Federal Agricultural Mortgage Corporation (Farmer Mac) — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 18, 2013. This is an annual report, not a standalone fourth-quarter filing. Comparisons below are primarily with 2011.
Business context
Farmer Mac is a stockholder-owned, federally chartered GSE providing a secondary market for rural loans through Farm & Ranch, USDA Guarantees, and Rural Utilities. It earns net interest spread and guarantee and commitment fees, and primarily funds assets with debt issued in capital markets. Farmer Mac’s obligations are not guaranteed by the U.S. government; the USDA guarantee applies to eligible USDA-guaranteed loan portions.
Key financial and operating metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Interest income | $264.7 million | $274.7 million |
| Net interest income | $122.0 million | $121.3 million |
| Net interest income after loan-loss provision | $118.3 million | $120.7 million |
| Guarantee and commitment fees | $25.0 million | $24.8 million |
| Income before taxes | $91.1 million | $44.6 million |
| Net income attributable to common stockholders | $43.9 million; diluted EPS $3.98 | $13.8 million; diluted EPS $1.28 |
| Management’s non-GAAP core earnings | $49.6 million; diluted EPS $4.51 | $42.9 million; diluted EPS $3.97 |
| Adjusted net interest yield / net effective spread | 1.05% / 0.95% | 1.20% / 0.96% |
| Total assets / total liabilities | $12.62 billion / $12.03 billion | $11.88 billion / $11.33 billion |
| Notes payable | $11.60 billion | $10.19 billion |
| Cash and cash equivalents | $785.6 million | $817.0 million |
| Cash, cash equivalents and investment securities | $3.29 billion | $3.00 billion |
| Total equity, including non-controlling preferred interest | $593.0 million | $554.5 million |
2012 cash flows were $33.3 million provided by operating activities, $1.33 billion used in investing activities, and $1.26 billion provided by financing activities. Cash and cash equivalents declined by $31.5 million during the year.
Farmer Mac reported 164 days of liquidity at year-end and averaged 147 days during 2012, against a regulatory minimum of 60 days and a management target of 90 days. Outstanding debt comprised about $5.0 billion of discount notes and $6.6 billion of medium-term notes.
Regulatory core capital was $519.0 million, $145.0 million above the $374.0 million statutory minimum. Regulatory capital exceeded the $58.1 million risk-based capital requirement by approximately $477.8 million. Farmer Mac was in the highest capital compliance category.
Material changes versus 2011
- Outstanding program volume rose to $13.0 billion from $11.9 billion, a 9% increase. New purchases, guarantees, and commitments totaled $2.95 billion, down from $3.38 billion.
- Common-stockholder GAAP income more than tripled, while core earnings increased about 16%. Management attributed much of the GAAP improvement to less adverse derivative fair-value effects: derivative and hedging losses were $19.8 million versus $92.6 million in 2011.
- Net effective spread increased to $106.6 million from $89.4 million, while the spread rate was nearly flat at 0.95% versus 0.96%. The broader adjusted net interest yield declined to 1.05% from 1.20%.
- Farm & Ranch 90-day delinquencies fell to $33.3 million, or 0.70% of the non-AgVantage portfolio, from $40.6 million, or 0.93%. Across all program lines, 90-day delinquencies were 0.26% of program volume versus 0.34%.
- Net credit losses increased to $1.7 million from $0.2 million. The allowance for losses ended at $16.9 million, down from $17.5 million.
- Debt increased by approximately $1.4 billion. The board raised its debt issuance authorization from $12 billion to $15 billion.
Outlook, commentary, and risks
- Management described earnings and financial condition as strong and expected opportunities for growth, particularly in Farm & Ranch and Rural Utilities. No specific earnings or volume guidance was provided.
- Management cited potential lender demand for capital relief, liquidity, and longer-term fixed-rate products, as well as possible future rural-utility investment needs. Growth depends on lender demand, capital-market access, and the ability to expand the lender network.
- Management reported no measurable portfolio credit impact from the 2012 Midwest and Great Plains drought as of year-end, while continuing to monitor effects on producers, especially livestock, dairy, and ethanol borrowers.
- Ethanol conditions remained difficult because of narrow margins, corn costs, and reduced government support. Ethanol exposure was $144.9 million, or 3.1% of the non-AgVantage Farm & Ranch portfolio; management did not expect new ethanol lending beyond $16.9 million of undisbursed commitments.
- Concentration is material: four counterparties issued approximately 99.8% of the $5.6 billion AgVantage balance. CFC accounted for all Rural Utilities business to date and serviced that portfolio. A counterparty default, or failure to renew maturing AgVantage transactions, could affect liquidity, income, or both.
- Off-balance-sheet Farmer Mac guarantees and LTSPCs totaled $4.08 billion. These are contingent obligations; collateral and recoveries may mitigate losses, but the company noted that aggregate contingent obligations exceed certain immediately available loss resources.
- Capital-market access is central to funding and refinancing. Other risks include borrower defaults, interest-rate and prepayment mismatches, derivatives collateral calls, regulatory or legislative changes, and dependence on management estimates. Level 3 fair-value measurements represented a substantial share of reported assets and required significant unobservable inputs.
- In January 2013, Farmer Mac issued $60 million of 5.875% non-cumulative Series A preferred stock and redeemed its $57.6 million Series C preferred stock. In February 2013, the board raised the quarterly common dividend from $0.10 to $0.12 per share. These are post-year-end developments; dividends remain subject to capital and board decisions.
- A $1.0 million after-tax severance expense related to the former CEO affected 2012 results. The company also reported CEO and CFO transitions. The auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- Reconcile the $43.9 million GAAP common income with $49.6 million core earnings, including derivative, hedge-accounting, and other non-GAAP adjustments.
- Assess debt maturities and refinancing needs alongside liquidity, capital-market access, and the $3.29 billion liquid investment portfolio.
- Review concentration and renewal risk in AgVantage securities, including major issuers and scheduled maturities.
- Evaluate credit trends in stressed agricultural categories, ethanol exposure, allowance adequacy, and the effects of land values and drought.
- Examine off-balance-sheet guarantees and LTSPCs, related collateral and recovery assumptions, and derivative collateral requirements.
- Consider the size and valuation sensitivity of Level 3 assets, preferred-stock costs and terms, and the effect of the 2013 financing and dividend actions.