Federal Agricultural Mortgage Corporation (Farmer Mac) — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; filed November 12, 2013. Farmer Mac provides secondary-market liquidity and credit support to agricultural and rural utility lenders through Farm & Ranch, USDA Guarantees, and Rural Utilities businesses.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $28.2 million | $30.4 million | $84.7 million | $99.2 million |
| Net income attributable to common stockholders | $15.4 million | $16.4 million | $59.3 million | $34.3 million |
| Diluted EPS | $1.37 | $1.49 | $5.30 | $3.12 |
| Core earnings (non-GAAP) | $11.8 million | $13.4 million | $39.6 million | $38.0 million |
| Net effective spread | $25.8 million; 0.83% | $27.3 million; 0.95% | $78.1 million; 0.87% | $80.1 million; 0.96% |
At September 30, 2013, total assets were $13.1 billion, including $651.7 million cash and cash equivalents; notes payable totaled $12.1 billion, and total equity was $605.2 million. Total liabilities were $12.5 billion. Nine-month operating cash flow was $288.1 million, investing cash outflow was $796.1 million, and financing cash inflow was $374.1 million; cash declined $133.9 million to $651.7 million.
Business volume was $13.8 billion, up from $13.0 billion at year-end 2012 and $12.5 billion a year earlier. Core capital of $578.4 million exceeded the $389.5 million minimum capital requirement by $188.9 million. Farmer Mac reported 168 days of liquidity at quarter-end against the then-applicable 60-day minimum.
Material changes versus comparable periods
- Q3 common-stockholder income and core earnings fell year over year, primarily reflecting lower net interest income and spread compression. Management cited seasonal repayments of higher-spread Farm & Ranch loans and higher refinancing costs for floating-rate assets.
- Nine-month GAAP common-stockholder income rose to $59.3 million from $34.3 million, while core earnings increased modestly. A key contributor to the GAAP comparison was $22.5 million of net derivative and hedging gains in 2013, versus a $23.3 million loss in 2012; these fair-value effects are excluded from core earnings.
- Total assets rose from $12.6 billion at year-end, mainly from new program-asset purchases; notes payable increased by about $457 million. Cash decreased, while available-for-sale securities remained broadly stable.
- Accumulated other comprehensive income related to available-for-sale securities declined to $26.8 million from $74.0 million, primarily reflecting higher Treasury rates and lower security fair values.
- 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 per quarter from $0.10.
Outlook, risks, and unusual items
- Management anticipated opportunities for continued Farm & Ranch and Rural Utilities growth, but gave no quantified earnings or business-volume guidance. Growth depends on lender demand, capital and liquidity needs, and Farmer Mac’s ability to expand its lender network.
- Key risks include agricultural commodity prices, weather, farmland values, interest-rate and refinancing movements, borrower repayment capacity, and access to debt markets. Farm Bill policies had expired September 30, 2013, and replacement legislation and future funding for USDA-guaranteed loans remained uncertain.
- Farm & Ranch 90-day delinquencies were $33.0 million, or 0.66% of the non-AgVantage portfolio, compared with $40.8 million, or 0.93%, a year earlier. Across all program business, delinquencies were 0.24%. The allowance for losses was $13.4 million; nine-month loan charge-offs included $3.6 million on an ethanol loan transferred to real estate owned.
- Management expected CoBank likely to call Farmer Mac’s $78.5 million par-value preferred-stock investment beginning in October 2014; it generated approximately $7.7 million of annual after-tax dividend income. Replacement investment income could be lower.
- A new FCA liquidity rule raises the minimum liquidity reserve requirement from 60 to 90 days, subject to its effective date. Farmer Mac said it did not expect the rule or a new capital-planning rule to materially affect its operations or financial condition.
- Valuation uncertainty is notable: $6.8 billion of recurring fair-value assets and liabilities were Level 3, with significant unobservable inputs. Farmer Mac said it did not consider identified unrealized security losses other-than-temporary and did not intend, or expect to be required, to sell the affected securities before recovery.
- Management said it had sufficient liquidity and capital for the next 12 months and foreseeable future, assuming continued capital-market access; a contingency plan includes repurchase borrowing and liquid-asset sales.
Important facts for investors to verify
- Whether net interest spread stabilizes as higher-spread loans repay and funding costs reset.
- How much of the strong nine-month GAAP earnings reflects fair-value movements rather than core earnings and recurring spread income.
- Trends in Farm & Ranch delinquencies, specialized-collateral exposures, and allowance adequacy, including ethanol and agricultural storage and processing loans.
- Whether maturing AgVantage securities are replaced on comparable terms; management had arranged approximately $415 million of replacements for 2013–2014 maturities.
- Continued access to debt markets, compliance with the new 90-day liquidity requirement, and capital headroom under regulatory tests.
- The timing and financial impact of CoBank’s potential call of its preferred stock and the outcome of Farm Bill and USDA funding developments.