Federal Agricultural Mortgage Corporation (Farmer Mac) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; filed August 7, 2023. Farmer Mac is a federally chartered secondary market that provides liquidity and financing solutions to agricultural and rural infrastructure lenders.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $78.7m | $63.9m | $157.7m | $129.5m |
| Net income | $47.2m | $41.9m | $94.2m | $93.3m |
| Net income attributable to common stockholders | $40.4m | $35.1m | $80.7m | $79.7m |
| Diluted EPS | $3.70 | $3.23 | $7.39 | $7.33 |
| Core earnings (non-GAAP) | $42.2m | $30.7m | $81.0m | $56.5m |
| Net effective spread (non-GAAP) | $81.8m; 1.20% | $60.9m; 0.99% | $159.0m; 1.17% | $118.8m; 0.98% |
Q2 interest income was $343.8m and interest expense was $265.2m. Six-month operating expenses rose 16% to $47.9m, including compensation and benefits of $29.3m (+17%) and general and administrative expense of $16.9m (+15%). The six-month provision for credit losses was $1.9m, versus a $1.6m release in 2022. The six-month effective tax rate was 21.1%.
Balance sheet, funding and liquidity
- Assets were $27.66bn at June 30, up $326m from year-end 2022. Loans, net of allowance, were $10.56bn, including $1.45bn in consolidated trusts.
- Notes payable were $24.51bn, with a further $1.36bn of consolidated-trust debt held by third parties. Total equity was $1.35bn.
- Cash and cash equivalents were $874m; cash plus investment securities totaled $5.64bn. Farmer Mac reported 307 days of liquidity at quarter-end, compared with a 90-day regulatory minimum.
- Six-month operating cash flow was $180m, investing cash flow was negative $282m, and financing cash flow was $116m. Ending cash was $874m.
- Core capital was $1.381bn, $566m above the minimum requirement; the Tier 1 capital ratio was 15.9%. Farmer Mac reported compliance with capital requirements at the highest compliance level.
Material changes and business trends
- Outstanding business volume reached $26.74bn, up $815m from year-end 2022 and $2.26bn year over year. Q2 net growth was $253m; Agricultural Finance grew $511m, partly offset by a $258m decline in Rural Infrastructure Finance.
- Management attributed stronger earnings and spread mainly to lower funding costs, higher returns on excess capital as rates rose, and increased business volume. Q2 net interest income was up $14.8m year over year; core earnings rose $11.4m.
- Q2 operating expenses increased 21% year over year, reflecting higher headcount, software and IT spending, and consulting costs. Management expects operating expenses to continue increasing over the next several years, though employee headcount growth may slow in coming quarters.
- Accumulated other comprehensive loss improved to $34.4m from $50.8m at year-end, largely reflecting gains in available-for-sale securities. However, unrealized losses remain significant on some securities and reflect interest-rate and spread movements.
Outlook, risks and unusual items
- Management expects generally supportive net portfolio growth in the second half of 2023 and anticipates positive wholesale refinancing momentum, with most AgVantage securities maturing in that half expected to be refinanced. No specific earnings guidance was provided.
- Management cited elevated interest rates, inflation and input costs, possible recession and tighter credit, commodity and export volatility, supply-chain disruption, severe weather, drought, flooding, and changing farmland values as risks. Higher rates may dampen new originations while slowing prepayments.
- Farmer Mac says its asset-liability management and non-deposit funding model support earnings stability and liquidity. Its interest-rate simulations show that a parallel +100-basis-point shock would reduce estimated market value of equity by 3.9% and next-12-month net effective spread by 0.8%; these are model estimates, not forecasts.
- A single agricultural storage and processing borrower was in bankruptcy at quarter-end. After June 30, a buyer acquired the borrower’s assets and assumed its liabilities; Farmer Mac received proceeds close to the loan’s amortized cost and expects to release about $4.6m of related allowance in Q3 2023.
- Farmer Mac revised 2022 comparative financial information for an immaterial error involving accrual of interest on cleared derivatives. The revision reduced reported Q2 2022 net income by $4.0m and six-month 2022 net income by $0.4m; management said the prior-period error was not material to those statements as a whole.
- The farm bill was due to expire September 30, 2023, and proposed FCA changes to Farmer Mac’s regulatory capital framework remained under review. Farmer Mac reported no legal proceedings and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether Q3 results reflect the expected release of the $4.6m loan-loss allowance and whether the borrower’s sale proceeds remain close to carrying value.
- Refinancing and maturity outcomes for AgVantage securities, especially the volume scheduled to mature in the second half of 2023.
- Credit trends in Agricultural Finance, including the 0.42% direct-exposure 90-day delinquency rate, concentration in larger delinquent borrowers, and storage and processing exposures.
- Funding costs, debt refinancing needs, liquidity levels, and sensitivity of earnings and capital to further rate changes.
- Growth in operating expenses and execution of the multi-year securities-trading platform and treasury-system initiatives.
- Assumptions behind Level 3 valuations and non-GAAP measures; Level 3 assets represented 28% of total assets. Compare core earnings and net effective spread with GAAP results.