Federal Agricultural Mortgage Corporation (Farmer Mac) — Q1 2012 Form 10-Q
Business context and reporting period. Farmer Mac is a federally chartered provider of secondary-market liquidity and credit support for agricultural and rural utilities lending. This unaudited report covers the three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. Results for the quarter are not necessarily indicative of full-year results.
Financial results and position
| Metric | Q1 2012 | Comparison |
|---|---|---|
| Total interest income | $73.1 million | $64.1 million in Q1 2011 |
| Net interest income | $34.2 million | $27.0 million in Q1 2011 |
| Net interest yield | 1.19% | 1.18% in Q1 2011 |
| Net effective spread | $25.6 million; 0.94% yield | $19.6 million; 0.94% yield in Q1 2011 |
| Net income attributable to Farmer Mac | $22.9 million | $19.0 million in Q1 2011 |
| Net income attributable to common stockholders | $22.2 million; $2.04 diluted EPS | $18.3 million; $1.72 diluted EPS in Q1 2011 |
| Core earnings (non-GAAP) | $11.8 million; $1.08 diluted per share | $9.1 million; $0.85 diluted per share in Q1 2011 |
| Total assets | $12.31 billion | $11.88 billion at year-end |
| Total notes payable | $10.83 billion | $10.19 billion at year-end |
| Total equity | $576.9 million | $554.5 million at year-end |
| Cash and cash equivalents | $975.0 million | $817.0 million at year-end |
Operating cash flow was $72.8 million, investing cash outflow was $493.5 million, and financing cash inflow was $578.6 million. Cash increased by $157.9 million during the quarter. The company reported an average 146 days of liquidity during Q1 and 131 days at quarter-end, against a 60-day regulatory minimum and 90-day target. Core capital was $497.7 million, $137.1 million above the $360.6 million statutory minimum; regulatory capital exceeded the $34.7 million risk-based requirement by approximately $481 million.
Material changes versus the prior comparable period
- Common-stockholder net income rose about 21% year over year. Management attributed the increase primarily to higher net interest income, supported by growth in on-balance-sheet assets, including AgVantage securities.
- Net effective spread increased to $25.6 million from $19.6 million, while the spread yield was unchanged at 0.94%.
- New program volume fell to $616.2 million from $963.8 million in Q1 2011. Outstanding program volume nevertheless increased to $12.1 billion from $11.9 billion at year-end.
- Net credit-loss provisions were $0.5 million, versus a net release of $0.7 million in Q1 2011. No charge-offs were recorded in either period.
- Common dividends were $0.10 per share, double the $0.05 paid in 2011, following the increase announced in February 2012.
Outlook, risks, contingencies, and unusual items
- Outlook: Management gave no specific numerical earnings or volume guidance. It described potential longer-term growth opportunities but noted that strong farm-sector profitability, cash-funded land purchases, rural lenders’ liquidity, and weak demand for rural electric power were constraining near-term program growth.
- Credit quality: Farmer Mac I 90-day delinquencies were $53.1 million, or 1.21% of the relevant portfolio, versus $57.3 million, or 1.33%, a year earlier; they had risen from $40.6 million at year-end. Total program delinquencies were 0.44%. Delinquencies were concentrated in certain categories, including part-time farms and permanent plantings. Management reported no Q1 ethanol-loan delinquencies.
- Industry and concentration risks: Management highlighted agricultural commodity, weather, land-value and borrower-income variability; ethanol-sector margin pressure and policy uncertainty; and subdued rural utilities borrowing demand. Ethanol exposure was $155.7 million across 27 plants, with another $39.7 million in undisbursed commitments.
- Interest-rate and valuation risk: Derivatives are not designated as accounting hedges, so fair-value changes can produce significant GAAP earnings volatility. Level 3 instruments were approximately $6.0 billion, or 49% of total assets. A 100-basis-point rate increase was estimated to reduce net interest income by 5.7%.
- Funding and contingent exposures: Farmer Mac relies on continued capital-market access to fund its business. Potential undiscounted obligations included $1.60 billion of off-balance-sheet guarantees and $1.9 billion of LTSPCs. Derivative contracts could have required an additional $85.1 million of collateral if specified provisions had been breached.
- Unusual liquidity item: The company held $58.9 million of auction-rate certificates backed by federally guaranteed student loans; failed auctions have prevented sales through that mechanism since 2008. Their carrying value was 79% of par. Management said it believed they would not impair liquidity and reported receiving interest to date.
- Other matters: The FCA had proposed changes to investment and liquidity rules, with the final rule not yet published. The filing reported no legal proceedings and no material change in previously disclosed risk factors. Management concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether net interest income and core earnings growth persists, and how much reported GAAP profit depends on derivative and trading-asset fair-value gains.
- Whether delinquencies, impaired loans, allowance adequacy, and exposure to permanent plantings, part-time farms, and ethanol remain manageable.
- Whether program-volume growth can recover amid muted borrower demand and upcoming AgVantage maturities, including $402.8 million due in 2012.
- Whether access to debt markets and liquidity remain adequate, and whether proposed regulatory changes affect funding, investment rules, or derivative costs.
- How the auction-rate certificates are valued and whether the company can realize their carrying value or obtain liquidity from them.