Federal Agricultural Mortgage Corporation (Farmer Mac) — Q3 2022 Form 10-Q
Business context and period: Farmer Mac is a federally chartered secondary-market provider of financing and credit support for agricultural and rural infrastructure lending. This unaudited report covers the quarter and nine months ended September 30, 2022; it was filed November 7, 2022. Amounts below are U.S. dollars.
Financial performance and position
- Q3 earnings: Net interest income was $67.9 million, up 15% from $58.9 million a year earlier. Net income was $41.4 million versus $35.3 million; net income attributable to common stockholders was $34.6 million versus $28.5 million. Diluted EPS was $3.18 versus $2.63.
- Nine-month earnings: Net interest income was $197.3 million, up from $168.1 million; net income was $134.7 million versus $102.2 million; common-stockholder income was $114.4 million versus $84.4 million. Diluted EPS was $10.51 versus $7.79.
- Margins and non-GAAP measures: Net interest yield was 1.04% in Q3 versus 1.00% a year earlier, and 1.03% for nine months versus 0.96%. Net effective spread, a company-defined non-GAAP measure, was 1.03% in Q3 versus 0.99%, and 1.00% for nine months versus 0.99%. Core earnings were $33.4 million in Q3 versus $27.6 million, and $89.9 million for nine months versus $83.5 million.
- Balance sheet and growth: Total assets were $26.44 billion, up 5% from year-end 2021. Outstanding business volume reached $25.33 billion, up 7% from $23.61 billion at year-end; Q3 net growth was $847 million. Net loans were $9.93 billion, including loans in consolidated trusts.
- Debt and liquidity: Notes payable were $23.50 billion, up from $22.71 billion at year-end; $7.39 billion was due within one year. Cash and cash equivalents were $868 million. Farmer Mac reported 355 days of liquidity at quarter-end, above its 90-day regulatory minimum, and said it had maintained access to debt markets.
- Cash flow, nine months: Operating activities provided $706 million; investing activities used $2.05 billion; financing activities provided $1.30 billion. Cash declined $40.6 million to $868 million.
- Capital: Core capital was $1.296 billion, $513.9 million above the minimum requirement. The Tier 1 capital ratio was 14.9%; Farmer Mac reported compliance with capital requirements.
Material changes and notable items
- Q3 common-stockholder income rose $6.1 million year over year, principally from higher net interest income and derivative fair-value gains; operating expenses increased $1.8 million after tax and guarantee fees declined $0.4 million.
- Nine-month net interest income growth reflected increased business volume, higher yields on assets, and funding-cost effects. Rising rates also materially affected security and derivative valuations: nine-month other comprehensive loss, net of tax, was $67.4 million, and accumulated other comprehensive loss was $63.6 million at September 30, compared with income of $3.9 million at year-end.
- Operating expenses rose 13% in Q3 and 15% for nine months year over year, mainly from higher compensation, headcount, stock compensation, technology, and consulting costs.
- The allowance for loan losses and reserve for losses totaled $15.2 million at September 30. Nine-month credit-loss provisions were a net release of $1.1 million. Agricultural Finance 90-day delinquencies increased to $44.2 million, or 0.42% of direct exposure, from 0.20% at June 30, though below 0.48% at year-end 2021. Management said the portfolio remained adequately collateralized. Rural Infrastructure Finance reported no delinquencies.
- Farmer Mac completed a Q3 structured securitization of $297.7 million of agricultural mortgage loans. Off-balance-sheet guaranteed securities and standby commitments expose the company to potential future payments; LTSPCs had a maximum principal amount of $3.38 billion.
- The filing revises prior-period figures to correct an immaterial error in accrued interest on derivatives cleared through CME. The correction increased reported 2021 net income by $4.2 million for Q3 and $6.7 million for the first nine months. Management stated the error was not material to the previously issued statements.
Outlook, commentary, and risks
Management expects opportunities for profitable growth across agricultural and rural infrastructure businesses and said conditions were generally supportive of continued net portfolio growth in Q4 2022. It did not provide specific earnings or revenue guidance. Management expects operating expenses to continue increasing over the next several years as it invests in staff, technology, servicing, and funding infrastructure.
Key uncertainties include rapid interest-rate increases, inflation and input costs, commodity-price and export volatility, supply-chain disruption, the Russia-Ukraine conflict, drought and severe weather, and the possibility of recession. Higher rates may slow new originations and refinancing while also reducing prepayments; funding costs, asset values, and portfolio duration remain rate-sensitive. Management cited the potential for agricultural credit deterioration despite strong farm income and collateral values, and identified continuing LIBOR transition risks. It said it did not anticipate material credit risks to customers from Hurricane Ian at the time of filing.
Important facts for investors to verify
- Reconcile GAAP earnings with core earnings and net effective spread, which are non-GAAP measures, and assess how much reported growth depends on rates, derivatives, and funding effects.
- Track the unrealized securities losses and AOCI position, including whether management’s assumptions about recovery and holding securities remain valid.
- Monitor agricultural delinquencies, substandard loans, borrower concentrations, commodity and weather exposures, and changes in credit-loss reserves.
- Review debt maturities, funding-market access, liquidity days, and interest-rate and benchmark-transition exposures, particularly LIBOR-linked assets and derivatives.
- Assess whether business-volume growth and servicing investments generate returns sufficient to offset rising operating costs and contingent guarantee obligations.
- Review the disclosed correction of prior-period derivative interest accruals and its effects on comparative results.