Federal Agricultural Mortgage Corporation (Farmer Mac) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; filed November 8, 2018. Amounts below are U.S. dollars. Farmer Mac provides financing and credit enhancement for agricultural and rural borrowers through loan purchases, securities, guarantees, and long-term standby purchase commitments (LTSPCs).
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total interest income | $142.6m | $104.5m | $397.8m | $289.2m |
| Net interest income | $45.1m | $39.6m | $132.2m | $116.4m |
| Net interest yield | 0.99% | 0.92% | 0.98% | 0.94% |
| Income before taxes | $37.7m | $33.0m | $107.0m | $97.4m |
| Net income attributable to common stockholders | $26.5m | $18.5m | $75.3m | $54.6m |
| Diluted EPS | $2.46 | $1.71 | $7.01 | $5.06 |
- Non-GAAP core earnings were $22.4m for Q3 ($2.08 diluted per share), versus $16.8m ($1.55) a year earlier. Nine-month core earnings were $63.6m ($5.92 per diluted share), versus $47.8m ($4.42).
- Non-GAAP net effective spread was $39.1m, or 0.93%, in Q3, versus $36.0m, or 0.91%. For nine months it was $112.3m, or 0.90%, versus $103.8m, or 0.91%. Core earnings and net effective spread exclude or reclassify certain GAAP items; they are not directly interchangeable with GAAP results.
- Q3 non-interest income was $4.4m and non-interest expense was $11.7m. Nine-month operating expenses were $36.2m, up from $32.6m; compensation and general and administrative costs rose, with management citing higher headcount, technology and infrastructure investment, office leases, and certain legal and hiring expenses.
- Net cash provided by operating activities was $252.2m for the first nine months, versus $157.3m. Investing activities used $239.8m, versus $1.78bn; financing provided $121.7m, versus $1.72bn. Cash and cash equivalents ended at $436.2m, up from $302.0m at year-end 2017.
Balance sheet, funding, and capital
- Total assets were $18.47bn at September 30, 2018, up from $17.79bn at December 31, 2017. Total liabilities were $17.70bn and equity was $777.6m.
- Notes payable totaled $15.80bn, including $7.38bn due within one year; debt securities of consolidated trusts held by third parties were $1.49bn. Farmer Mac had $2.71bn in cash and investment securities available as liquidity resources.
- Regulatory liquidity was 212 days at quarter-end, above the 90-day minimum; the quarterly average was 215 days. Management said liquidity and capital resources should support operations for 12 months and beyond, assuming continued capital-market access.
- Core capital was $713.6m, $173.8m above the $539.8m statutory minimum. Farmer Mac reported compliance with capital requirements and the highest compliance level. Its Tier 1 capital ratio was 13.3%, versus 12.6% at year-end 2017.
- Outstanding business volume was $19.54bn, up $533.3m from year-end 2017 but only $15.7m from the prior quarter. The Institutional Credit line included $8.37bn of on- and off-balance-sheet AgVantage exposure.
Material changes and management commentary
- Common dividends rose to $0.58 per share per quarter in 2018 from $0.36 in 2017. Dividends remain subject to capital requirements.
- The effective tax rate for the first nine months was 20.1%, down from 35.5% for full-year 2017, primarily reflecting the lower federal corporate rate enacted in December 2017; share-based award exercises also reduced the rate.
- Q3 net income improved year over year mainly through higher net interest income and lower tax expense. Sequentially, management cited the absence of a $1.6m after-tax interest-only security premium amortization recorded in Q2, plus lower operating expenses. The security had been called after full prepayment of its underlying loan.
- Management expects compensation and general and administrative expenses together to increase approximately 15% in 2018 versus 2017, with percentage increases moderating in 2019. It expects growth opportunities across most business lines, but did not provide a specific earnings or business-volume forecast.
- Gross new business volume was $1.46bn in Q3, versus $893.3m a year earlier. Farm & Ranch and USDA loan purchases were lower year to date, which management attributed to fewer large-loan opportunities, competition, higher rates reducing refinancings, and potentially lower USDA processing volume. Net portfolio growth remained strong, aided by slower prepayments.
- Bradford T. Nordholm became President and CEO effective October 15, 2018, succeeding the acting CEO; Lowell L. Junkins remained Chairman.
Credit, risks, contingencies, and unusual items
- Farm & Ranch 90-day delinquencies were $37.5m, or 0.53% of that portfolio, down from $48.4m, or 0.71%, at year-end 2017. Substandard assets were $216.0m, or 3.1%, versus $221.3m, or 3.2%. Total allowance for losses was $9.0m, approximately 0.13% of the Farm & Ranch portfolio. Management reported modestly improved credit quality but expects delinquency and substandard rates may move back toward or above historical averages over time.
- Agricultural-sector risks include lower commodity prices and farm income, weather and farmland-value volatility, and trade disputes and tariffs. USDA forecast a 12% decline in 2018 net farm cash income; management warned that prolonged trade disruption without sufficient relief could pressure borrowers and the portfolio. The Farm Bill expired September 30, 2018, with replacement or extension pending.
- Interest-rate and funding risks include asset-liability timing mismatches and basis risk—the potential for Farmer Mac’s funding costs to worsen relative to floating-rate indexes such as LIBOR. Management said short-term funding costs relative to LIBOR had become less favorable than historical experience and expected material near-term improvement to be unlikely. Rate shocks also affect modeled net effective spread and market value.
- Potential undiscounted off-balance-sheet payments included $945.8m of guaranteed securities and up to $3.0bn under LTSPCs, before collateral, recourse, and recoveries. These are contractual exposure measures, not expected losses. USDA-related credit exposure is backed by the full faith and credit of the U.S. government.
- Level 3 fair-value instruments totaled approximately $6.0bn, or 32% of assets and 73% of fair-value-measured financial instruments, relying on management estimates and significant unobservable inputs. Fair values could change materially with valuation assumptions.
- Unrealized losses on several securities were attributed primarily to higher interest rates and market spreads. Management concluded the losses were not other-than-temporary and said it did not intend, and was not more likely than not required, to sell the securities before recovery.
- Hedge-accounting guidance adopted in Q1 changed presentation of fair-value hedge changes within net interest income; management said adoption had no material effect on financial position or results. No material changes to previously disclosed risk factors were reported; no legal proceedings were listed.
Key facts for investors to verify
- Reconcile GAAP earnings with core earnings and net effective spread, including the effect of derivative fair-value changes and hedge-accounting presentation.
- Track Farm & Ranch delinquencies, substandard assets, allowance coverage, and exposure to stressed commodities, regions, and trade-sensitive borrowers.
- Assess refinancing and concentration risk in the $8.37bn AgVantage portfolio and the $3.0bn maximum LTSPC exposure.
- Monitor funding spreads relative to LIBOR, interest-rate sensitivity, capital-market access, and liquidity against regulatory requirements.
- Evaluate whether the expected 2018 expense increase and agricultural-market conditions affect earnings growth, capital headroom, and dividend capacity.