Federal Agricultural Mortgage Corporation (Farmer Mac) — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; filed August 8, 2013. Farmer Mac provides financing and credit-risk management for agricultural and rural utility lenders through Farm & Ranch, USDA Guarantees, and Rural Utilities businesses.
Key financial metrics
| Metric | Q2 / June 30, 2013 | Comparable period / prior date |
|---|---|---|
| Net income attributable to common stockholders | $27.7 million; diluted EPS $2.48 | Q2 2012: loss of $4.3 million; diluted loss per share $0.41 |
| Core earnings (non-GAAP) | $16.5 million; diluted EPS $1.48 | Q2 2012: $12.9 million; $1.17 per diluted share |
| Six-month net income attributable to common stockholders | $43.9 million; diluted EPS $3.93 | Six months 2012: $17.9 million; $1.63 per diluted share |
| Net interest income | Q2: $28.2 million; six months: $56.5 million | Q2 2012: $34.6 million; six months 2012: $68.8 million |
| Net effective spread (management measure) | Q2: $26.1 million, 0.87%; six months: $52.3 million, 0.88% | Q2 2012: $27.2 million, 0.99%; six months 2012: $52.8 million, 0.97% |
| Total assets / total liabilities | $12.94 billion / $12.33 billion | December 31, 2012: $12.62 billion / $12.03 billion |
| Cash and cash equivalents | $650.7 million | December 31, 2012: $785.6 million |
| Notes payable | $11.96 billion | December 31, 2012: $11.60 billion |
| Total equity | $602.3 million | December 31, 2012: $593.0 million |
For the first six months, operating cash flow was $173.8 million, investing cash flow was negative $611.9 million, and financing cash flow was $303.3 million; cash decreased $134.8 million. Average liquidity was 183 days in Q2 and 178 days at quarter-end, against a 60-day regulatory minimum and a 90-day management target.
Material changes and operating performance
- Outstanding business volume grew to $13.6 billion from $13.0 billion at year-end 2012 and $12.3 billion a year earlier. Q2 additions were $646.8 million; first-half additions were $1.55 billion.
- Q2 GAAP earnings improved sharply from the prior-year loss, primarily reflecting derivative and hedge-related fair-value gains, securities-sale gains, and REO-sale gains. Derivative and hedging activity generated a $15.0 million Q2 gain, compared with a $31.3 million loss in Q2 2012. These items make GAAP earnings volatile.
- Net interest income declined as asset yields and net effective spread contracted. Management attributed spread pressure to lower rates on loans and securities while short-term funding rates did not decline comparably.
- Farm & Ranch 90-day delinquencies were $33.9 million, or 0.69% of that portfolio, versus $33.3 million, or 0.70%, at year-end 2012 and $47.0 million, or 1.07%, in Q2 2012. Across all business lines, delinquencies were 0.25% of business volume.
- The allowance for losses was $13.5 million at June 30, down from $16.9 million at year-end. First-half activity included $3.9 million in charge-offs, including a $3.6 million ethanol-loan charge-off; the related property was sold in Q2, producing a $1.1 million recovery.
- Accumulated other comprehensive income from available-for-sale securities fell to $38.7 million from $74.0 million at year-end, reflecting lower fair values amid rising rates. First-half other comprehensive loss was $35.2 million.
Outlook, risks, and unusual items
- Management said it expected sufficient liquidity and capital for the next 12 months and foreseeable future, assuming continued capital-market access. No specific earnings guidance was provided.
- Management sees potential Farm & Ranch and Rural Utilities growth from lender capital and liquidity needs, demand for longer-term fixed-rate financing, and future rural utility investment. Growth is expected to help replace income from maturing or paying-down assets.
- Risks include interest-rate and funding-spread movements, refinancing and capital-market access, agricultural commodity and weather volatility, elevated farmland values, and borrower repayment capacity. Management said land-value growth appeared to be slowing and continued to monitor potential rate-related pressure on farmland values.
- The Farm Bill’s agricultural policies were scheduled to expire September 30, 2013; replacement legislation had not passed as of the filing. Federal budget decisions could also affect USDA-guaranteed lending and related services.
- Management reported $113.7 million of ethanol exposure, plus $23.0 million of undisbursed commitments, and said it did not expect to add ethanol loans beyond existing commitments. It cited industry margin pressures but reported no ethanol loans 90 days delinquent.
- Off-balance-sheet guarantees and long-term standby purchase commitments totaled approximately $4.05 billion and $2.2 billion, respectively, in potential principal exposure. These amounts are not expected losses and do not reflect collateral or recoveries.
- Fair-value estimation is a notable uncertainty: $6.8 billion of fair-value-measured instruments were Level 3 at quarter-end. Farmer Mac also held $65.1 million of auction-rate certificates with limited auction liquidity, carried at 88% of par.
- Core capital was $563.6 million, $179.1 million above the $384.5 million minimum requirement. The risk-based capital requirement rose to $123.6 million from $58.1 million at year-end, primarily due to increased sensitivity to upward rate shocks and additional modeled credit losses as volume grew.
- Farmer Mac issued $58.3 million of Series A preferred stock and redeemed $57.6 million of Series C preferred stock in January 2013. The common dividend increased to $0.12 per share quarterly from $0.10 in 2012; dividends remain subject to regulatory capital restrictions.
Most important facts for investors to verify
- Separate recurring earnings and spread trends from GAAP results driven by fair-value movements and asset-sale gains; review management’s non-GAAP core-earnings reconciliation.
- Track net effective spread, funding costs, rates, and upcoming maturities, including the $6.0 billion AgVantage portfolio and management’s expectation that CoBank may call its $78.5 million preferred investment beginning in October 2014.
- Monitor Farm & Ranch delinquencies, impaired loans, the allowance, ethanol and specialized-property exposure, and any deterioration in agricultural conditions or collateral values.
- Assess liquidity and continued debt-market access, including the auction-rate securities and the potential obligations from guarantees, commitments, and derivatives.
- Follow Farm Bill and regulatory developments, and confirm capital buffers against both minimum and risk-based requirements as the portfolio expands.