Federal Agricultural Mortgage Corporation (Farmer Mac) — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; filed May 6, 2021. Farmer Mac is a federally chartered secondary market supporting agricultural and rural infrastructure lending through loan purchases, guarantees, standby purchase commitments, and securities.
Financial performance and condition
- Earnings: Net income was $33.2 million, versus $12.8 million in Q1 2020; net income attributable to common stockholders was $28.0 million versus $9.4 million. Basic EPS was $2.60 versus $0.88. Management attributed much of the GAAP earnings increase to improved derivative fair-value results, as well as higher net interest income and lower credit-loss expense.
- Core earnings: The company’s non-GAAP core earnings were $25.9 million, up from $20.1 million; diluted core EPS was $2.39 versus $1.87. Core earnings exclude fair-value movements and certain other items and are not a GAAP measure.
- Interest income and margins: Interest income declined to $107.4 million from $149.9 million, while interest expense fell to $54.2 million from $108.5 million. Net interest income rose to $53.3 million from $41.3 million; net interest yield increased to 0.91% from 0.78%. Non-GAAP net effective spread rose to $53.9 million from $44.2 million, with spread yield of 0.97% versus 0.89%.
- Expenses and credit costs: Operating expenses increased 16% to $18.9 million, reflecting higher headcount and technology spending. The income statement reported a $0.9 million net release/provision benefit for losses, compared with a $3.4 million benefit in Q1 2020. Within that total, loan-loss provision was $0.9 million, partly offset by a $0.9 million release of off-balance-sheet reserves.
- Cash flow: Operating cash flow was $397.8 million, compared with cash used of $330.3 million a year earlier; investing activities provided $64.6 million, while financing activities used $483.8 million. Cash and equivalents declined $21.4 million to $1.013 billion. Operating cash flow included substantial noncash fair-value adjustments, so it should not be read as a direct measure of recurring earnings.
- Balance sheet and debt: Total assets were $24.014 billion, down 1% from year-end 2020; equity rose 9% to $1.077 billion. Notes payable were $21.560 billion, and third-party debt of consolidated trusts was $1.189 billion. Approximately $9.6 billion of notes payable was due within one year.
- Capital and liquidity: Core capital was $1.026 billion, $348.1 million above the minimum requirement; the Tier 1 capital ratio was 14.0%. Farmer Mac reported 264 days of liquidity at quarter-end, compared with a 90-day regulatory minimum, and $4.867 billion of cash and specified liquidity investments.
Material changes versus comparable periods
- Year over year, common-stockholder income increased $18.6 million, while core earnings rose $5.8 million. The difference highlights the impact of fair-value and other excluded items on GAAP results.
- Outstanding business volume was $21.863 billion, down $61.6 million from December 31, 2020. Farm & Ranch volume grew $48.2 million; Institutional Credit declined $97.7 million, primarily due to scheduled maturities and payments by two large counterparties.
- Farm & Ranch 90-day delinquencies rose to $72.3 million, or 0.84% of that portfolio, from $46.2 million, or 0.54%, at year-end. Management described the quarterly increase as consistent with seasonal patterns; the rate was below the 1.02% reported a year earlier. Farm & Ranch substandard assets increased to $321.7 million, or 3.7% of the portfolio, from $291.5 million, or 3.4%.
- Equity increased partly because accumulated other comprehensive income moved from a $13.9 million loss at year-end to $51.7 million of income, reflecting market-value changes in securities and cash-flow hedges.
Outlook, commentary, and risks
- Outlook: Management saw opportunities for profitable growth across its businesses, including agricultural lending, rural broadband, and renewable energy. It gave no specific numerical earnings or volume guidance and expected operating expenses to continue rising over the next several years, with investment in staff, technology, and infrastructure expected to continue over the next 12–18 months.
- COVID-19: Farmer Mac reported uninterrupted remote operations and continued borrower payment-deferment activity. It stated that approximately $51.0 million of unpaid principal remained in deferment across specified portfolios; the detailed Farm & Ranch discussion separately reported $56.6 million still in deferment. These figures have different stated scopes and should be checked against the full disclosures.
- Credit and economic risks: Management cited uncertainty from the pandemic, commodity prices, weather, trade, farmland values, and borrower repayment capacity. It reported Texas exposure of approximately $624 million in agriculture and $416 million in rural infrastructure following the February 2021 freeze; the financial effects on utilities, including cost recovery and regulatory responses, remained uncertain. A $1.0 million Rural Utilities loan-loss provision was primarily attributed to ratings downgrades following the freeze.
- Policy and rate risks: The American Rescue Plan authorized USDA debt relief for certain socially disadvantaged producers; Farmer Mac estimated 3%–8% of its USDA Securities comprising FSA loans might be eligible, potentially accelerating prepayments. A proposed increase in the corporate tax rate could reduce profitability if enacted. Farmer Mac also highlighted LIBOR transition risks, refinancing and funding-spread exposure, and interest-rate sensitivity.
- Capital allocation and contingencies: The board reinstated the Class C share-repurchase program in March, with up to $9.8 million remaining authorization and an extended expiration date of March 2023. Farmer Mac said it had not used its statutory authority to borrow up to $1.5 billion from the U.S. Treasury, which is limited to fulfilling guarantee obligations. No material changes to the prior-year risk factors or legal proceedings were reported.
Important facts for investors to verify
- Reconcile GAAP earnings growth with the derivative and hedge fair-value effects, and review the company’s non-GAAP core-earnings definitions and reconciliation.
- Track Farm & Ranch delinquencies and substandard assets, including subsequent performance of downgraded loans and borrowers previously granted deferments.
- Assess the concentration and maturity profile of AgVantage securities and the company’s ability to refinance significant near-term debt maturities while retaining capital-market access.
- Monitor the Texas freeze’s effects on rural utility borrowers, potential USDA debt-relief prepayments, and any resulting changes in portfolio balances or earnings.
- Review interest-rate, LIBOR-transition, and Level 3 valuation assumptions; management notes that these estimates can change with market conditions and modeling inputs.