Federal Agricultural Mortgage Corporation (Farmer Mac) — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; filed August 11, 2014. The interim consolidated financial statements are unaudited. Farmer Mac provides secondary-market financing, guarantees, and liquidity products to agricultural and rural lenders.
Financial results and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Interest income | $61.8m | $61.7m | $111.5m | $123.2m |
| Interest expense | $42.5m | $33.6m | $77.2m | $66.7m |
| Net interest income | $19.3m | $28.2m | $34.3m | $56.5m |
| Net income attributable to common stockholders | $20.2m | $27.7m | $21.0m | $43.9m |
| Diluted EPS | $1.78 | $2.48 | $1.85 | $3.93 |
| Management-defined core earnings (non-GAAP) | $23.2m | $16.5m | $34.2m | $27.8m |
| Net effective spread | $26.3m; 0.84% | $26.1m; 0.87% | $50.1m; 0.79% | $52.3m; 0.88% |
Q2 net income attributable to common shareholders declined year over year, while core earnings increased. Key influences included derivative and hedging fair-value losses in 2014 versus gains in 2013, an $11.6m income-tax benefit from releasing a valuation allowance, lower prior-year securities-sale and REO gains, and higher preferred dividends. Core earnings is a non-GAAP measure; the filing cautions it may not be comparable across companies.
At June 30, total assets were $14.67bn, versus $13.36bn at year-end 2013; total liabilities were $13.90bn and total equity was $772.3m. Notes payable totaled $11.67bn ($6.27bn due within one year). Cash and cash equivalents were $384.1m, alongside $1.64bn of repo investments and $2.32bn of investment securities. The loan portfolio, net of allowance, was $3.33bn. Six-month operating cash flow was $1.77bn, investing cash outflow $1.57bn, financing cash outflow $568.6m, and cash declined $365.2m to $384.1m. Operating cash flow included large securities-financing-related movements and should not be read as ordinary operating cash generation.
Material changes and credit quality
- Net interest income fell substantially in the first half, principally reflecting $11.6m of accelerated premium amortization on refinanced/recast Rural Utilities assets, legacy funding costs, $7.8m of repo-strategy financing expense, and asset-spread compression. Management said the legacy financing and related premium-amortization effects ended after Q1.
- Farmer Mac launched a cash-management initiative, establishing $1.6bn of repo assets and related financing through $1.67bn of Treasury securities sold, not yet purchased. It recorded $7.8m of unrealized gains on those securities in Q2; the gains were offset by $7.8m of financing interest expense before tax.
- Farmer Mac issued $75m of Series B preferred stock in Q1 and $75m of Series C preferred stock in Q2. Total stockholders’ equity rose to $536.4m; total equity, including non-controlling preferred interests, was $772.3m.
- Total allowance for losses declined to $11.4m from $13.3m at year-end, largely due to paydowns and maturities in the ethanol-related portfolio. Q2 included $2.6m of net allowance releases. Farm & Ranch 90-day delinquencies were $25.9m, or 0.49% of that portfolio, down from $28.3m (0.55%) at year-end; total program-business delinquencies were 0.18%.
- Business volume was $14.1bn, up $122.2m from year-end but down $35.7m from March 31. Q2 new volume was $590.2m, including $300.8m of AgVantage securities and $159.1m of Farm & Ranch loans.
Outlook, risks, and unusual items
- Management estimated an approximately $8m–$9m full-year 2014 net economic benefit from the cash-management strategy, including the tax benefit, and approximately $2m of incremental after-tax financing expense in the second half. Estimates assume interest rates remain constant. The strategy seeks to strengthen eligibility for a possible Federal Reserve reverse-repo facility; approval is not assured, and the Federal Reserve was not accepting applications at the time.
- Management expects Farmer Mac II LLC to redeem its $250m preferred stock on March 30, 2015, using preferred-offering proceeds and cash on hand. The filing also notes Farmer Mac expects CoBank may call its $78.5m preferred-stock investment beginning in October 2014; the investment generated about $7.7m of annual after-tax income, which could be lost if called.
- Farmer Mac reported $168 days of liquidity at June 30, above the 90-day regulatory minimum, and said it had sufficient liquidity and capital resources for the next 12 months, assuming continued capital-market access. Core capital was $750.3m, $317.7m above the $432.6m minimum requirement; the company reported compliance with capital requirements.
- Risks include interest-rate and spread movements, borrower prepayments, agricultural commodity and land-value volatility, drought and other weather conditions, and changes in agricultural policy under the 2014 Farm Bill. Management had not observed a material portfolio impact from western drought as of June 30, but prolonged severe drought could affect delinquencies and losses, particularly in permanent plantings and dairy.
- Farmer Mac held $5.2bn of recurring fair-value assets classified as Level 3, or 35% of total assets, making valuation assumptions a material consideration. It reported no material changes to previously disclosed risk factors, no legal proceedings, and effective disclosure controls.
- No conventional full-year earnings or revenue guidance is provided in the filing text.
Most important facts for investors to verify
- Whether the repo strategy achieves Federal Reserve facility eligibility and whether the estimated $8m–$9m net benefit materializes, including actual close-out costs and tax treatment.
- Underlying spread and earnings trends excluding volatile derivative fair-value movements, accelerated amortization, and the one-time tax valuation-allowance release; also reconcile GAAP results with management’s non-GAAP core earnings.
- Developments in Farm & Ranch credit quality, especially delinquency and collateral trends in permanent plantings, the Southeast, and drought-affected regions; assess whether allowance releases remain supportable.
- Funding and refinancing exposure: $6.27bn of notes payable due within one year, continued access to capital markets, and the maturity/refinancing profile of AgVantage securities.
- The effect of a potential CoBank preferred-stock call on recurring earnings, and the planned 2015 redemption of Farmer Mac II LLC preferred stock on capital and liquidity.
- Valuation sensitivity and liquidity of Level 3 instruments, including auction-rate certificates and guaranteed securities, and the assumptions used for fair value estimates.