainability of the reported tax benefits.
- Review AgVantage issuer concentrations, 2015–2016 maturities, collateral terms and replacement issuance, including exposure to key counterparties.
- Track Farm & Ranch delinquency and loss trends by commodity and region, especially permanent plantings, part-time farms, and drought-affected areas.
- Confirm completion and funding of the March 30, 2015 Farmer Mac II LLC preferred-stock and FALConS redemption, and its effect on capital and dividends.
- Assess reliance on frequent debt-market access, interest-rate hedging and collateral calls, as well as the assumptions supporting $5.5 billion of Level 3 fair values.