Business context and reporting period
Federal Agricultural Mortgage Corporation (Farmer Mac), a federally chartered secondary market for agricultural and rural infrastructure loans, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The filing was made August 8, 2022. Financial amounts below are in U.S. dollars; “m” and “b” mean millions and billions.
Financial and operating performance
- Second-quarter earnings: Interest income was $144.9m, up from $107.1m a year earlier; net interest income was $69.4m versus $55.1m. Net income was $45.9m versus $31.3m, and net income attributable to common stockholders was $39.1m versus $25.4m. Diluted EPS rose to $3.60 from $2.35.
- First-half earnings: Net interest income was $131.3m versus $108.4m; net income was $93.7m versus $64.5m; common-stockholder income was $80.2m versus $53.4m. Diluted EPS was $7.37 versus $4.93.
- Margins and core earnings: Second-quarter net interest yield was 1.09%, compared with 0.94% in Q2 2021; net effective spread, a non-GAAP measure, was $60.9m and 0.99%, versus $56.6m and 1.01%. Q2 core earnings were $30.7m, compared with $30.0m. First-half core earnings were $56.5m versus $55.9m.
- Balance sheet: Total assets were $25.9b, up 3% from December 31, 2021. Net loans were $9.7b versus $9.2b; notes payable were $23.5b versus $22.7b. Total equity was $1.21b versus $1.20b. Accumulated other comprehensive loss was $49.5m, compared with income of $3.9m at year-end, primarily reflecting unrealized market-value losses on securities.
- Cash flow and liquidity: For the first half, operating cash flow was $526.0m, investing cash flow was negative $1.42b, and financing cash flow was positive $896.8m. Cash and cash equivalents were $909.4m, essentially unchanged from year-end. Farmer Mac reported 364 days of liquidity at June 30, against a 90-day regulatory minimum; the quarterly average was 387 days.
- Capital and portfolio: Core capital was $1.26b, $506.3m above the minimum requirement; Farmer Mac reported compliance with capital requirements. Outstanding business volume was $24.48b, up from $23.61b at year-end and $24.24b at March 31.
Material changes versus comparable periods
- Q2 net income attributable to common stockholders increased $13.7m year over year, mainly from higher net interest income, more favorable derivative fair-value results, and a greater release of credit-loss provisions; higher operating expenses and preferred dividends partly offset the gains.
- For the first half, net income attributable to common stockholders increased $26.7m. Net interest income grew with higher business volume, fair-value effects from designated hedges, and lower funding costs. Derivative termination and settlement effects also contributed to reported results.
- Operating expenses rose 19% in Q2 and 16% for the first half year over year, reflecting higher compensation, headcount and stock compensation, and increased technology, software and consulting costs.
- Second-quarter credit indicators improved: direct-exposure Agricultural Finance loans at least 90 days delinquent were $20.6m, or 0.20% of the portfolio, versus 0.57% at March 31. Agricultural Finance direct-exposure substandard assets were $213.7m, or 2.1%, versus $215.8m, or 2.2%, at March 31. Rural Infrastructure Finance reported no delinquencies.
- The total allowance and reserve for losses fell to $14.8m from $16.4m at year-end. The first-half release was $1.6m, mainly reflecting updated credit-loss assumptions and improved risk ratings, partly offset by loan growth and a downgrade of one agricultural storage and processing loan.
Outlook, risks and unusual items
- Management expects conditions to be generally supportive of continued net portfolio growth in the second half of 2022, citing financing demand, rural infrastructure opportunities and agricultural-sector strength. The filing gives no quantitative earnings or EPS guidance.
- Management expects operating expenses to continue increasing over the next several years as Farmer Mac invests in staff, technology, servicing and funding infrastructure. It expects the loan-servicing-rights acquisition to increase interest income, partly offset by higher servicing costs; near-term core-earnings effects were not expected to be significant.
- Risks include rising interest rates and funding costs, inflation and input costs, supply-chain disruption, commodity-price and export volatility, the Russia-Ukraine conflict, recession risk, severe weather and drought, COVID-19 uncertainty, regulatory or legislative changes, and the LIBOR transition. Higher rates may slow originations and refinancing but also reduce prepayments.
- Q2 common-stockholder income was affected by a $10.0m after-tax sequential decline in fair value of undesignated derivatives, partly offset by higher net interest income and lower expenses. For the first half, reported derivative gains included $18.3m of gains from terminations or net settlements; these effects are excluded or deferred in Farmer Mac’s non-GAAP core-earnings presentation. Core earnings and net effective spread are management-defined non-GAAP measures and should be considered alongside GAAP results.
- Farmer Mac had $3.20b of maximum principal exposure under long-term standby purchase commitments and $526.3m of off-balance-sheet guaranteed securities. These are potential obligations, not reported debt. The filing reports no legal proceedings.
Important facts for investors to verify
- Review the reconciliation of GAAP earnings to core earnings, especially derivative fair-value and termination/settlement adjustments.
- Assess how rapidly rising rates, higher funding costs and asset/liability repricing could affect future net interest income and net effective spread.
- Monitor Agricultural Finance delinquencies, substandard assets, the single noted loan downgrade, and the adequacy of loss allowances as input costs and economic conditions change.
- Evaluate liquidity and refinancing exposure alongside $23.5b of notes payable, including $7.1b due within one year and the reported 364 days of liquidity.
- Track the market-value impact of rate movements on securities and accumulated other comprehensive loss, as well as collateral posted for derivatives.
- Check subsequent filings for updated growth, expense, credit, capital and LIBOR-transition developments; management’s outlook is conditional and not a formal numerical forecast.