Federal Agricultural Mortgage Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 6, 2023. Financial statements are unaudited. Farmer Mac provides secondary-market financing, guarantees, and liquidity for agricultural and rural infrastructure lending.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $381.8 million | $193.8 million | $1,040.9 million | $449.1 million |
| Net interest income | $87.6 million | $67.9 million | $245.4 million | $197.3 million |
| Net income | $58.1 million | $41.4 million | $152.4 million | $134.7 million |
| Net income attributable to common stockholders | $51.3 million | $34.6 million | $132.0 million | $114.4 million |
| Diluted EPS | $4.69 | $3.18 | $12.08 | $10.51 |
| Operating expenses | $24.0 million | $19.4 million | $71.9 million | $60.8 million |
| Operating cash flow | — | — | $542.6 million | $706.3 million |
Net interest yield was 1.22% in Q3 versus 1.04% a year earlier; management’s non-GAAP net effective spread was 1.20% versus 1.03%. Nine-month core earnings, a non-GAAP measure, were $126.2 million versus $89.9 million.
At September 30, 2023, total assets were $28.31 billion, notes payable were $25.12 billion, third-party debt of consolidated trusts was $1.33 billion, and equity was $1.39 billion. Cash and cash equivalents were $782.3 million; cash plus investment securities totaled $5.70 billion. Cash declined $78.7 million from year-end. Nine-month investing cash use was $1.28 billion and financing cash provided was $659.1 million.
Outstanding business volume was $27.65 billion, up $915.0 million during Q3 and $1.73 billion from year-end 2022. Core capital was $1.42 billion, $581.1 million above the minimum requirement; the Tier 1 capital ratio was 16.0%. Liquidity was 297 days at quarter-end, against a 90-day regulatory minimum.
Material changes and credit
- Q3 common-stockholder income rose $16.7 million year over year, driven mainly by higher net interest income and guarantee fees; higher operating expenses partly offset the improvement.
- Management attributed stronger spread results to increased business volume, higher yields on short-term investments, and funding strategies. Operating expenses rose 24% in Q3, primarily from headcount, software, IT, and consulting costs.
- On July 1, Farmer Mac transferred $2.7 billion of AgVantage securities from available-for-sale to held-to-maturity, retaining $31.9 million of accumulated unrealized losses in other comprehensive income.
- Agricultural Finance 90-day delinquencies were $42.4 million, or 0.39% of direct-exposure mortgage loans, down from 0.42% at June 30. Agricultural Finance substandard assets were $180.2 million, or 1.6% of the portfolio. Rural Infrastructure had one $29.5 million telecommunications loan downgraded to substandard; the filing reports no delinquencies in that portfolio.
- The allowance for loan losses was $16.6 million. A Rural Infrastructure telecommunications loan downgrade drove a quarterly provision, partly offset by release following payoff of a collateral-dependent agricultural loan. No loan charge-offs were reported in 2023 through September.
Outlook, risks, and contingencies
- Management expects positive net portfolio growth in Q4 2023 and anticipated that most AgVantage securities maturing in Q4 would be refinanced. The filing provides no specific earnings or EPS guidance.
- Management cites elevated interest rates, inflation, potential recession, tighter credit, commodity and export-market volatility, weather and drought, and possible pressure on farm income and collateral values. It notes USDA projections for 2023 net cash farm income to fall 27% from 2022, while remaining above the 10-year average.
- Farmer Mac expects operating expenses to continue rising over the next several years as it invests in staffing, technology, and infrastructure. Interest-rate and refinancing risks remain; the company uses debt and derivatives to manage asset-liability exposures.
- Management reported steady access to debt markets and sufficient liquidity and capital for the next 12 months, assuming continued market access. Statutory Treasury borrowing authority of up to $1.5 billion had not been used.
- The 2018 Farm Bill expired September 30, 2023; reauthorization and proposed charter changes could affect the business. The FCA’s cyber-risk rule is effective January 1, 2025, and a proposed capital-framework rulemaking was targeted for May 2024.
- No legal proceedings were reported. Off-balance-sheet guarantees and commitments included $456.8 million of guaranteed securities and $3.61 billion of maximum principal under long-term standby purchase commitments.
Important facts for investors to verify
- Whether earnings and spread growth persist as funding costs, rates, and business volume change; compare GAAP results with management’s non-GAAP core earnings and net effective spread.
- Q4 refinancing and maturity outcomes for AgVantage securities, including the concentration and credit quality of counterparties and pledged collateral.
- Credit performance of the downgraded telecommunications exposure and agricultural borrowers, particularly delinquency concentrations and evolving farm incomes, commodity prices, and weather conditions.
- Liquidity and capital headroom under stressed debt-market conditions, and the effect of higher expenses and regulatory changes on profitability and capital.
- The consequences of the $2.7 billion securities reclassification and accumulated unrealized losses, as well as interest-rate and fair-value sensitivities.