Federal Agricultural Mortgage Corporation (Farmer Mac) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; filed November 8, 2021. Farmer Mac is a federally chartered secondary market provider of financing and credit solutions for agricultural and rural infrastructure lenders. The financial statements are unaudited.
Financial performance and position
- Third-quarter results: Net interest income was $55.0 million, up from $44.7 million a year earlier; net interest yield increased to 0.94% from 0.78%. Net income was $31.1 million versus $25.5 million, and net income attributable to common stockholders was $24.3 million versus $18.7 million. Basic and diluted EPS were $2.26 and $2.24, compared with $1.74 and $1.73.
- Nine-month results: Net interest income was $163.4 million versus $134.3 million; net interest yield was 0.93% versus 0.80%. Net income was $95.6 million versus $73.9 million, and net income attributable to common stockholders was $77.7 million versus $59.7 million. Diluted EPS was $7.17 versus $5.54.
- Core earnings (non-GAAP): Q3 core earnings were $27.6 million, nearly unchanged from $27.7 million a year earlier; nine-month core earnings were $83.5 million versus $74.2 million. Core diluted EPS was $2.55 for Q3 and $7.71 for the nine months. These measures exclude certain fair-value effects and specified items; they are not GAAP results.
- Drivers and costs: Year-over-year Q3 net interest income growth reflected lower funding costs, new business volume, and designated hedge fair-value effects. Nine-month net interest income rose by $29.1 million, which management attributed mainly to new business, designated hedge effects, and lower funding costs. Nine-month operating expenses increased 18% to $52.9 million, including higher compensation and technology-related costs. The nine-month provision for loan losses was $0.5 million, compared with $4.5 million in 2020; the reserve for off-balance-sheet losses was released by $1.3 million.
- Balance sheet at September 30: Total assets were $24.7 billion, up 2% from year-end 2020. Net loans were $9.0 billion; notes payable were $22.4 billion, up 2%; total equity was $1.20 billion, up 21%. Cash and cash equivalents were $899.1 million, down from $1.03 billion at year-end. Outstanding business volume was $23.1 billion, up from $21.9 billion.
- Cash flow and funding: Nine-month operating cash flow was $433.2 million, compared with cash used of $225.4 million in 2020; investing used $751.7 million and financing provided $183.6 million. Cash ended the period at $899.1 million. These cash-flow figures include substantial noncash fair-value adjustments and financing activity from debt issuance and repayment.
- Capital and liquidity: Core capital was $1.179 billion, $479.5 million above the $699.6 million minimum requirement. The Tier 1 capital ratio was 15.1%, compared with 14.1% at year-end 2020. Farmer Mac reported 266 days of liquidity at quarter-end against a 90-day regulatory minimum, and a quarterly average of 279 days.
Material changes and business developments
- Farm & Ranch and Institutional Credit growth helped lift outstanding business volume; the Institutional Credit increase included $1.2 billion of short-term funding expected to mature in Q4 2021. USDA Guarantees volume decreased slightly during Q3.
- In August, Farmer Mac acquired servicing rights for a sizeable portion of its Farm & Ranch and USDA Guaranteed Securities portfolios and expanded internal servicing. The acquisition added ten employees. Management expects additional interest income to be partly offset by operating costs; it did not expect a significant near-term effect on core earnings.
- In May, Farmer Mac issued $121.3 million of Series G preferred stock, with a 4.875% fixed, non-cumulative dividend rate. The common dividend was $0.88 per share per quarter during 2021, versus $0.80 in 2020.
- After quarter-end, on October 14, Farmer Mac completed the FARM Series 2021-1 securitization of approximately $302.7 million of agricultural mortgage loans, including a $280.0 million guaranteed senior tranche and a $22.7 million unguaranteed subordinate tranche. Management expected an approximately $4 million after-tax gain in Q4.
Outlook, risks, and contingencies
- Management cited opportunities for profitable growth across its businesses, including rural broadband, renewable energy, agricultural lending, and larger lender relationships. It expects operating expenses to rise over the next several years and anticipates continued investment over the next 12–18 months.
- Farmer Mac said it had maintained access to debt markets and believed it had sufficient liquidity and capital for the next 12 months and foreseeable future, assuming continued capital-market access. Its $1.5 billion U.S. Treasury borrowing authority had not been used.
- Credit indicators improved sequentially: Farm & Ranch 90-day delinquencies were $54.8 million, or 0.58% of that portfolio, versus 0.70% at June 30; substandard assets were $278.3 million, or 2.9%, versus 3.3% at June 30. Management cautioned that drought, severe weather, supply-chain disruption, rising input costs, export conditions, and COVID-19 uncertainty could worsen borrower performance. The Texas Arctic Freeze continued to affect the Rural Utilities portfolio; the company reported approximately $405 million of Texas rural infrastructure exposure.
- Interest-rate, refinancing, and benchmark-transition risks remain relevant. At September 30, $14.3 billion of interest-rate swaps, $3.9 billion of floating-rate assets, and $2.2 billion of floating-rate debt reset based on LIBOR. The filing also discusses market and valuation risks, including Level 3 fair-value estimates for significant securities.
- Litigation was reported concerning a proposed USDA debt-relief program for socially disadvantaged producers; the filing noted a preliminary injunction halting payments pending resolution. Proposed legislative and regulatory changes, including tax provisions and potential changes to FCA board composition, could affect Farmer Mac.
Most important facts for investors to verify
- Whether the Q4 securitization closed as described and whether the expected approximately $4 million after-tax gain was recognized.
- Whether portfolio growth and lower funding costs continue to support net interest income and core earnings as short-term Institutional Credit balances mature.
- How servicing-acquisition costs, staffing, and transition-service payments affect expenses and core earnings; the transition agreement includes $1.25 million payable through December 2022.
- Whether delinquencies, nonaccrual loans, and substandard assets remain contained, particularly in drought-affected and other stressed agricultural segments and in Texas Rural Utilities exposures.
- Whether Farmer Mac maintains capital-market access, regulatory liquidity and capital buffers, and manages LIBOR transition and interest-rate risks effectively.
- The sensitivity of reported results and portfolio values to fair-value assumptions, including the significant Level 3 measurements.