Federal Agricultural Mortgage Corporation (Farmer Mac) — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; filed November 9, 2015. Farmer Mac provides secondary-market liquidity, guarantees, and loan-purchase and standby commitment products for agricultural and rural utility lending.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $32.2m | $14.5m | $94.8m | $54.2m |
| Net income attributable to Farmer Mac | $11.7m | $14.9m | $50.4m | $39.1m |
| Net income attributable to common stockholders | $8.4m | $11.6m | $32.3m | $32.6m |
| Diluted EPS | $0.74 | $1.02 | $2.85 | $2.87 |
| Core earnings (non-GAAP) | $13.2m | $9.3m | $33.9m | $43.5m |
- Q3 net effective spread was $30.4m, or 0.88%; nine-month spread was $89.4m, or 0.87%. The comparable 2014 yields were 0.97% for Q3 and 0.91% for the nine-month period.
- Total assets at September 30 were $14.85bn; notes payable were $13.50bn, including $8.28bn due within one year. Cash and cash equivalents were $1.52bn, and total equity was $540.5m.
- Operating cash flow was $165.4m for the nine months, versus $1.83bn in 2014; investing cash outflow was $367.9m and financing cash inflow was $355.6m. The prior-year operating cash flow included significant securities-related activity from a liquidity initiative.
- Liquidity was 124 days at quarter-end, above the 90-day regulatory minimum; the quarterly average was 159 days. Core capital was $558.2m, $115.4m above the $442.8m minimum requirement, compared with a $345.0m excess at year-end 2014.
Material changes and notable items
- Outstanding business volume reached $15.63bn, up $1.03bn from December 31, 2014. Growth included $522.3m of Rural Utilities loans added under LTSPCs—the first such transaction in that business line—and a new, undrawn $300m revolving AgVantage facility.
- Q3 common-stockholder income declined year over year, primarily because derivative and hedging fair-value changes produced a $4.5m after-tax loss versus a $2.7m after-tax gain in Q3 2014. Lower preferred dividends after the March 2015 redemption of Farmer Mac II LLC preferred stock partly offset the decline.
- Nine-month core earnings fell to $33.9m from $43.5m. The comparison reflects, among other items, prior-year income-tax benefits and the $8.1m pretax write-off of deferred issuance costs on the 2015 preferred-stock retirement. Core earnings is a company-defined non-GAAP measure and excludes specified fair-value and unusual items.
- Accumulated other comprehensive income moved from $15.5m at year-end to a $17.8m loss, primarily reflecting lower fair values of available-for-sale securities. The reported decline in total equity also reflects redemption of $235.9m of non-controlling preferred interests.
- Farmer Mac authorized up to $25m of Class C share repurchases over two years and had repurchased approximately 104,000 shares for about $2.8m by September 30.
Outlook, risks, and contingencies
- Management sees opportunities for growth across Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit, but provides no specific earnings or volume guidance. Growth depends on customer funding needs, market access, and replacing maturing assets, potentially at lower spreads.
- Management reported generally stable credit quality, but Farm & Ranch 90-day delinquencies increased to $36.7m, or 0.67% of that portfolio, from $18.9m, or 0.35%, at year-end 2014. A borrower’s two canola facility loans accounted for $13.5m of exposure and prompted a $1.3m increase in the related loss reserve. Total allowance for losses was $10.3m.
- Farmer Mac cited agricultural commodity and land-value volatility, drought in western states, borrower repayment capacity, interest-rate and prepayment risk, and access to debt and equity markets as risks. It had not observed a material drought impact to its portfolio as of filing, but warned persistent drought could affect delinquencies and losses.
- Off-balance-sheet exposure included $1.85bn of guaranteed securities and $2.7bn of LTSPCs. AgVantage balances were concentrated among a small group of counterparties. Level 3 fair-value instruments totaled $6.1bn, or 41% of assets, and depend on management estimates and unobservable assumptions.
- Management stated that capital-market access had remained favorable and liquidity and capital resources were sufficient for the next 12 months, assuming continued market access. Derivative agreements could require additional collateral following specified contract events.
- No material change to previously disclosed risk factors was reported, and the filing reported no legal proceedings. The board declared subsequent quarterly common dividends of $0.16 per share.
Important facts for investors to verify
- Whether Farm & Ranch delinquencies, especially the canola facility exposure, stabilize and whether reserves adequately reflect collateral values and loss expectations.
- How much of the $15.6bn business-volume growth converts into durable earnings, including utilization of the $300m AgVantage facility and performance of the new Rural Utilities LTSPCs.
- Whether the $115.4m capital cushion and 124 days of liquidity remain adequate as short-term debt maturities rise and capital requirements evolve.
- The effects of interest rates, credit spreads, derivative fair values, and Level 3 valuation assumptions on GAAP earnings, accumulated other comprehensive income, and capital.
- Whether agricultural land values, commodity prices, drought conditions, and AgVantage counterparty concentrations create emerging credit or collateral risks.