Federal Agricultural Mortgage Corporation (Farmer Mac) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 10, 2018. Farmer Mac provides secondary-market liquidity, credit guarantees and funding for agricultural and rural utility lending.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior year-end |
|---|---|---|
| Total interest income | $119.5 million | $86.6 million in Q1 2017 |
| Net interest income | $43.2 million; 0.98% net interest yield | $37.1 million; 0.96% yield in Q1 2017 |
| Net income attributable to Farmer Mac | $25.8 million | $21.9 million in Q1 2017 |
| Net income attributable to common stockholders | $22.5 million; diluted EPS $2.10 | $18.6 million; diluted EPS $1.73 in Q1 2017 |
| Core earnings, non-GAAP | $21.8 million; diluted EPS $2.03 | $15.0 million; diluted EPS $1.39 in Q1 2017 |
| Net effective spread, non-GAAP | $37.1 million; 0.91% | $32.5 million; 0.90% in Q1 2017 |
| Net cash from operating activities | $117.8 million | $102.6 million in Q1 2017 |
| Total assets / total equity | $18.4 billion / $745.3 million | $17.8 billion / $708.1 million at Dec. 31, 2017 |
| Notes payable | $16.0 billion | $15.5 billion at Dec. 31, 2017 |
| Cash and cash equivalents | $493.3 million | $302.0 million at Dec. 31, 2017 |
| Regulatory capital | Core capital $673.2 million, $136.9 million above minimum | $657.1 million, $136.8 million above minimum at Dec. 31, 2017 |
Quarter-end outstanding business volume was $19.4 billion, up $372.1 million from year-end 2017. Growth was principally in AgVantage securities. Q1 cash flows included $383.997 million of net investing outflows and $457.4 million of net financing inflows; cash increased by $191.2 million.
Changes, drivers and unusual items
- Common-stockholder net income rose $3.9 million year over year. Higher net interest income and lower income taxes more than offset lower reported derivative and hedge gains and increased operating expenses.
- The effective tax rate was 20.0%, versus 35.5% for full-year 2017, following the December 2017 tax-law changes; share-based award exercises also reduced the Q1 rate. The lower rate materially supported earnings.
- Farmer Mac adopted hedge-accounting guidance in Q1. The adoption did not materially affect financial position, results or cash flows, but changed presentation: fair-value changes on designated fair-value hedges moved into net interest income. Comparisons of derivative-related line items therefore require care.
- GAAP net income includes fair-value movements that management excludes from non-GAAP core earnings. Q1 GAAP derivative and hedging activities reported a $3.9 million loss, versus a $2.5 million gain in Q1 2017; core earnings exclude specified fair-value and other adjustments.
- Common dividends increased to $0.58 per share from $0.36 in each 2017 quarter. Preferred dividends were $3.3 million.
Credit, outlook, risks and contingencies
- Management reported moderate improvement in Farm & Ranch credit measures from year-end: total allowance for losses was $8.5 million (0.12% of the portfolio), versus $8.9 million (0.13%); 90-day delinquencies were $47.6 million (0.69%), versus $48.4 million (0.71%). Substandard assets were essentially unchanged at $221.2 million (3.2%). No Q1 charge-offs were recorded.
- Management noted agricultural-cycle risk: substandard assets and delinquencies had risen from especially favorable levels in recent years, and management expects credit indicators may move back toward or exceed historical averages. Commodity prices, weather, farmland values, export demand and trade-policy changes could affect borrower repayment and collateral.
- Management cited growth opportunities across all four business lines but gave no specific earnings or business-volume target. It expects compensation and G&A expenses combined to increase approximately 15% in 2018 versus 2017, with elevated increases likely in 2019, reflecting investment in staff, technology and infrastructure.
- Farmer Mac reported access to capital markets and stated it expects sufficient liquidity and capital for the next 12 months and foreseeable future, assuming continued market access. It had 156 days of regulatory liquidity at March 31, above the 90-day minimum. Funding access, interest-rate and LIBOR basis risk remain material sensitivities.
- Off-balance-sheet exposure included $910.5 million of guaranteed securities and $3.0 billion of long-term standby purchase commitments (LTSPCs), before collateral, recourse or recoveries. The company reported $38.5 million of guarantee and commitment obligations on its balance sheet.
- Fair values of $5.9 billion of instruments were Level 3, relying on significant management estimates. Farmer Mac said unrealized security losses were not other-than-temporary and that it did not intend, nor expect to be required, to sell the relevant securities before recovery.
- The board chair was serving as Acting President and CEO following the former CEO’s termination in December 2017; a search for a successor was underway. Farmer Mac said it was cooperating with FCA oversight requests and did not expect a material business or financial effect. The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- How much earnings growth persists after separating the benefit of the lower tax rate from operating performance, and how GAAP results compare with non-GAAP core earnings.
- Whether AgVantage concentration and growth remain sustainable, including issuer credit quality, collateralization and maturity/refinancing exposure.
- Whether agricultural credit indicators worsen, especially substandard assets, delinquencies, collateral values and loss reserves.
- Whether planned expense growth, capital requirements and liquidity remain manageable as the balance sheet and business volume expand.
- How interest-rate, LIBOR basis and derivative valuation movements affect net interest income, spread and reported earnings; review the filing’s hedge-accounting presentation changes when comparing periods.