Federal Agricultural Mortgage Corporation (Farmer Mac) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; filed August 10, 2015. Farmer Mac provides secondary-market financing and credit enhancement for agricultural and rural utility lending. Figures are in U.S. dollars; financial statements are unaudited.
Financial performance and condition
- Q2 earnings: Net income was $25.3 million, versus $28.3 million a year earlier. Net income attributable to Farmer Mac common stockholders was $22.2 million, up from $20.2 million; diluted EPS was $1.94, versus $1.78.
- First-half earnings: Net income was $44.0 million, versus $35.6 million. Common-stockholder net income was $24.0 million, versus $21.0 million; diluted EPS was $2.11, versus $1.85. The 2015 amount includes an $8.1 million pretax charge for retiring Farmer Mac II LLC preferred stock.
- Core earnings (non-GAAP): Q2 was $11.6 million, versus $23.2 million; first-half core earnings were $20.7 million, versus $34.2 million. Management attributes the declines chiefly to the absence of a prior-year $11.6 million tax benefit, higher credit costs, and lost preferred-dividend income. Core earnings exclude specified fair-value effects and unusual items and may not be comparable with other companies’ measures.
- Interest income and spread: Q2 net interest income was $31.9 million, versus $22.0 million; first-half was $62.7 million, versus $39.7 million. Net effective spread was $29.8 million (0.88%) in Q2 and $59.0 million (0.87%) for the half-year, versus $29.0 million (0.92%) and $55.5 million (0.88%), respectively. First-half net interest yield was 0.89%, versus 0.60%.
- Other income and expenses: Q2 derivative and hedging gains were $14.4 million, versus a $5.7 million loss; first-half gains were $10.5 million, versus a $13.3 million loss. First-half operating expenses were $18.8 million, versus $16.6 million; the increase was mainly compensation-related. First-half provision for losses was $0.6 million, compared with a $1.9 million release in 2014.
- Cash flow: First-half operating cash flow was $113.4 million, versus $1.77 billion in 2014; investing used $330.1 million, while financing provided $536.5 million. Cash and equivalents rose $319.8 million to $1.68 billion. The comparison is affected by prior-year cash-management transactions, including securities sold short and repurchase-related activity.
- Balance sheet and debt: Total assets were $15.14 billion at June 30, up from $14.29 billion at year-end; total liabilities were $14.57 billion, versus $13.51 billion. Notes payable totaled $13.65 billion ($7.63 billion due within one year and $6.01 billion after one year). Total equity was $576.3 million, down from $781.8 million, primarily following redemption of Farmer Mac II LLC preferred stock.
- Liquidity and capital: Cash and cash equivalents were $1.68 billion; cash plus investment securities totaled $3.54 billion. Liquidity was 187 days at quarter-end and averaged 194 days during Q2, above the 90-day regulatory minimum. Core capital was $553.4 million, $109.6 million above the $443.8 million minimum. The company reported compliance with capital requirements and a Tier 1 capital ratio of 11.7%.
- Business volume: Outstanding on- and off-balance-sheet business volume reached $15.13 billion, up $532.4 million from December 31, 2014 and $1.1 billion year over year. Q2 new business volume was $731.1 million. Common dividends were $0.16 per share for the quarter.
Material changes versus comparable periods
- Q2 common earnings rose year over year, supported by favorable derivative and hedged-asset fair-value changes and lower preferred-dividend expense. The prior-year quarter included an $11.6 million tax benefit that did not recur.
- First-half net interest income increased, reflecting higher portfolio balances and the absence of prior-year accelerated premium amortization and certain cash-management financing costs. Lower funding costs partly offset lost income from preferred stock redeemed in 2014.
- Business volume expanded, notably in AgVantage securities, Farm & Ranch loans, and USDA-backed securities. Rural Utilities loan volume remained limited.
- Farmer Mac II LLC redeemed its outstanding preferred stock on March 30, 2015, reducing non-controlling interest and total equity and generating the $8.1 million deferred-issuance-cost charge.
Outlook, commentary, risks and unusual items
- Management expects continued growth opportunities across its four business lines but gave no quantified earnings or volume guidance. Growth depends on customer financing needs, capital and liquidity access, and replacement of assets as they mature or repay.
- Credit metrics remained low overall, but Farm & Ranch 90-day delinquencies rose to $31.9 million (0.58% of that portfolio), from $18.9 million (0.35%) at year-end. A Northwest borrower accounted for $9.4 million of exposure; Farmer Mac reported full repayment in July 2015. A separate $13.5 million canola-facility loan underlying an LTSPC prompted a specific reserve after collateral shortfalls; total loss allowances and reserves were $10.6 million.
- Management cited risks from agricultural commodity and farmland-value volatility, drought in western states, borrower repayment capacity, interest-rate and prepayment changes, market access to debt and equity funding, and legislative or regulatory changes. It reported no material portfolio effect from drought to date, while warning persistent drought could affect certain permanent-planting and dairy borrowers.
- Off-balance-sheet exposure included $1.57 billion of guaranteed securities and $2.2 billion of LTSPCs at maximum principal amounts, before collateral, recourse, or recoveries. Derivatives had $69.4 million of fair-value liabilities and $35.3 million of posted cash collateral; their Q2 gains materially influenced GAAP results.
- About $6.0 billion of fair-value-measured instruments used Level 3 inputs, making valuation dependent on management models and assumptions. Auction-rate certificates remained illiquid after failed auctions, carried at 86% of par ($40.2 million); management said interest had continued to be received.
- Farmer Mac said it had adequate liquidity and capital resources for the next 12 months, assuming continued capital-market access. A proposed FCA rule on governance and standards of conduct was under review; the company submitted comments in June. No legal proceedings were reported, and the filing disclosed no material change to previously reported risk factors.
Most important facts for investors to verify
- Whether normalized earnings and net effective spread can be sustained apart from derivative fair-value movements, prior-year tax benefits, and preferred-stock changes.
- Subsequent performance of the canola-facility exposure and whether the July repayment resolves the delinquency increase attributed to the Northwest borrower.
- Capital headroom after the preferred-stock redemption, including the effect of portfolio growth and regulatory capital requirements.
- Funding-market access, near-term debt maturities, and compliance with liquidity requirements if market conditions deteriorate.
- Concentration and counterparty risk in AgVantage securities, off-balance-sheet guarantees and LTSPCs, and the assumptions underlying Level 3 valuations.
- Whether drought, commodity prices, farmland values, and changing interest rates alter credit quality, prepayments, or future margins.