Business context and reporting period
Federal Agricultural Mortgage Corporation (Farmer Mac) filed this unaudited Form 10-Q for the quarter ended June 30, 2021. It operates a secondary market supporting agricultural and rural infrastructure lending through Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit. Comparisons below are with the second quarter or first six months of 2020, as applicable.
Financial performance and position
| Metric | Q2 2021 | Comparable period / context |
|---|---|---|
| Net interest income | $55.1 million | Up from $48.3 million in Q2 2020 |
| Net interest yield | 0.94% | 0.87% in Q2 2020 |
| Net income | $31.3 million | Down from $35.6 million in Q2 2020 |
| Net income attributable to common stockholders | $25.4 million; diluted EPS $2.35 | $31.7 million; diluted EPS $2.94 in Q2 2020 |
| Core earnings (non-GAAP) | $30.0 million; diluted core EPS $2.77 | $26.3 million; diluted core EPS $2.45 in Q2 2020 |
| Net effective spread (non-GAAP) | $56.6 million; 1.01% | $46.5 million; 0.89% in Q2 2020 |
| Operating expenses | $16.9 million | Up 20% from $14.1 million in Q2 2020 |
For the six months ended June 30, 2021, net interest income was $108.4 million, net income was $64.5 million, net income attributable to common stockholders was $53.4 million, and diluted EPS was $4.93. Core earnings were $55.9 million, compared with $46.5 million in the first half of 2020.
At June 30, total assets were $24.18 billion, notes payable were $21.71 billion, debt securities of consolidated trusts held by third parties were $1.12 billion, and equity was $1.18 billion. Cash and cash equivalents were $828.4 million. Six-month operating cash flow was $305.8 million, investing cash flow was negative $209.9 million, and financing cash flow was negative $301.4 million; cash declined $205.5 million from year-end to $828.4 million.
Farmer Mac reported 274 days of liquidity at June 30, against a regulatory minimum of 90 days; the second-quarter monthly average was 269 days. Core capital was $1.163 billion, $482.6 million above the $680.8 million minimum capital requirement. The Tier 1 capital ratio was 15.3%, versus 14.1% at year-end 2020.
Material changes versus prior periods
- Q2 common-stockholder net income declined year over year, principally reflecting a $7.6 million after-tax unfavorable change in fair value of undesignated derivatives, higher operating expenses, and higher preferred dividends. Higher net interest income partially offset these effects.
- Core earnings rose year over year, mainly from higher net effective spread; management attributed spread growth to new business volume, lower funding costs, and increased collections on nonaccrual loans.
- Six-month net interest income increased $18.7 million year over year. Average asset yields declined, but lower funding costs and higher business volume supported the increase.
- Outstanding business volume was $22.2 billion at June 30, up $273.1 million from year-end 2020. Farm & Ranch growth was partly offset by declines in USDA Guarantees, Rural Utilities, and Institutional Credit.
- Equity increased 19% from year-end, primarily reflecting the Series G preferred-stock issuance, higher retained earnings, and an increase in accumulated other comprehensive income.
Outlook, commentary, risks and unusual items
- Management described growth opportunities across its lines of business, including agricultural lending, rural broadband, and renewable energy, but did not provide numerical earnings or business-volume guidance. It expects operating expenses to continue increasing over the next several years, with investment in people, technology, and infrastructure expected to continue over the next 12–18 months.
- Farmer Mac said it maintained debt-market access and liquidity and could meet liquidity and capital needs for the next 12 months and foreseeable future, assuming continued capital-market access. It also maintains a contingency funding plan.
- Q2 included $35.0 million of after-tax other comprehensive loss, mainly reflecting valuation changes in available-for-sale securities and cash-flow hedges; comprehensive income was a loss of $3.7 million. Derivative fair-value movements also contributed to the difference between GAAP earnings and core earnings.
- Credit indicators improved sequentially: Farm & Ranch 90-day delinquencies were $63.1 million, or 0.70% of that portfolio, versus 0.84% at March 31. Farm & Ranch substandard assets were $299.1 million, or 3.3% of the portfolio. The loan-loss allowance was $14.0 million and the off-balance-sheet reserve was $2.1 million.
- Management cited continuing uncertainty from COVID-19 and borrower payment capacity, severe drought and weather events, commodity and farmland-value movements, interest rates and funding spreads, and competition. COVID-related payment deferments had covered $428.4 million of unpaid principal since March 2020; most had ended and borrowers had resumed payments.
- The Texas February 2021 freeze affected rural-utility borrowers. Texas legislation could provide a securitization route for extraordinary costs, but management said no solution had yet been implemented; the event contributed to a small six-month loan-loss provision.
- Potential policy risks include litigation over American Rescue Plan debt relief for socially disadvantaged producers; management estimated 3%–8% of Farmer Mac’s USDA Securities comprising FSA loans could be eligible if implemented, potentially accelerating prepayments. A proposed increase in the corporate tax rate could reduce after-tax earnings. LIBOR transition also remains a risk; $4.5 billion of floating-rate assets, $3.1 billion of floating-rate debt, and $14.9 billion of swaps reset based on LIBOR at quarter-end.
- Farmer Mac issued 5.0 million shares of 4.875% Series G preferred stock in May, receiving $121.3 million net of issuance costs. The board reinstated the previously suspended Class C share-repurchase program in March 2021; no shares were repurchased in the first half.
Important facts for investors to verify
- Review the reconciliation of GAAP earnings to core earnings and net effective spread, including the treatment of derivative fair-value changes and other non-GAAP adjustments.
- Track Farm & Ranch delinquencies and substandard assets, especially exposures affected by drought, commodity conditions, and COVID-related deferments.
- Monitor the Texas rural-utility freeze’s financial consequences and whether the proposed securitization mechanism is implemented.
- Assess liquidity and capital against upcoming debt maturities, continued access to capital markets, and regulatory requirements.
- Follow LIBOR transition, potential FSA-loan prepayments tied to litigation and debt-relief policy, and any corporate tax or regulatory changes.