Federal Agricultural Mortgage Corporation (Farmer Mac) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; filed May 9, 2023. Farmer Mac is a federally chartered secondary market supporting agricultural and rural infrastructure finance. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise stated.
Financial performance and position
- Earnings: Net interest income was $79.1 million, up 21% from $65.5 million in Q1 2022. Net income was $47.0 million, down 9% from $51.5 million; net income attributable to common stockholders was $40.2 million, down 10%. Diluted EPS was $3.69 versus $4.10.
- Core earnings and spread: Non-GAAP core earnings rose to $38.9 million from $25.8 million; core diluted EPS was $3.56 versus $2.37. Net effective spread, also non-GAAP, increased to $77.2 million from $57.8 million, and its yield rose to 1.15% from 0.97%. These measures exclude or adjust for certain fair-value and other items and are not GAAP substitutes.
- Interest income and expenses: Total interest income was $315.3 million versus $115.9 million, while interest expense was $236.2 million versus $50.3 million. Higher interest rates increased both asset yields and funding costs; management cited advantageous funding execution and business growth as key contributors to higher net interest income and spread.
- Expenses and credit: Operating expenses increased 11% to $23.7 million, mainly reflecting compensation, higher headcount, technology spending and consultants. The company recorded a $0.8 million net provision for credit losses, primarily related to deterioration in one agricultural storage and processing borrower in bankruptcy.
- Assets, debt and equity: Total assets were $27.9 billion, up 2% from year-end 2022; notes payable were $24.8 billion, up 2%, with another $1.4 billion of consolidated-trust debt held by third parties. Total equity was $1.29 billion. Core capital was $1.35 billion, $534.4 million above the minimum requirement; Farmer Mac reported compliance with capital requirements.
- Cash flow and liquidity: Operating cash flow was $60.6 million, versus $269.3 million in Q1 2022; investing activities used $461.3 million and financing activities provided $404.3 million. Cash and cash equivalents were $864.6 million. Including qualifying investment securities, disclosed liquidity assets totaled $5.56 billion. Liquidity was 286 days at quarter-end, above the 90-day regulatory minimum.
Material changes and business developments
- Outstanding business volume grew to $26.48 billion from $25.92 billion at year-end 2022. Rural Infrastructure Finance increased $608 million; Agricultural Finance declined $46 million. Q1 new business volume was $1.73 billion, down from $2.98 billion in Q1 2022.
- Farmer Mac completed its third structured agricultural mortgage securitization, involving approximately $281 million of loans placed in a consolidated trust. Management also reported providing $1.7 billion of liquidity and lending capacity to rural lenders during the quarter.
- Q1 2022 comparative financial statements were revised for an immaterial prior-period error involving accrued interest on derivatives cleared through CME. The revision increased reported Q1 2022 net income by $3.6 million to $51.5 million; management stated the error was not material to prior statements taken as a whole.
- Accumulated other comprehensive loss widened to $59.9 million from $50.8 million at year-end, including a $9.0 million after-tax quarterly comprehensive loss, mainly reflecting cash-flow hedge changes. Available-for-sale securities had $150.8 million of gross unrealized losses at quarter-end; management attributed these principally to interest rates and market spreads, not credit concerns.
Outlook, risks and contingencies
- Management expects opportunities for profitable growth across its businesses and said current conditions are generally supportive of continued net portfolio growth in 2023. This is a qualitative outlook, not a numerical earnings forecast. Management expects operating expenses to continue increasing over the next several years while noting headcount growth may slow in coming quarters.
- Risks include elevated and volatile interest rates, funding-market access and refinancing costs, tighter credit conditions, inflation and input costs, changing commodity prices and trade conditions, and borrower repayment or collateral stress from economic or severe-weather events. Management noted that USDA projected 2023 net cash farm income to decline 21% from 2022, while remaining above its 10-year average.
- Agricultural Finance 90-day delinquencies rose to $70.6 million, or 0.66% of direct-exposure mortgage balances, from $43.5 million, or 0.41%, at year-end 2022. Management said a small number of larger borrower disruptions drove the increase and that delinquency remained below its approximately 1% 15-year average. Rural Infrastructure Finance reported no delinquencies.
- Funding and interest-rate risks remain significant: $8.4 billion of notes payable were due within one year, and management’s sensitivity analysis estimated a 3.2% decline in market value of equity under an immediate 100-basis-point rate increase. Farmer Mac uses derivatives and maturity management to mitigate, but not eliminate, these exposures.
- Farmer Mac continued its LIBOR transition. At March 31, $2.6 billion of floating-rate assets, $0.2 billion of floating-rate debt and $9.8 billion notional of swaps still referenced LIBOR. The filing also discusses uncertainty from potential FCA capital-rule changes and the 2023 farm bill reauthorization.
- Off-balance-sheet exposures included $489 million of Farmer Mac Guaranteed Securities and $3.42 billion maximum principal under long-term standby purchase commitments. The filing reports no legal proceedings.
Important facts for investors to verify
- Whether core earnings and net effective spread trends persist, and how they reconcile to GAAP results as fair values and derivative settlements fluctuate.
- Whether agricultural delinquencies, especially concentrated larger exposures and the borrower in bankruptcy, lead to higher provisions, charge-offs or collateral losses.
- How higher rates, refinancing needs and debt-market conditions affect funding costs, liquidity and spread; review the debt maturity schedule and interest-rate sensitivity assumptions.
- Whether business-volume growth, particularly in rural utilities and renewable energy, is sustained and generates adequate risk-adjusted returns.
- How unrealized investment losses, Level 3 valuation assumptions, LIBOR transition, regulatory capital developments and potential farm bill changes affect capital and reported results.