Federal Agricultural Mortgage Corporation (Farmer Mac) — Q1 2017 10-Q
Reporting period: Three months ended March 31, 2017; filed May 10, 2017. Farmer Mac provides secondary-market liquidity, credit guarantees and financing for agricultural and rural utility lending through Farm & Ranch, USDA Guarantees, Rural Utilities and Institutional Credit businesses.
Key financial results
Amounts are in millions of dollars except per-share data, percentages and where noted.
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Interest income | $86.6 | $73.9 |
| Net interest income | $37.1; 0.96% net interest yield | $33.6; 0.88% yield |
| Net effective spread (non-GAAP) | $32.9; 0.91% | $29.9; 0.82% |
| Net income attributable to Farmer Mac | $21.9 | $13.6 |
| Net income attributable to common stockholders | $18.6 | $10.3 |
| Diluted EPS | $1.73 | $0.94 |
| Core earnings (non-GAAP) | $15.6; $1.45 diluted per share | $12.4; $1.12 diluted per share |
| Operating cash flow | $102.6 | $53.4 |
- Net income attributable to common stockholders rose about 80% year over year. Derivative and hedging results shifted to a $2.5 million gain from a $6.8 million loss; net interest income also increased. Core earnings increased about 26%.
- Q1 provision for loan losses was $0.6 million, partly offset by a $0.2 million release of reserves; total provision for losses was $0.4 million. Income tax expense was $10.8 million versus $7.3 million.
- Other comprehensive income was $7.8 million, compared with a $7.9 million loss a year earlier, primarily reflecting gains on available-for-sale securities.
- Investing cash flow was a use of $245.9 million, versus a source of $14.2 million in Q1 2016; financing cash flow provided $191.7 million, versus $451.8 million. Cash increased $48.4 million to $313.6 million.
Balance sheet, debt and liquidity
- Total assets were $15.93 billion at March 31, up from $15.61 billion at year-end 2016. Total liabilities were $15.27 billion, up from $14.96 billion.
- Notes payable totaled $13.92 billion, including $7.62 billion due within one year and $6.30 billion due after one year. Debt securities of consolidated trusts held by third parties were $1.21 billion.
- Net loans were $4.64 billion; Farmer Mac Guaranteed Securities totaled $6.32 billion and USDA Securities $2.04 billion. Total equity was $666.0 million.
- Cash and investment securities available as liquidity totaled $2.79 billion. Regulatory liquidity was 194 days at quarter-end, above the 90-day minimum; the quarterly average was 181 days.
- Core capital was $624.3 million, $148.7 million above the $475.6 million statutory minimum. Farmer Mac reported compliance with capital requirements and its highest regulatory compliance level.
- Outstanding business volume reached $17.84 billion, up $445.1 million from December 31, 2016. On-balance-sheet notes payable issuance is subject to an $18 billion board authorization.
Material changes and operating trends
- Business volume grew primarily from AgVantage securities and Farm & Ranch lending. Q1 new business volume was $1.15 billion, compared with $1.30 billion in Q1 2016; the mix shifted, with AgVantage purchases of $561 million versus $927 million a year earlier.
- Farm & Ranch 90-day delinquencies rose to $50.8 million, or 0.81% of the portfolio, from $21.0 million, or 0.34%, at year-end; the rate was 0.61% at March 31, 2016. Management cited seasonality and agricultural-cycle factors, while noting a $15.4 million exposure to one borrower across two permanent-planting loans accounted for about half the increase from year-end.
- Substandard Farm & Ranch assets were $171.5 million, or 2.7% of the portfolio, compared with $165.2 million and 2.7% at year-end. The total allowance for losses was $7.6 million, also 0.12% of relevant Farm & Ranch exposure.
- Management attributed stronger net interest income and spread mainly to portfolio growth, funding strategy, improved LIBOR-based funding costs and wider spreads on certain refinanced AgVantage securities. Results also benefited from a $0.7 million tax benefit related to share-based awards under newly adopted accounting guidance.
Outlook, risks and unusual items
- Management sees continued growth opportunities in Farm & Ranch, USDA Guarantees and Institutional Credit, but provided no specific earnings or volume guidance. It expects growth to help replace income as assets mature, repay or are reinvested at potentially lower spreads.
- Management reported access to capital markets at favorable rates and believes liquidity and capital are sufficient for the next 12 months and the foreseeable future, assuming continued market access. Risks include financing availability and cost, interest rates and basis risk, agricultural commodity prices, weather and drought, farmland values, borrower repayment capacity, and legislative or regulatory changes.
- Management noted declining U.S. farm income since its 2013 cyclical peak and recent weakness in some farmland markets. It said delinquencies increased but remained below historical averages and that no material drought effect on its portfolio had been observed through March 31.
- AgVantage securities were a significant concentration: $7.59 billion outstanding, including large positions with MetLife and CFC. Most are obligations of institutional issuers secured by pledged loans, rather than direct Farmer Mac ownership of the underlying loans.
- In April, Farmer Mac purchased and retained $1.0 billion of replacement MetLife AgVantage securities, shifting the amount from a prior mix of on- and off-balance-sheet exposure to entirely on-balance-sheet holdings. The securities have one-, two- and three-year maturities; management estimated an annual weighted-average net effective spread of about 0.42%.
- On May 1, 2017, Farmer Mac transferred its 65% interest in AgVisory back to the company for $5,000 and expects to record an approximately $0.1 million after-tax loss in Q2. The CME’s variation-margin rule change altered derivative presentation and recognition; management said it does not expect a cumulative economic impact.
- Common dividends increased to $0.36 per share for Q1 from $0.26 per share in each 2016 quarter. Dividend capacity may be restricted if capital requirements are not met. The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the increase in Farm & Ranch delinquencies, particularly the concentrated $15.4 million borrower exposure, results in further downgrades, provisions or losses.
- How AgVantage issuer concentration, refinancing and maturity timing affect credit exposure, liquidity and spread income, including the April 2017 MetLife transaction.
- Whether reported earnings growth persists after separating recurring spread and fee performance from derivative fair-value movements and the $0.7 million share-based compensation tax benefit.
- Whether Farmer Mac sustains capital-market access and the reported 194-day liquidity position as debt maturities and business volume grow.
- The effects of agricultural income, commodity prices, farmland values, weather and future regulatory or accounting changes on portfolio quality and capital.